New Directions in International Economic Law: In Memoriam Thomas Walde

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New Directions in International Economic Law

Thomas Wälde

New Directions in International Economic Law In Memoriam Thomas Wälde

Edited by

Todd Weiler Freya Baetens

LEIDEN • BOSTON 2011

This book is printed on acid-free paper. Library of Congress Cataloging-in-Publication Data New directions in international economic law : in memoriam Thomas Walde / edited by Todd Weiler, Freya Baetens. p. cm. Includes index. ISBN 978-90-04-19143-3 (hardback : alk. paper) 1. Law and economic development. 2. Law reform. 3. International economic relations. 4. Investments, Foreign—Law and legislation. 5. Waelde, Thomas W. I. Waelde, Thomas W. II. Weiler, Todd. III. Baetens, Freya. K3820.N49 2011 343’.07—dc22 2011018155

ISBN 978-90-04-19143-3 Copyright 2011 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Global Oriental, Hotei Publishing, IDC Publishers, Martinus Nijhoff Publishers and VSP. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change.

CONTENTS Foreword ......................................................................................................... Rosalyn Higgins

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Preface ............................................................................................................. Todd Weiler, Freya Baetens

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PART ONE

WHERE PUBLIC MEETS PRIVATE Introduction ................................................................................................... Emmanuel Gaillard

3

Human Rights & Investment Tribunals Jurisprudence Along the Private/Public Divide ............................................................................... Moshe Hirsch

5

Public or Private Dispute Settlement? The Culture Clash in Investment Treaty Arbitration and its Impact on the Role of the Arbitrator ...... Stephan W. Schill

23

The Transnational Law of Contracts: What it Can and What it Cannot Achieve ......................................................................................... Giuditta Cordero-Moss

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Codification of the New Lex Mercatoria through the Internet: The TransLex Principles at www.trans-lex.org ..................................... Klaus Peter Berger

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Thinking about BITs and BIT Arbitration: The Legitimacy Crisis that Never Was ......................................................................................... Devashish Krishan

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contents PART TWO

FIELD-SPECIFIC APPLICATIONS Introduction Memories of Thomas Wälde ................................................. Detlev F. Vagts Arbitration to Settle Private War-Damage Claims? The EritreaEthiopia Claims Commission Revisited ................................................. Hans van Houtte Foreign Direct Investment for Development: The United Nations Code of Conduct and the Search for Balance in International Investment Rules ............................................................................................................ Karl P. Sauvant

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Negotiated Settlement of Public Infrastructure Disputes ......................... Mark Kantor

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International Corporate Social Responsibility and International Law ... Peter Muchlinski

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The Legal Landscape of International Energy Investment After the 2008 Global Financial Crisis ................................................................... Robert Pritchard

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Investor-State Mediation: Reflections on its Feasibility from a Process Perspective .................................................................................... Ximena Bustamante

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PART THREE

INTERNATIONAL ECONOMIC LAW IN A WIDER CONTEXT Introduction ................................................................................................... R. Daniel Vock International Investment Law Regime and the Rule of Law as a Pre-condition for International Development ....................................... Nicholas J. Birch, Borzu Sabahi, Ian Laird

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contents

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An Historical Analysis of the Function of the Minimum Standard of Treatment in International Investment Law ........................................ Todd Weiler

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States, Sanctions and Soft Law: An Analysis of Differing Approaches to Business and Human Rights Frameworks ........................................ Stéphane Brabant, Anna Kirk and Jonathan Proust

383

Positivism, New Haven Jurisprudence, and the Fragmentation of International Law ..................................................................................... Tai-Heng Cheng

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Beyond Fragmentation ................................................................................. Andrea K. Bjorklund and Sophie Nappert

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APPENDICES: TRANSCRIPTS MEMORIAL SYMPOSIUM FOR PROFESSOR THOMAS WÄLDE Appendix A: Part I ....................................................................................... 483 Roundtable on Cross-Cutting Issues on Energy & Natural Resources and Development—Part 1 Moderators: Arif Ali and Timothy McCrum Contributors: William Fox, Elizabeth Bastida, Ibibia Worika, Christian Pielow, Andrey Konoplyanik, Borzu Sabahi, Graham Coop Appendix A: Part II ...................................................................................... 495 Roundtable on Cross-Cutting Issues on Energy & Natural Resources and Development (continued) Moderators: Arif Ali and Timothy McCrum Contributors: William Fox, Elizabeth Bastida, Ibibia Worika, Christian Pielow, Andrey Konoplyanik, Borzu Sabahi, Graham Coop Appendix B: Special Presentation on Foreign Investment and the Work of the UN’s Special Representative on Business & Human Rights ............................................................................................................... Moderator: Stéphane Brabant Contributors: Peter Muchlinski, Lorenzo Cotula, Andrea Shemberg

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Appendix C: Roundtable: What does the Future Hold for International Arbitration? ........................................................................... 526 Moderator: Tim Nelson Contributors: Hew Dundas, Bart Legum, Mark Feldman, Sophie Nappert

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Appendix D: Reflections upon the Idea of International Judicial Review ............................................................................................................. Moderator: Robert Voltera Contributors: Stephan Schill, Ian Laird, Todd Weiler, Klaus Reichert Appendix E: Roundtable on the Question of Convergence in International Law ......................................................................................... Moderator: Kaj Hober Contributors: Federico Ortino, Melaku Desta, Tai-Heng Cheng and Mark Kantor

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Appendix F: Closing Remarks ..................................................................... Philip Andrews-Speed

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Index ...............................................................................................................

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FOREWORD Rosalyn Higgins DBE QC* This book is dedicated to the memory of Professor Thomas Wälde who died on 11 October 2008 after an accident at his summer home in the south of France. Upon hearing the tidings of his death, hundreds of colleagues and friends worldwide expressed shock and sadness at this premature passing. His reputation was global, because of the quality and nature of his work and the large number of students and younger colleagues whom he mentored throughout the years. In the introduction to Part 6 of my book Themes and Theories, I wrote that in the 1960s and 1970s ‘national developments in petroleum law were being played out against the background of an international law regime for the continental shelf that was also rapidly evolving’.† Thomas and I shared the same fascination for energy law from its inception: it was developed under intense pressure and by a group of dynamic and talented people. I valued my academic links as an external examiner at the University of Dundee’s Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP). Apart from anything else, this afforded an opportunity for animated discussions with Thomas. Thomas also enthusiastically followed the tradition established by his predecessors as director at Dundee, by generously inviting my students at the LLM course on the International Law of Natural Resources (at the London School of Economics) to the annual London conference of the Dundee Centre. Thomas grew up in Heidelberg and studied law at the Universities of Heidelberg, Lausanne-Geneva, Berlin and Frankfurt, after which he completed his professional legal training in Frankfurt. He worked as associate officer and resident consultant with the UN/CTC in New York and UNIDO in Vienna, and was a fellow at the Institute for International Economic Law in Frankfurt. From 1972 to 1974, Thomas was an LL.M. student and subsequent visiting scholar at Harvard Law School, where Detlev Vagts (one of the contributors to this volume) was his academic mentor and teacher. * Dame Rosalyn Higgins DBE QC was the President of the International Court of Justice from 2006 to 2009. She would like to express her great appreciation for the support of Dr. Freya Baetens in the preparation of this foreword. † R. Higgins, Themes and Theories, Selected Essays, Speeches, and Writings in International Law, OUP 2009, p. 693.

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In 1978, he obtained the German Research Foundation (DFG) prize for his publication on transnational investment agreements which was, a decade later, named after Heinz Maier-Leibnitz, at one time the President of DFG. From 1976 to 1980, Thomas worked as a staff member and consultant for the UN Centre on Transnational Corporations and UN Industrial Development Organization. Subsequently, he became a UN interregional adviser on mineral law (until 1990) with the task of providing rapid ad hoc advisory services to developing country governments throughout the world. He later became responsible for energy, petroleum and international investment policy as well. While at the UN, he advised over sixty governments on legislative reform and contract negotiations with international investors. He was also, from 1981 to 1983, a UN investigator in charge of the Secretary General’s reports on “Permanent Sovereignty over Natural Resources” and “Permanent Sovereignty in Occupied Palestinian Territories”. During this period, he set up numerous advisory projects combining legal, financial and technical expertise to support ongoing investment negotiations, for example by organising training seminars and international UN conferences in the field of mining, oil and gas. He was the chair of the drafting group that reported on the outcome of the 1991 Berlin Round Table on Mining and the Environment organized by the United Nations and the German Foundation for International Development—the foundation of the first edition of the UN Environmental Guidelines for Mining Operations (the “Berlin Guidelines”— published in 1994) and its successor, the “Berlin II Guidelines” (published in 2002).‡ The nineties brought a major change in Thomas’ career and one that would bring him back to Europe. In 1991, Thomas became Professor and Executive Director at Dundee University where in less than a decade, he expanded the CEPMLP into the world’s largest graduate school in its field. In this he was greatly supported by the UK Petroleum Law Education Trust, which rapidly saw the exceptional entrepreneurial abilities of the new director. He obtained a Jean-Monnet Chair on EU Energy and Economic Law in an EU-wide competition organised by the European Commission in 1995. Due to his leadership and his ability to assemble a well-functioning team of highly qualified professionals, the CEPMLP obtained the prestigious Queen’s Award for Enterprise in 2004 as a recognition for its spectacular growth. Thomas was also a prolific writer and speaker, who each year accepted as many as ten to fifteen invitations to speak at conferences around the world. ‡ United Nations Environmental Guidelines for Mining Operations (“Berlin II”) ST/ TCD/20 (2002) Compiled by the United Nations Department of Economic and Social Affairs (UNDESA) and the United Nations Environment Programme Industry and Environment (UNEP).

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He served as visiting professor at Paris II (Pantheon-Assas) and American University Washington. He was a member of the investment law programme at the British Institute of International and Comparative Law and of the advisory board of the Columbia University Program on International Investment, among other. It is fair to say that, through his academic writings, Thomas changed the landscape of international economic law. He extensively explored the link between the economy and the environment, as well as the interaction between the private and the public sphere—as evidenced by his study of Mining and environment in the context of underdevelopment: government, company and international agency policies (1994). Works such as Regulatory reform in the energy industry of post-Soviet countries (1998) explored areas of law which were, up to that point, largely terra incognita for western lawyers. Thomas was an expert at foreseeing the impact (or lack thereof) of legal developments, a skill expressed in the attention he paid to the negotiation, drafting and conclusion (or failure) of multilateral treaties (e.g. International law of foreign investment: towards regulation by multilateral treaties—2000). Most notably, much of his work focused on one such treaty: the Energy Charter Treaty which Thomas rightly predicted would have a significant influence on the settlement of energy-related disputes (e.g. Investment arbitration under the Energy Charter Treaty: an overview of selected key issues based on recent litigation experience—2003). These thorough analyses made Thomas’ works among the most cited in this field. He frequently served as an expert, and sometimes also as counsel, mediator and arbitrator in international energy and investment disputes, including disputes concerning the International Centre for Settlement of Investment Disputes (ICSID) Convention, the North American Free Trade Agreement (NAFTA), the Energy Charter Treaty, numerous Bilateral Investment Treaties (BITs) as well as commercial contracts. Thomas was a member of the Association of International Petroleum Negotiators (AIPN) and of several international arbitral institutions. He was a Rechtsanwalt (Frankfurt) and also a door tenant at Essex Court Chambers, Lincoln’s Inn Fields (London). He also served as adviser to international institutions such as the Organization of Petroleum Exporting Countries (OPEC), International Energy Agency (IEA), the Asia-Pacific Economic Cooperation (APEC), the European Union and the World Bank. He was listed on the panel of arbitrators of the Permanent Court of Arbitration. The listing of his professional memberships of energy- and arbitration-related institutes, working groups and councils is simply too long to enumerate here. When he left the directorship of the CEPMLP at Dundee, Thomas focused on his professional expertise in international dispute settlement, in the form of mediation and arbitration for large, complex, cross-border transnational

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disputes, primarily (but not exclusively) in the field of oil, gas, energy, infrastructure and mining based on contracts as well as investment treaties. He served as co-arbitrator in several investor-State arbitration cases, including the NAFTA Chapter XI arbitration International Thunderbird Gaming Corporation v Mexico (Ad hoc arbitration under the UNCITRAL Arbitration Rules) and TCW Group, Inc and Dominion Energy Holdings, LP v Dominican Republic (PCA arbitration under the UNCITRAL Arbitration Rules). He also frequently acted as expert witness and/or co-counsel in international arbitrations, including Glamis Gold Ltd v United States (Ad hoc NAFTA arbitration under the UNCITRAL Arbitration Rules), Duke Energy International Peru Investments No 1 Ltd v Peru, (ICSID Case No ARB/03/28), and Nykomb Synergetics Technology Holding AB v Latvia (SCC Case No 118/2001). He was also sought after for mediation in commercial disputes between international oil companies. Thomas’ visionary understanding of the influence of modern media and technology on the distribution of knowledge translated into the creation of the electronic database ‘Transnational Dispute Management’ (TDM). TDM focuses on recent developments in the area of arbitration and dispute management, and is available at http://www.transnational-dispute-management. com/. Another great achievement was the establishment of OGEMID—a mailing list which serves as a place for discussion, sharing of insights and intelligence, of relevant issues related in a significant way to international dispute management. Younger professionals are welcomed to Young OGEMID. Both fora have developed into a “must” for any lawyer engaged in international investment disputes, but also in complex commercial disputes in the energy and resources field. These achievements did not go unnoticed, as for example, OGEMID (originally set up as a discussion group for mainly CEPMLP PhD students, CEPMLP staff, select alumni and external colleagues) has now developed from about 25 members to well over 800. It was the first “post-box” through which colleagues shared their distress upon the news of Thomas’ unexpected death. In recognition of Thomas’ outreach to younger professionals, the organisers and arbitrators of the Foreign Direct Investment International Moot Court Competition grant the Thomas Wälde Advocacy Award for the Best Oralist of that year’s edition of the moot court. The premature death of Thomas Wälde has rightly given rise to global expressions of recognition, both of his merits as an academic and as a practitioner. This in memoriam book consists of four parts, reflecting the cornerstones of Thomas’ impressive career: arbitration, international organisations and international development, international economic law and natural resources [SECTION HEADINGS ARE SUBJECT TO CHANGE]. Its chapters deal with a wide range of issues: from fragmentation of international

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law, over contract law and lex mercatoria, to the private/public divide; zooming in on specific economic sectors, the interaction between different areas of international law and global financial developments. Each of the authors has known Thomas personally, either because they worked with him as colleagues in academia or legal practice, or because they were his students or (in one case) his teacher. As a result, each author has endeavoured to maintain the book’s coherence and focus on the person and work of Thomas Wälde, by weaving a personal anecdote through the introduction and by linking the topic of the chapter to the writings or other professional activities of Thomas. Thomas Wälde was not an easy person. He did not suffer fools gladly, and he did not hesitate to make his views forcefully known even on those occasions when silence might have been more prudent. His personality was staccato, perhaps even brusque. In the practice of law, he was sometimes thought of as ‘not a good team player’. But this complex, driven man was loved by his colleagues and students, as well as respected by them. I think of his prodigious erudition and all that I learnt from him. But I also think of the occasion when the two of us were asked to advise a particular university on a very sensitive personnel matter. Thomas took remarkable pains, wishing to be humane every bit as much as he wished to be efficient. Finally, I would like to extend my condolences to the family of Thomas Wälde. Nothing can ever compensate the untimely loss they are suffering but this book is offered as a sign of heart-felt appreciation for the work and life of Thomas Wälde.

PREFACE There are many people to thank in the production of this volume of essays such as this one, but none more than the man to whom it is dedicated, Prof. Dr. Thomas Wälde. Thomas was a legal polymath, as evidenced in the outpouring of shock and sadness at his untimely passing from hundreds of colleagues worldwide, so many of whom could never have known each other, but for a connection through him. That we could even report upon this spontaneous, transnational outpouring of is testament to Thomas’ early embrace of Internet technologies in establishing, and carefully cultivating, two global expert communities,1 which both continue to thrive today. Thomas Wälde’s professional and academic accomplishments were too many and varied to list in a brief introduction, so we will focus on only on two: his contribution to world peace and prosperity during his service at the United Nations; and his contribution to sustainable economic development and peaceful dispute settlement at the University of Dundee, Scotland. From 1976 to 1991, Thomas served in many capacities with the United Nations. First, he acted as a consultant advisor at the UN Centre on Transnational Corporations, from 1976 to 1979. In 1980, he became the UN Interregional Adviser on Mineral Law. From 1981–1983, he took on the role of UN investigator on occupation practices in the Palestinian Territories, as well as the key role in advising the Secretary General in issuing his reports on “Permanent Sovereignty over Natural resources” and “Permanent Sovereignty in Occupied Palestinian Territories.” Thomas took on expanded responsibilities in 1983, then serving as UN Inter-regional Adviser on Energy, Mineral and International Investment Law until 1991. Throughout his time at the United Nations, Thomas excelled in providing rapid, ad-hoc advisory services to five-dozen different developing country governments throughout the world. In short, Thomas Wälde was an indefatigable champion of economic development, who devoted his

1 Those two communities were: “OGEL” (Oil, Gas, Energy Law Intelligence) and “OGELFORUM,” an electronic journal and email-based discussion forum, established in January, 2003; and “TDM” (Transnational Dispute Management), “OGEMID” and “Young-OGEMID” (Oil, Gas, Energy, Mineral and Infrastructure Investment Dispute Management), established in 2004—and which became the premier discussion forum for the field of investment treaty arbitration whose rapid growth mirrored that of TDM and OGEMID. http://www .transnational-dispute-management.com, last visited 14 March 2011.

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considerable creative talents to finding new ways to assist the leaders and citizens of less developed countries acquire the indigenous skills and international resources to improve global wellbeing. Following a successful career at the United Nations, in 1991 Thomas Wälde, became a Professor and the Executive Director of a little known programme at the University of Dundee, Scotland, known as the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP). By 1995, he had been awarded a coveted Jean-Monnet Chair from the EU Commission. By the time Thomas stood down from his position as CEPMLP Executive Director in 2002, it had grown into the world’s most prestigious interdisciplinary graduate programme of its kind, with a diverse and talented group of permanent and “global” faculty members, and an even more diverse student body. In 2004, Thomas’ achievements were recognised with the prestigious Queen’s Award for Enterprise, which he gladly shared with the entire faculty and staff of the CEPMLP. Thomas Wälde received many accolades during his career, which we hope is honoured by this volume. A prolific writer and speaker, he served as a visiting professor at prestigious institutions such as Paris II (Pantheon-Assas), the Washington College of Law at American University and Columbia University’s Law School. He was a Special Member of the Association of International Petroleum Negotiators; a member of the Institut pour l’Arbitrage International in Paris; and a member of Essex Court Chambers in London. He was also honoured with an invitation to serve as the 2004 Director of the Hague Academy for International Law Research Seminar on International Investment Law. In a recording made in 2007, Thomas explained that his work had always been motivated by the desire to determine precisely “what lay underneath the emperor’s clothes” and to explain the answers he found, no matter how “unpalatable it might be to listeners”. Thomas had a well-deserved reputation for making frank assessments of situations; for holding a wide array of multi-disciplinary interests; and for his prodigious work ethic. At the time of his death, he had no less than one half dozen papers underway. His departure from the Executive Director’s position at the CEPMLP did not signal a relaxation of his work schedule by any means. Indeed, Thomas became busier than ever, serving as counsel, consultant, expert witness and arbitrator in the burgeoning field of investment treaty arbitration. He also became a leading proponent of mediation—as a much less costly, politically feasible alternative to arbitration. Todd first met Thomas in 1998, through an email discussion group on international regulatory reform, which he established in 1996 and moderated until 2000. Within two years of their electronic meeting, Todd was teaching a course for Thomas once a year at the CEPMLP. They shared many views on

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the function and development of international economic law, and its potential for future growth, addressed in some of the chapters found herein. They collaborated on a number of academic endeavours together and Todd had the privilege of appointing Thomas to his first treaty arbitration tribunal. Freya and Thomas met almost a decade later, in 2006. While she was enrolled in the Ph.D. programme at Cambridge, she grasped every opportunity to travel to London to participate in conferences with eminent practitioners. At their first meeting, she enthusiastically explained her research topic to Thomas, who showed himself most interested but then said: “you do realise that in practice the focus is for 90% on evidence and enforcement, and only about 10% on the detailed intricacies of applying international law? Let that show in your work.” This wise advice still resounds in her ears whenever writing an article or consulting on a case. It is truly a shame that we lost Thomas at the height of his dynamic and productive career. Many professionals have felt the loss of his guidance, which was always freely and generously given. Thomas was a natural teacher who excelled in mentorship. His candour and his inescapable dearth of pretence was a constant source of insight and amusement to us over the years. Thomas had mentors himself. Two of them, Professor Detlev Vagts, Thomas’ academic mentor and teacher at Harvard Law School, and Dame Rosalyn Higgins QC, who was Thomas’ academic mentor upon his move to Dundee, have both shared some personal insights about Thomas with us. We are grateful for both of these contributions. We also thank each author and co-author for the many contributions made to this volume, which we hope reflects the panoply of interests that Thomas addressed during his career. In addition, we thank the CEPMLP for its support in hosting the conference upon which this volume is largely based.2 It is our fondest hope that many CEPMLP alumni members will have a chance to read this book, particularly as all of the royalties it generates will be returned to the CEPMLP in support of the charitable trust established in his memory. Finally, thank you, Thomas, for making our lives and our profession at least a little better, and a lot livelier, than they would have been without you. Todd Weiler London, Ontario March 2011

Freya Baetens Leiden, The Netherlands March 2011

2 The conference was held on 19–20 October, 2009, at the Old Course Hotel, at St. Andrews, Scotland, close to the location that Thomas, Professor Charlotte Wälde, and their daughter, Olivia, made their home. The proceeds of the conference have been appended to this volume.

PART ONE

WHERE PUBLIC MEETS PRIVATE

INTRODUCTION Emmanuel Gaillard* Thomas Wälde was, first and foremost, a complete thinker. Having started his career and having specialized in the field of natural resources, he found a natural flow of the mind in questions of international investment law and international arbitration. I knew Thomas Wälde in all three capacities at which he excelled: as a Professor of law dedicated to his students, as a forceful expert witness in arbitration proceedings, and as a thoughtful author. I first came to know him as a Professor of law during the defense examination of a PhD candidate at University of Paris II on investment arbitration. His principled approach in relation to the protection of investments was immediately striking. As an expert witness, he proved to be a tenacious advocate of the theses he put forward, leaving very little room for challenge to those who had the privilege of cross-examining him. As a prolific and respected author, he was and continues to be an invaluable resource for all those having an interest in the fields to which he applied his formidable analytical mind. Although international arbitration was not his first—and by far not his only—field of study, it soon bore the impact of his influential thinking. A number of his works in this discipline have become indispensable readings. In particular, Thomas Wälde’s extensive and early writings on the Energy Charter Treaty (ECT) constitute the best analysis on the topic. The seminal work he edited on The Energy Charter Treaty, an East-West Gateway for Investment and Trade1 show how intuitive Thomas was on the strength of a treaty which, only a few years later, has become one of the main instruments of promotion of the rule of law in the field of energy. A number of other articles on the subject are equally known as reference works.2 Unsurprisingly, he

* Professor of Law, University of Paris XII; Head of the International Arbitration Group of Shearman & Sterling LLP. 1 See The Energy Charter Treaty, an East-West Gateway for Investment and Trade (Thomas Wälde ed., Kluwer Law International, London/The Hague/Boston, 1996). 2 See in particular Thomas Wälde, “Investment Arbitration under the Energy Charter Treaty: An Overview of Selected Key Issues Based on Recent Litigation Experience”, in Arbitrating Foreign Investment Disputes—Procedural and Substantive Legal Aspects (Norbert Horn and Stefan Kröll eds., Kluwer Law International, The Hague, 2004), p. 193; Thomas Wälde, “Energy Charter Treaty-based Investment Arbitration: Controversial Issues”, 5 The Journal of World Investment & Trade 373 (2004).

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became involved as the principal expert in the arbitration having resulted in the first award rendered on the basis of the ECT.3 Other areas of investment law and international arbitration in which Thomas Wälde will unquestionably leave a legacy include his analysis of the controversial topic of umbrella clauses,4 the specific nature of investment arbitration5 or equality of arms in investment arbitration.6 It is therefore only natural that a tribute to Thomas Wälde includes a section on international arbitration issues. The variety of the contributions published by Thomas’ friends perplexingly reflects the diversity of Thomas’ interests: Walid Benhamida addresses international investment arbitration arising from domestic law, followed by Sophie Nappert and Andrea Bjorklund’s reflections on the fragmentation of international law, Hans van Houtte’s analysis of private war damage claims and the Eritrea-Ethiopia Claims Commissions, Giuditta Cordero Moss’s investigation into the translation law of contracts and Mark Kantor’s views on the negotiated settlement of public infrastructure disputes.

3 Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia, Award of December 16, 2003. See also T. Wälde and K. Hobér, “The First Energy Charter Treaty Arbitral Award”, 22 Journal of International Arbitration 83 (2005). 4 See Thomas Wälde, “The ‘Umbrella’ Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases”, 6 The Journal of World Investment and Trade 183 (2005). 5 See Thomas Wälde, “The Specific Nature of Investment Arbitration”, in Les aspects nouveaux du droit des investissements internationaux / Académie de Droit international de La Haye: New Aspects of International Investment Law / Hague Academy of International Law (Philippe Kahn ed., Martinus Nĳhoff, Leiden/Boston, 2007). 6 See Thomas Wälde, “ ‘Equality of Arms’ in Investment Arbitration: Procedural Challenges”, in Arbitration under International Investment Agreements: A Guide to the Key Issues (Katia Yannaca-Small ed., Oxford University Press, New York, 2010), p. 161. See also Thomas Wälde, “Procedural Challenges in Investment Arbitration under the Shadow of the Dual Role of the State”, 26 Arbitration International 3 (2010).

HUMAN RIGHTS & INVESTMENT TRIBUNALS JURISPRUDENCE ALONG THE PRIVATE/PUBLIC DIVIDE Moshe Hirsch* I. Introduction On 28 September 2004, I met Thomas Wälde in Prague and he advised me to explore the interactions between investment and non-investment treaties. Later on, he was so kind as to provide insightful comments on the paper submitted to the ILA group on foreign investment law on this topic.1 Since this conversation, we talked several times about this fascinating topic and I continued to examine this subject from different perspectives. The links between various specialized branches of international law have recently attracted vast attention from international law scholars,2 and investment scholars are increasingly exploring the links between international investment and human rights law.3 Facing various arguments raised during different stages of litigation (interim orders, awards on liability and remedies) regarding the relationships between investment obligations and human rights treaties,

* Maria Von Hofmannsthal Chair in International Law, Faculty of Law and Department of International Relations, Hebrew University of Jerusalem; Principal Research Fellow, Centre for Energy, Petroleum, Mineral Law & Policy, Faculty of Law, University of Dundee. I am grateful to Ohad Abrahami for his excellent research assistance. 1 This paper was eventually published (with modifications) as: M. Hirsch, ‘Interactions between Investment and Non-Investment Obligations in International Investment Law’ in P. Muchlinski, F. Ortino, and C. Schreuer, (eds), The Oxford Handbook of International Law on Foreign Investment (Oxford; Oxford University Press, 2008), 262. 2 See, e.g., the special issue of the Michigan Journal of International Law on “Diversity or Cacophony?: New Sources of Norms in International Law Symposium” (2004) 25 Michigan Journal of International Law. See also ILC, ILC Report on the Work of its 58th Session: Conclusion 2, Conclusions of the work of the Study Group on the Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law (2006) UN Doc A/61/10, para 251. . 3 See, e.g., P.M. Dupuy, E.U. Petersmann and F. Francioni (eds.) Human Rights, International Investment Law and Investor-State Arbitration (Oxford; Oxford University Press, 2009); L.E. Peterson, ‘Human Rights and Bilateral Investment Treaties: Mapping the Role of Human Rights Law within Investor-State Arbitration’ (Rights and Democracy, Montreal, 2009), available at http://www.dd-rd.ca/site/_PDF/publications/globalization/HIRA-volume3ENG.pdf.; L.E. Peterson, ‘South Africa’s Bilateral Investment Treaties Implications for Development and Human Rights’, Occasional Papers, N° 26 (2006), available at http://library.fes .de/pdf-files/iez/global/04137.pdf.

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investment tribunals had to develop new rules regarding the relationships between these two branches of international law. This chapter briefly examines the jurisprudence of investment tribunals regarding the weight to be accorded to human rights treaties in investment disputes. The chapter also discusses some factors that have affected the approach undertaken by these tribunals, emphasizing the predominant private features of contemporary investment arbitral tribunals, and the dominant public character of international human rights law. Finally, the chapter addresses the emerging trend of investment tribunals to grant increasing weight to public interests and more general norms of international law. II. The Approach undertaken by Investment Tribunals Arguments regarding the application of international human rights treaties4 have been raised by all parties to investment arbitration: investors (e.g., Channel Tunnel case),5 host States (e.g., Siemens case)6 and NGOs (e.g., Grand River case).7

4 On the links between human rights and investments, see, e.g., T. Weiler, ‘Balancing Human Rights and Investor Protection: a New Approach for a Different Legal Order’ (2004) 27 Boston College International and Comparative Law Review 429; UNCTAD, ‘Selected Recent Developments in IIA Arbitration and Human Rights: International Investment Agreements’ (2009) 2 International Investment Agreements Monitor; L.E. Peterson and K.R. Gray, International Human Rights in Bilateral Investment Treaties and in Investment Treaty Arbitration (Winnipeg, IISD, 2003), 16–17; L. Davarnejad, ‘Strengthening the Social Dimension of International Investment Agreements by Integrating Codes of Conduct for Multinational Enterprises’ (OECD Global Forum on Forum Investment VII, March 2008), available at www .oecd.org/dataoecd/10/5/40352144.pdf; The High Commissioner for Human Rights, ‘Human Rights, Trade and Investment’ (Report) (2 July 2003), E/CN.4/Sub.2/2003/9, at 8–13; K. Kolben, ‘Foreign Investment and the Human Rights Link’ in Human Rights, Trade and Investment Matters at 50–51 (Amnesty International, 2006). Available at: http://www.amnestyusa .org/business/HRTradeInvestmentMatters.pdf. 5 The Channel Tunnel Group argued in the Euro-Tunnel case that the obligations of the United Kingdom and France, as set out in the 1986 Concession Agreement, should be read in conjunction with the European Convention on Human Rights and its First Protocol regarding peaceful enjoyment of possessions. Channel Tunnel Group v Governments of the United Kingdom and France (Partial Award), paras. 107, 110, available at http://www.pca-cpa.org/ upload/files/ET_PAen.pdf. See also Biloune v Ghana, 95 ILR 183 (1993). 6 In the Siemens v. Argentina case, Argentina invoked the jurisprudence of the European Court of Human Rights to reduce the amount of compensation for property deprivations that were motivated by social objectives. Siemens v Argentina, available at http://ita.law.uvic.ca/ documents/Siemens-Argentina-Award.pdf. 6 Ibid., at para. 346. 7 Amicus Curiae Submission of the Office of the National Chief of the Assembly of Nations, 19 January 2009, available at http://www.state.gov/documents/organization/117812.pdf. See also D. Vis-Dunbar, ‘Canadian First Nations Chief Intervenes in NAFTA Chapter 11’ (27 February, 2009) Investment Treaty News, available at: http://www.investmenttreatynews

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Investment tribunals that encounter questions regarding the relationship between human rights and investment instruments may rely on the rules developed in general international law regulating inconsistencies among international legal rules. Thus, peremptory norms of international law (jus cogens) prevail over all other inconsistent rules of international law.8 Unless peremptory rules of international law are involved, Article 103 of the UN Charter stipulates that the Charter’s provisions prevail over other incompatible treaties.9 Where rules of jus cogens or the UN Charter provisions are not involved, other rules of international law regulate interactions among inconsistent international legal rules. If different international rules arise from customary and treaty law, generally, treaty and custom have equal weight,10 and inconsistencies are regulated by three inter-related principles: (i) lex specialis derogat generali, i.e., a specific rule prevails over a general one; (ii) lex posterior derogate priori, i.e., a later in time rule prevails over a prior one; (iii) respecting the parties’ intentions, i.e., where the parties intend to replace a rule deriving from one source of international law with another rule included in another source of law (e.g., replace a customary rule with a treaty rule), the rule preferred by the parties will prevail.11 Similar regulatory principles apply where the inconsistent rules are included in the same source of international law. Thus, where rules emanating from two (or more) treaties are incompatible, the specific treaty trumps the general one.12 Additional rules regarding the relationships between conflicting treaties are elaborated in Article 30 of the Vienna Convention on the Law of Treaties. .org/cms/news/archive/2009/02/27/canadian-first-nations-chief-intervenes-in-nafta-chapter11-tobacco-dispute.aspx. 8 Article 53 of the Vienna Convention on the Law of Treaties, (1969) 8 ILM 679, 698. See also, The Conclusions of the ILC Fragmentation Report, above n 2, Conclusions 32–33; See also, D. Shelton, ‘Normative Hierarchy in International Law’ (2006) 100 American Journal of International Law, 291, at 297–319; R. Jennings and A. Watts, Oppenheim’s International Law (London; Longman, 1992) 7–8; L.F. Damrosch, L. Henkin, R.C. Pugh, O. Schacter and H. Smit, International Law: Cases and Materials, 4th edn (St. Paul Minnesota; West Group, 2001), 105–106. 9 See also Article 30(1) of the Vienna Convention on the Law of Treaties (1969) 8 ILM 679, 691. The special status of the UN Charter’s provisions was affirmed by the International Court of Justice’s decision in the Lockerbie Case regarding the relationship between article 25 of the Charter and the 1971 Montreal Convention for the Suppression of Unlawful Acts Against the Safety of Civil Aviation. Case Concerning Questions of Interpretation and Application of the 1971 Montreal Convention Arising from the Aerial Incident at Lockerbie (Libyan Arab Jamahiriya v United Kingdom), Request for the Indication of Provisional Measures, Order 14 April 1992. 1992 ICJ Reports 3. On Article 103 of the UN Charter, see Conclusions 34 of the Conclusions of the ILC Fragmentation Report, above n 2. 10 See L.F. Damrosch et al., International Law: Cases and Materials, above n 8, at 119. 11 The Conclusions of the ILC Fragmentation Report, above n 2, Conclusions 5, 10 and 24; L.F. Damrosch et al., International Law: Cases and Materials, above n 8, at 109. 12 R. Reuter, Introduction to the Law of Treaties (London; Kegan Paul International, 1995), 132–133.

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Facing arguments regarding the interactions between human rights and investment instruments, investment tribunals have refrained from resorting to the above principles regarding the relationships between various sources of international law. While investment tribunals often incorporate in their decisions various rules of general international law on State responsibility,13 treaty law,14 “postal regulation”15 or bribery;16 an analysis of investment tribunals’ jurisprudence regarding the relevance of human rights instruments reveals that they adopt a quite consistent approach with regard to the nonsignificant role of international human rights law in investment disputes.17 Thus far, no investment tribunal has discharged a party from its investment obligations or significantly reduced the amount of compensation due to the injured party.18 With few exceptions (such as the Mondev award),19 investment tribunals have declined to examine thoroughly the specific provisions of international human rights instruments invoked by the parties. Investment tribunals offered various reasons for their reserved approach regarding the application of human rights instruments in investment relations. Those reasons included lack of sufficiently elaborated arguments by the parties (e.g., the Azurix20 and Siemens21 cases), lack of jurisdic-

13 On the application of rules of state responsibility by investment tribunals, see, e.g., K. Hober, ‘State Responsibility and Attribution’ in P. Muchlinski, F. Ortino and C. Schreuer (eds), The Oxford Handbook of International Law on Foreign Investment (Oxford, Oxford University Press, 2008) 549. 14 On the application of the 1969 Vienna Convention on the Law of Treaties by investment tribunals, see C. Schreuer ‘Diversity & Harmonization of Treaty Interpretation in Investment Arbitration’ (April 2006) 3 Transnational Dispute Management, Available at www .transnational-dispute-management.com. 15 UPS v. Canada, Award 24 July, 2007, at paragraphs 118–119, http://www.naftaclaims. com/Disputes/Canada/UPS/UPS-Canada-Final_Award_and_Dissent.pdf. 16 See, e.g., World Duty Free v. Kenya, ICSID Case No. ARB/00/7, Award, (4 October 2006) (invoking international public policy); Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, (Award), (2 August 2006) (invoking general principles of law). For a discussion of these decisions, see Section IV below. 17 See, e.g., M. Hirsch, ‘Investment Tribunals & Human Rights: Divergent Paths’ in PM Dupuy, F. Francioni and E.U. Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford, Oxford University Press, 2009) 97. 18 For a criticism of this approach of investment tribunals, see M. Sornarajah, The Clash of Globalisations and the International Law on Foreign Investment (Ottawa; The Norman Paterson School of International Affairs, 2002), Available at: http://www.carleton.ca/ctpl/pdf/ papers/sornarajah.pdf; M.A. Orellana, ‘Science, Risk and Uncertainty: Public Health Measures and Investment Disciplines’ in P. Kahn and T.W. Wälde (eds.), New Aspects of International Investment Law, (Martinus–Nijhoff, BRILL, 2007). 19 Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2 at para. 1, available at http://www.state.gov/documents/organization/14442.pdf. 20 Azurix v. Argentina (2006), ICSID CASE No. ARB/01/12 at para 3, available at ita.law. uvic.ca/documents/AzurixAwardJuly2006.pdf—full reference to the case? 21 Siemens v. Argentina (2007), supra note 6, Paragraph 354.


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tion (e.g., the Biloune,22 Euro-Tunnel,23 and Aguas del Tunari24 cases), and the different features of international investment law and international human rights law (e.g., the Azurix Annulment award25 and the Siemens case).26 In some cases the tribunals did not elaborate the reasons for this approach.27 In several cases, investment tribunals were ready to examine the impact of the European human rights law on investment disputes (the Mondev, Tecmed28 and Azurix awards). Thus, for instance the Mondev and Tecmed tribunals cited the case law of the European Court of Human Rights (the James case)29

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Biloune v. Ghana, 95 ILR 184, 213 (1993). Channel Tunnel Group v Governments of the United Kingdom and France (Partial Award), available at http://www.pca-cpa.org/upload/files/ET_PAen.pdf—Paragraphs 151 and 153. 24 Aguas del Tunari SA v Bolivia, ICSID Case No. ARB/02/3, Petition of La Coordinadora Para La Defensa Del Agua Y. Vida, and others to The Arbitral Tribunal, 29 August 2002, at paras 47 and 48, available at http://ita.law.uvic.ca/documents/Aguaaboliviapetition.pdf. Letter from the President of the Tribunal in the Matter of Aguas del Tunari v. The Republic of Bolivia, 29 January 2003, available at http://www.law.berkeley.edu/faculty/ddcaron/ Documents/ICSID%20Arbitrations/ARB-02-3_NGO_Petition_ICSID_Response_2003.pdf. 25 See the tribunal in this case stated as follows: “128. Argentina also has referred by analogy to the European Convention on Human Rights and NAFTA. As the extent of the protections afforded by an investment protection treaty depends in each case on the specific terms of the treaty in question, the Committee regards comparisons with differently-worded treaties as of limited utility, especially treaties outside the field of investment protection. It is noted that the European Court of Human Rights has held that (subject to possible exceptions) a shareholder in a company does not have standing to bring a claim for a violation of the company’s right’s under Article 1 of Protocol No. 1 of the European Convention on Human Rights, and that the mere fact that there has been a violation of the company’s right’s under Article 1 of Protocol No. 1, does not of itself mean that there has been a violation of the shareholder’s rights under that provision. However, such an approach does not inform the situation where a law or treaty might confer certain rights directly on a shareholder which would be violated by an injury to the company, or answer the question whether the shareholder could have standing to bring a claim in that event.” [Emphasis added, M.H.; footnote omitted]. Azurix Corp. v. The Argentine Republic, Decision on the Application for Annulment of the Argentine Republic, paragraph 128, available at http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal= viewCase&reqFrom=Home&caseId=C5. 26 Siemens v. Argentina, supra 6, at para 354. 27 See, e.g., Sempra v Argentina, at paras 4, 93, available at http://www.investmentclaims. com/decisions/Sempra_Energy-Award.pdf. Similarly, certain activities mentioned in the Decision on Annulment in the Mitchel v. DR Congo (mainly seizure of property and incarceration) raise human rights issues but there is no indication that the tribunal dealt addressed these issues. Patrick Mitchell v Democratic Republic of Congo, ICSID Case No. ARB/99/7, decision on the application for annulment of the award, 1 November 2006, at para 1, citing para 23 of the award, 9 February 2004 (not publicly available). Cited in C. Reiner and C. Schreuer, ‘Human Rights and International Investment Arbitration’, below n 42, at 88. 28 Tecmed v Mexico, 43 International Legal Materials 133, (2004), at para. 122. 29 92 James and Others v The United Kingdom, [1986] European Court of Human Rights 2 (21 February 1986) at para 50.—references in Mondev and Tecmed? Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, Award, 29 May 2003, ICSID Case No. 00/2, 43 ILM (2004) 133, at para. 122; Mondev v. USA, supra note 19, at paragraph 144. 23

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in order to underline the vulnerability of investors in foreign countries. A later attempt by Argentina to apply the same ECHR judgment was dismissed by the Siemens tribunal, emphasizing the inconsistency between the European Convention’s rules regarding the ‘margin of appreciation’ and international investment law.30 In the Saipem case, the tribunal cited the ECHR jurisprudence to conclude that rights under judicial decisions are protected property that can be the object of an expropriation, and that court decisions can amount to an expropriation.31 In the CMS case, the tribunal concluded, after analyzing the relevant circumstances, that the issues disputed by the parties did not raise the ‘question of affecting fundamental human rights’.32 Nevertheless, as noted above, in all these cases that dealt with the interaction between investment and human rights instruments, no investment tribunal has absolved a party from its investment obligations, or reduced the amount of compensation due to be paid to the injured party in such cases. It is noteworthy that investment tribunals have not sought to develop a consistent body of rules regarding the relationships between human rights and investment instruments, and it seems that their jurisprudence is still in a formative period. III. Across the Private/Public Divide Several factors may explain the general reluctance of investment tribunals to accord a significant role to international human rights instruments.33 This chapter emphasizes the different private/public conceptions that underlie these two spheres of international law. International investment and human rights laws deal with asymmetric legal relations between States and individuals (including corporations). States are in a superior position vis-à-vis individuals and foreign investors. Sovereign States may, for example, change the domestic law applicable to individuals, and they are in a better position to 30 Siemens v. Argentina, supra note 6, at para 354. On this part of the award, see L. Liberti, ‘The Relevance of Non-Investment Treaty obligations in the Assessment of Compensation’ (November 2007) 4 Transnational Dispute Management No. 6. 31 Saipem SpA v Bangladesh, ICSID Case No. ARB/05/07, decision on jurisdiction and recommendation on provisional measures, 21 March 2007, at paras 130 and 132. 32 CMS Gas Transmission v Argentina, Final Award, 12 May 2005, ICSID Case No. ARB/01/08, 44 ILM (2005) 1205, at paragraph 121. For Argentina’s argument in this regard, see paragraph 114. 33 On several explanations for the general reserved attitude of investment tribunals to noninvestment treaties, see M. Hirsch, ‘The Interaction between International Investment Law & Human Rights Treaties: A Sociological Perspective’ in Y. Shany (ed), Multi-Sourced Equivalent Norms in International Law (Hart, forthcoming); M. Hirsch, ‘Conflicting Obligations in International Investment Law: Investment Tribunals’ Perspective’, in Y. Shany and T. Broude (eds), The Allocation of Authority in International Law (Hart, 2008) 323.


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influence changes in international law.34 Consequently, legal rules developed in those spheres aim to compensate individuals and corporations that are in an inferior position under the domestic law, and this goal is prominently attained by enhancing their legal protection at the international level. While international investment and human rights laws strive to cope with similar structural challenge, they have evolved along different conceptual lines. International human rights law has largely developed within the public law sphere and it primarily applies to the relationship between individuals (including legal persons) and the State.35 Consequently, various freedoms and rights have been assigned to individuals, and diverse authorities and obligations have allocated to states. In light of the original inferior position of individuals, human rights law has established a long list of individual rights and freedoms to protect weaker individuals in their relationships with government authorities. Aiming to cope with a parallel structural pattern, international investment law undertook a different route and focused on the private law aspects of the relations between host governments and foreign investors. Consequently, investment tribunals are inclined to attach considerable weight to reciprocal promisebased obligations (arising, for instance, from the investment contract) and reliance-based obligations (arising, for instance, from the host State’s legislation or declarations made by its officials that are primarily formed during the negotiations and the ‘entry stage’.36 International investment law (both investment treaties and tribunals’ jurisprudence) largely aims to protect various private law undertakings that are made between the host State and the foreign investor. Thus, facing asymmetric relationships, modern international investment law inclines to ‘lower’ these relationships to the private law

34 See, e.g., M. Hirsch, The Arbitration Mechanism of the International Center for the Settlement of Investment Disputes (Kluwer, 1993) 133–134; T. Wälde, ‘The Present State of Research Carried Out by the English-Speaking Section of the Centre for Studies and Research’, (2007) Hague Academy Report on Int’l Investment Law, at 76–79. 35 The distinction between jus privatum (private law) and jus publicum (public law) is attributed to the Roman jurist Ulpian, who drew a distinction between laws which govern relations between citizens and the government, and the principles which govern the relations of citizens with one another. T. Rowland, ‘Private Law’, in The Philosophy of Law: An Encyclopedia, Vol. II, (Garland Publishing, 1999) 687. For an insightful analysis of the history of the public-private divide, see M.J. Horwitz, ‘The History of the Public/Private Distinction’, (1982) 130 University of Pennsylvania Law Review, at 1423–1428. 36 During the negotiations towards a contract and the ‘entry stage’, the gap between the parties’ legal capacities is relatively smaller. Following this stage, the superior position of the host state regarding its influence upon the content of both domestic and international law is glaring. In light of these asymmetric relations, investment tribunals are inclined to level the normative field and emphasize the obligations included in the investment agreement and presentations made during the ‘entry stage’, as well as various circumstances prevailing at this critical stage, such as the information available to both parties in this phase.

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level (by emphasizing the private-law nature of the relevant undertakings), and to ‘elevate’ their protection to the international level. The public/private divergence between international human rights law and investment law37 arises also from the different scope of application, as well as the cogent and non-reciprocal nature of the rules applicable in these spheres. While investment obligations primarily bind the host State and the foreign investor inter se, international human rights obligations reflect fundamental values of the international community38 and have erga omnes application.39 The public nature of international human rights law conspicuously arises from the mandatory character of these rights. In contrast to private jus dispositivum obligations, some fundamental human rights are considered as jus cogens. 40 Furthermore, unlike the emphasis on reciprocal obligations in investment law, the compelling nature of human rights obligations results in the prohibition to operate countermeasures that infringe fundamental human rights.41 An examination of the institutional features of human rights and investment laws also reveals the public/private split between these two spheres. Investors’ rights are primarily protected by arbitral tribunals, which are mainly established by bilateral or trilateral investment treaties. Investment arbitral tribunals are regularly established on an ad hoc basis, premised on

37 On the public/private divide and investment disputes, see G. Van Harten, ‘The PublicPrivate Distinction in the International Arbitration of Individual Claims Against the State’ (August 24, 2009). Available at SSRN: http://ssrn.com/abstract=1461125; WW Burke-White, and A. Von Staden, ‘Private Litigation in a Public Law Sphere: The Standard of Review in Investor-State Arbitrations’ (August 28, 2009). Univ. of Pennsylvania Law School, Public Law Research Paper No. 09–23. Available at SSRN: http://ssrn.com/abstract=1465899. 38 See, for instance, the Preamble to the Institute of International Law Resolution on Obligations Erga Omnes in International Law (2005) (hereinafter Resolution on Obligation Erga Omnes), available at http://72.14.221.104/custom?q=cache:GIqqQm7n3QcJ:www.idi-iil.org/ idiE/resolutionsE/2005_kra_01_en.pdf+self-determination&hl=ca&ct=clnk&cd=2&lr=lan g_en|lang_es|lang_ ca&ie=UTF-8. 39 See e.g., the Resolution on Obligation Erga Omnes ibid. 40 On the peremptory nature of fundamental human rights, see, e.g., T. Koji, ‘Emerging Hierarchy in International Human Rights and Beyond’, (2001) 12 European Journal of International Law 917, 927; T. Meron, ‘On a Hierarchy of International Human Rights’, (1986) 80 AJIL 1. 41 See Article 50(1)b) of the International Law Commissions rules on Responsibility of States for Internationally Wrongful Acts (2001), available at http://untreaty.un.org/ilc/texts/ instruments/english/draft%20articles/9_6_2001.pdf. See also Article 60(5) of the 1969 Vienna Convention on the Law of Treaties, (1969) 8 ILM 679, 701; 1979 ILC Ybk (Vol. II, Part 2), 116; 1992 ILC Ybk (Vol. II, Part 2), 32–33. M. Craven, ‘Legal Differentiation and the Concept of the Human Rights Treaty in International Law (2000) 11 European Journal of International Law 489.


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the parties’ autonomy42 and consent,43 and they tend to adopt the private inter partes model that characterizes international commercial arbitration.44 Thus, for instance, in the Aguas del Tunari v. Bolivia case, a request by NGO to inter alia submit amicus curiae briefs (based also on the 1966 International Covenant of Civil and Political Rights the request to submit amicus curiae45 was turned down by the tribunal, explaining that: [. . .] it is the Tribunal’s unanimous opinion that your core requests are beyond the power or the authority of the Tribunal to grant. The interplay of the two treaties involved [the ICSID Convention and the BIT] and the consensual nature of arbitration places the control of the issues you raise with the parties, not the Tribunal.46 [Emphasis and insertion added]

One of the significant factors influencing the character of investment tribunals as inter partes or public dispute settlement mechanisms relates to the exposure of their proceedings to the public, as well as the participation of public interest groups in the legal proceedings. Generally, investment arbitration proceedings are not open to the public, tribunals do not disclose copies 42

On the major role of parties’ autonomy and private aspects of international economic arbitration, Bagheri notes: “In essence, arbitration is an institution by which individuals adjudicate disputes privately insofar as the law allows. The distinguishing factor of this form of private justice is its consensual and voluntary nature.” M. Bagheri, ‘Party Autonomy in Its Jurisdictional Capacity: The Place of International Commercial Arbitration’ in M. Bagheri (ed.), International Contracts and National Economic Regulation, (Kluwer, 2000) 95, 106. This author also states: “The supremacy of private initiative in international trade and investment is recognized once it is translated into the legal notion of party autonomy in international economic transactions. [at p. 113] 43 See, for instance, the following statement regarding the jurisdiction of ICSID tribunals: “Consent of the parties is the cornerstone of the jurisdiction of the Centre.”, Report of The Executive Directors on the Convention on the Settlement of Investment Disputes Between States and Nationals of other States (1965), available at http://www.worldbank.org/icsid/basicdoc/ partB-section05.htm. On the major role of the parties’ consent in arbitral investment proceedings and the ensuing limited competence to address human rights issues, see also C. Reiner and C. Schreuer, ‘Human Rights and International Investment Arbitration’ in P.M. Dupuy, F. Francioni and E.U. Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford; Oxford University Press, 2009) 82. 44 See, e.g., T. Wälde, ‘The Present State of Research Carried Out by the English-Speaking Section of the Centre for Studies and Research’ (2007) Hague Academy Report on International Investment Law, 75–76; G. Van Harten, Investment Treaty Arbitration and Public Law (Oxford, Oxford University Press, 2007) 5–6, 58; G. Van Harten and M. Loughlin, ‘Investment Treaty Arbitration as a Species of Global Administrative Law’ (2006) 17 The European Journal of International Law 121, 126–145. On the dominant private features of international arbitration, see also C. Rogers, ‘The Vocation of International Arbitrators’ (2005) 20 American University International Law Review 944, 957, 993–994. 45 Aguas del Tunari S.A. v. Republic of Bolivia, ICSID Case No. ARB/02/3 (Netherlands/ Bolivia BIT), NGO Petition to Participate as Amici Curiae, 29 August 2002, http://ita.law.uvic .ca/documents/Aguaaboliviapetition.pdf. 46 Letter from President of Tribunal Responding to Petition, 29 January 2003, available at http://ita.law.uvic.ca/documents/Aguas-BoliviaResponse.pdf.

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of written pleading and other documents submitted to them, and oral hearings are closed to the public.47 The prevailing atmosphere of confidentiality in most investment arbitral proceedings tends to intensify the adjudicators’ perception that their principal role is settling a private dispute between the specific parties, and to diminish the weight given to broader public interests that are often related to human rights. In contrast to ad hoc investment arbitration, human rights tribunals (like the European and Inter-American courts of Human Rights) present plain public features: they are permanent courts and their proceedings are regularly open to the public. Unlike the enforcement of investment obligations, exposure of human rights violations to the public is a major instrument for inducing States to respect their international obligations (‘the politics of shame’).48 Tribunals regularly fulfill two principal functions: settling disputes between the particular rival parties and developing standards of future behavior. Different tribunals emphasize different roles, and the perception of adjudicators of their essential function often influences the content of their decisions. Generally, tribunals that emphasize their law-making role are more likely to take into account wider public policy considerations (including those relating to human rights and environmental protection), and seek a due balance between the competing principles. On the other hand, tribunals that perceive their role in settling the specific dispute between the particular parties (the inter partes model) are less likely to grant significant weight to broader policy issues that are reflected in non-investment treaties. Most investment tribunals incline to adopt the inter partes model (which is prevalent in commercial arbitration) and grant precedence to their role as settlers of disputes between the particular litigants.49

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As noted by Knahr and Reinisch, the most restrictive rules are included in UNCITRAL Arbitration rules, ICSID tribunals handle confidentiality issues rather restrictively, and access to documents is easier in the context of NAFTA Chapter 11 proceedings. For a detailed analysis of the arbitration rules of UNCITRAL, ICSID and NAFTA, see C. Knahr and A. Reinisch, ‘Transparency versus Confidentiality in International Investment Arbitration—The Biwater Gauff Compromise’ (2007) 6 International Courts and Tribunals 97, 98–103; J. Delaney and DB Magraw, ‘Procedural Transparency’, in P. Muchlinski, F. Ortino and C. Schreuer (eds), The Oxford Handbook of International Law on Foreign Investment (Oxford, Oxford University Press, 2008) 721. 48 See, e.g., J.H. Lebovic and E. Voeten, ‘The Politics of Shame: The Condemnation of Country Human Rights Practices in the UNCHR’ (2006) 50 International Studies Quarterly 861. 49 See, e.g., Glamis Gold .v. United States of America, Award, June 8, 2009, paragraphs 3 and 7, available at http://www.naftalaw.org/Disputes/USA/Glamis/Glamis-USA-Award.pdf; T. Wälde, ‘The Present State of Research’, above n 43, 75–76; G. Van Harten, Investment Treaty Arbitration and Public Law (Oxford, Oxford University Press, 2007), 5–6, 58.


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“Thus, the Romak tribunal stated in that regard: Ultimately, the Arbitral Tribunal has not been entrusted, by the Parties or otherwise, with a mission to ensure the coherence or development of “arbitral jurisprudence.” The Arbitral Tribunal’s mission is more mundane, but no less important: to resolve the present dispute between the Parties in a reasoned and persuasive manner, irrespective of the unintended consequences that this Arbitral Tribunal’s analysis might have on future disputes in general. It is for the legal doctrine as reflected in articles and books, and not for arbitrators in their awards, to set forth, promote or criticize general views regarding trends in, and the desired evolution of, investment law.50 (Emphasis added)

The predominantly private character of investment tribunals, and their emphasis on the private-commercial aspects of investment disputes, may well explain those tribunals’ ingrained inclination not to focus on public policy issues (such as human rights obligations) that are involved in investment disputes. Most investment tribunals that did refer to human rights jurisprudence cited the case law of the European Court of Human Rights in order to protect the ‘private’ rights of investors vis-à-vis the host state.51 Investment tribunals’ inclination to focus on the private law aspects of investment disputes constitutes also de-politicization strategy52 enabling them to evade controversial ideological issues in international law. Most international investment rules are included in bilateral or trilateral treaties, and the lack of dense global rules in this field is explained by various factors, prominently disagreements between developing and developed countries, as well as the opposition of environmental and human rights NGOs.53 Wide-

50 Romak v. Uzbekistan, Award 26 November, 2009, at paragraph 171, http://www.pca-cpa. org/showpage.asp?pag_id=1339. 51 See, e.g., on Tecmed, Azurix, and Seipem awards in Section II above. 52 It is interesting to note that channeling investment disputes to international tribunals established by BITs was designed, inter alia, to de-politicize foreign investment disputes, and reduce the tensions that often accompany intervention of governments in such disputes. K.J. Vandervelde, United States Investment Treaties: Policy and Practice, (Deventer; Kluwer Law & Taxation, 1992) 21–25. 53 See, e.g., M.J. Trebilcock and R. Howse, The Regulation of International Trade, 3rd edn (London and New York; Routledge, 2005), 457–461; M. Matsushita, T.J. Schoenbaum and PC Mavoroidis, The World Trade Organization: Law, Practice and Policy, 2nd edn (Oxford; Oxford University Press, 2006), 836–838; A.B. Zampetti and P. Sauve, ‘International Investment’, in A.T. Guzman and AO Sykes (eds), Research Handbook in International Economic Law (Cheltenham UK; Edward Elgar, 2007) 211, at 249–251. This opposition of NGOs and developing countries to multilateral investment instruments was prominent with regard to the failed attempts to establish the comprehensive Multilateral Agreement on Investment (MAI). Trebilcock and Howse, 459–460. On the MAI, see also Zdenek Drabek, ‘A Multilateral Agreement on Investment: Convincing the Sceptics’, World Trade Organization, Economic Research and Analysis Division, Staff Working Paper 98-05 (June 1998); Matsushita, Schoenbaum and Mavoroidis, The World Trade Organization, 833–835.

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spread controversies between developing and developed States regarding the content of international investment rules reached their pick during the 1960s and 70s, marking an ideological divide.54 This rift still reverberates in contemporary international investment law, particularly in regard to the highly sensitive issues of expropriations and compensation for expropriations. Legal-ideological controversies are even more conspicuous in the sphere of international human rights (compared to investment law), and particularly with regard to the human rights of foreign investors. Fundamental disputes regarding the content and implementation of international human rights law have often evolved along political and ideological lines (e.g., Eastern ~ Western States, developing ~ developed States, Christian ~ Islamic States).55 Questions regarding the human rights of foreign investors have had particularly divisive effects among States. Disagreements between Western and Socialist countries regarding compensation for expropriations precluded the inclusion of the right to property in the 1966 Human Rights Covenants.56 Thus, the focus of investment tribunals on the private law aspects of investment disputes, and on the specific legal provisions set out in the particular investment agreement or treaty, enable these tribunals to evade highly controversial human rights issues that are involved in investment disputes. Where a non-investment tribunal encountered legal issues involving investment and human rights rules, it did not hesitate to accord significant weight to human rights instruments. The Southern African Development Community Tribunal discussed international legal rules applicable to expropriations undertaken by the government of Zimbabwe, and the tribunal did extensively apply various human rights treaties.57 In contrast to investment tribunals, however, this is a permanent tribunal (established in 1992) that 54 A.F. Lowenfeld, International Economic Law (Oxford; Oxford University Press, 2002), 378–380, 403–415. 55 J. Gordon, ‘The Concept of Human Rights: The History and Meaning of its Politicization’, (1998) 23 Brooklyn Journal of International Law 691; M.W. Mutua, ‘Politics and Human Rights: An Essential Symbiosis’, in M. Byers (ed), The Role of International Law in Politics (Oxford; Oxford University Press, 2000) 149; H.J. Steiner and P. Alston, International Human Rights in Context: Law, Politics and Morals (Oxford, Clarendon Press, 1996), 226; A. Cassese, International Law, 2nd edn (Oxford, Oxford University Press, 2005), 378–381. On IslamicChristian disputes regarding the scope of the freedom of religion, see M. Hirsch, ‘Freedom of Proselytism under the Fundamental Agreement and International Law’ (1998) 47 Catholic University Law Review 407. 56 Cassese, ibid., at 382–383; L. Damrosch et al., International Law: Cases and Materials, above n 8, at 601, 663, 672, 676. On the controversy regarding the right to property, see also M. Sornarajah, The International Law on Foreign Investment, 2nd edn (Cambridge, Cambridge University Press, 2004), at 367–371; F.F. Martin, S.J. Schnably, R.J. Wilson, J.S. Simon and M.V. Tushnet, International Human Rights and Humanitarian Law (Cambridge NY; Cambridge University Press, 2006), 911–937. 57 Campbell v. Zimbabwe (2008), Southern African Development Community Tribunal, at pp. 19–21, 47–51 available at www.zwnews.com/Ruling281108.pdf.


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presents prominent public features. The tribunal is established by multilateral treaty, with sessions that are regularly held in public, and its members are appointed for a term of five years (and may be re-appointed for a further term of five years).58 This case indicates that non-investment tribunals (which present ‘public’ features) are more likely to grant a significant role to human rights treaties. IV. Contemporary Trends and Future Changes? As discussed above, the prevalent private features of international investment tribunals and investment law may explain the current un-enthusiastic attitude of the investment tribunals towards human rights instruments. Some contemporary developments in international investment law indicate that the existing reserved approach of investment tribunals may change in the future. An analysis of recent decisions of investment tribunals indicates that investment adjudicators pay more attention to the public aspects involved in investor-State arbitral proceedings,59 and that this enhanced awareness may well influence the content of their decisions. This trend is discernable, for instance, from recent investment tribunals’ decisions regarding corruptive practices and international public policy as well as with respect to amicus brief submission by non-parties and transparency of arbitral investment proceedings. First, the increasing attention paid by investment tribunals to the public interest is reflected in a series of decisions on the impact of corruptive 58 The tribunal was established in 1992 as part of the SADC Treaty [South African Development Community] (Article 9(g) of the SADC Treaty); and became operational in 2005 (See website at: www.sadc.int/tribunal ). Its jurisprudence is based on the SADC treaty, along with other treaties, general rules of public international law and principles of the Law of States (Article 21 of the Tribunal’s Protocol ). The tribunal is comprised of five regular members, along with a pool of five replacement members selected by the president in case a regular member is ill or unavailable (Article 3(2) of the Protocol). Sessions are administered by a panel of three members unless the tribunal decides on a full bench of five (Article 3(3) of the Protocol ). The sessions are held in public unless the tribunal or one of the parties requests otherwise (Rule 45 of the Tribunal’s Rules of Procedure). Members are appointed for a period of five years with the option of being appointed for another five (Article 6(1) of the Protocol). On the SADC Tribunal see also e.g. the tribunal website at: www.sadc.int/tribunal; O.C. Ruppel and F.X. Bangamwabo, ‘Chapter 8—The SADC Tribunal: A Legal Analysis of its Mandate and Role in Regional integration’, (2008) 1 Monitoring Regional Integration in Africa Ybk; J. Pauwelyn, ‘Going Global, Regional or Both? Dispute Settlement in the Southern African Development Community (SADC) and Overlaps with the WTO and Other Jurisdictions’ (2004) 13 Minnesota Journal of International Law 231, 239–240. 59 On the process of ‘Judicialization’ in investment arbitration proceedings, see A. Stone Sweet and F. Griesel, ‘Transnational Investment Arbitration: From Delegation to Constitutionalization’ in P.M. Dupuy, F. Francioni and E.U. Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford; Oxford University Press, 2009) 118.

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practices on investment proceedings.60 In the World Duty Free case (2006), the ICSID tribunal found that a payment made by foreign investor to former Kenyan president to obtain a contract was a bribe.61 After discussing international instruments, domestic laws, and arbitral decisions relating to corruption, the tribunal ruled that bribery is contrary to the transnational public policy.62 Consequently, the tribunal declined to uphold the claim.63 As to the impact of bribery on the public, the tribunal explained: The answer, as regards public policy, is that the law protects not the litigating parties but the public; or in this case, the mass of tax-payers and other citizens making up one of the poorest countries in the world.64 [Emphasis added]

Similarly, the tribunal in the El Salvador case found that the claimant’s investment had been fraudulently made (involving forged documents to the government).65 The tribunal stated that international public policy bars the parties from benefiting from their own fraud, and ruled that the dispute was not arbitrable under the El Salvador-Spain treaty. Furthermore, the current trend to enhance the transparency of investment tribunal proceedings to the public66 is manifested in several instruments, arbitral decisions and State practice. The recent changes of the ICSID Arbitration Rules included the revised Article 37(2) which grants the tribunal the authority (after consulting the parties) to allow non-disputing parties to

60 On investment tribunals and corruption, see H. Raeschke-Kessler and D. Gottwald, ‘Corruption’, in P. Muchlinski, F. Ortino and C. Schreuer (eds), Oxford Handbook of International Investment Law (Oxford; Oxford University Press, 2008) 584; BM Cremades, “Corruption, International Public Policy and the Duties of Arbitrators”, (November 2003–January 2004) 58 Dispute Resolution Journal, available at http://findarticles.com/p/articles/mi_qa3923/ is_200311/ai_n9463706/print?tag=artBody;col1. 61 World Duty Free v. Kenya (ICSID Case no. Arb. 00/7), [4 October 2006] para. 136; http://ita.law.uvic.ca/documents/WDFv.KenyaAward.pdf. 62 World Duty Free, para. 157. See also paragraphs 138–156. 63 World Duty Free, para. 157. The tribunal ruled that the agreement was voidable and that Kenya “was legally entitled to avoid and did avoid legally”—and that “[t]he Claimant is not legally entitled to maintain any of its pleaded claims in these proceedings as a matter of ordre public international and public policy under the contract’s applicable laws.” [para. 188] 64 World Duty Free, para. 181. 65 Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, (Award), (2 August 2006) paras. 335–336, 245–252. Similarly, the arbitrator [Lagergren] stated in the famous case n° 1110 (1963) of the International Chamber of Commerce that bribery constituted “gross violation of good morals and international public policy” and he ruled that jurisdiction must be declined in this case. [Cited in Duty Free World—para. 148] 66 On this trend, see, e.g., Knahr and Reinisch, above n 46, at 97; J.E. Vinuales ‘Amicus Intervention in Investor-State Arbitration’, (January 2007) 61 Dispute Settlement Journal 72.


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submit amicus briefs.67 Indeed, several NGOs have already utilized this rule and presented written submissions to ICSID tribunals.68 As to public access to NAFTA documents, the NAFTA Trade Commission published in July 2001 a Note of Interpretation, stating that “nothing in the NAFTA precludes the Parties from providing public access to documents submitted to, or issued by, a Chapter Eleven tribunal.”69 In addition, the parties to the NAFTA pronounced that they agree to make available to the public all documents submitted or issued by a Chapter Eleven Tribunal.70 Furthermore, the NAFTA Trade Commission issued a declaration, in October 2003, stating that “[n]o provision of the [NAFTA] [. . .] limits a Tribunal’s discretion to accept written submissions from a person or entity that is not a disputing party”71 and recommended procedures for tribunals to accept and rule on petitions for amicus briefs.72 The parties to the Methanex dispute agreed to allow public observation of the tribunal hearings through closed-circuit television.73

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Article 37(2) of the ICSID Arbitration Rules provides as follows: “(2) After consulting both parties, the Tribunal may allow a person or entity that is not a party to the dispute (in this Rule called the “non-disputing party”) to file a written submission with the Tribunal regarding a matter within the scope of the dispute. In determining whether to allow such a filing, the Tribunal shall consider, among other things, the extent to which: (a) the non-disputing party submission would assist the Tribunal in the determination of a factual or legal issue related to the proceeding by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties; (b) the non-disputing party submission would address a matter within the scope of the dispute; (c) the non-disputing party has a significant interest in the proceeding. The Tribunal shall ensure that the nondisputing party submission does not disrupt the proceeding or unduly burden or unfairly prejudice either party, and that both parties are given an opportunity to present their observations on the non-disputing party submission.” ICSID Rules of Procedure for Arbitration Proceedings, available at http://www.worldbank.org/icsid/basicdoc/partF.htm On these rules, see K. Tienhaara, ‘Third Party Participation in Investment-Environment Disputes: Recent Developments’, (2007) 16 Review of European Community & International Environmental Law 230. 68 See, L. Cotula, Briefing 5: International Arbitration (International Institute for Environment and Development, August 2007), available at http://www.iied.org/pubs/pdfs/17016IIED .pdf. 69 Notes of Interpretation of Certain Chapter 11 Provisions, (NAFTA Free Trade Commission, July 31, 2001), available at http://www.naftaclaims.com/files/NAFTA_Comm_1105_ Transparency.pdf. On this Note, see M. Kinnear, Transparency and Third Party Participation in Investor-State Dispute Settlement (OECD Symposium, 2005), available at http://www.oecd .org/dataoecd/6/25/36979626.pdf, at page 4. 70 Ibid. 71 NAFTA Free Trade Commission, Statement of the Free Trade Commission on Non-Disputing Party Participation, available at http://www.dfait-maeci.gc.ca/nafta-alena/ nondisputing-en.pdf. 72 Ibid. 73 SE Gaines, ‘International Decisions: Methanex v. US’, (2006) 100 American Journal of International Law 683, at note 33.

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The trend of increasing transparency of investment arbitral proceedings to the public and participation of NGOs is also manifested in new bilateral investment treaties.74 The decision rendered by the Biwater tribunal highlights the competing interests regarding transparency, as well as the general trend in investment arbitration. The Biwater tribunal was careful to indicate that against the need for transparency in treaty proceedings, there is a need for procedural integrity of the arbitral proceedings.75 The tribunal explained that in light of the accepted need for greater transparency in treaty proceedings,76 the public nature of the particular investment dispute and the interests in transparency of public information, any restrictions on transparency “must be carefully and narrowly delimited.”77 As to the current trends in investment arbitration, the tribunal stated that “[w]ithout doubt, there is now a marked tendency towards transparency in treaty arbitration.”78 The Methanex tribunal allowed amicus submission and explained this ruling, inter alia, by the public interest in the arbitral proceedings.79 Similarly, the tribunal in the Aguas Argentinas case decided to accept amicus briefs and emphasized the difference between regular private litigation and particular public interests involved in this investment dispute.80 As Reiner and Schreuer noted in that respect: “[. . .] it appears that in permitting amicus curiae briefs, arbitral tribunals seem more moved by efforts to increase transparency and

74 See, e.g., Articlea 10.20(2)–(3) and Article 10.21 of the Dominican Republic—Central America—United States Free Trade Agreement, available at http://www.ustr.gov/assets/ Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file328_4718 .pdf. 75 Biwater Gauff v United Republic of Tanzania (Procedural Order), at para. 112, available at http://www.worldbank.org/icsid/cases/arb0522_procedural_order3.pdf. 76 Ibid., at para. 133. 77 Ibid., at para. 147. 78 Ibid., at para. 114. 79 The tribunal stated in that respect: “There is an undoubtedly public interest in this arbitration. The substantive issues extend far beyond those raised by the usual transnational arbitration between commercial parties. This is not merely because one of the Disputing Parties is a state . . . The public interest in this arbitration arises from its subject matter”. Methanex v United States, Decision of the Tribunal on Petitions from Third Persons to Intervene as “Amici Curiae”, at para. 49, available at http://www.iisd.org/pdf/methanex_tribunal_first_ amicus_decision.pdf. 80 The Tribunal stated in that respect: “19. These factors lead the Tribunal to conclude that this case does involve matters of public interest of such a nature that have traditionally led courts and other tribunals to receive amicus submissions from suitable nonparties. This case is not simply a contract dispute between private parties where nonparties attempting to intervene as friends of the court might be seen as officious intermeddlers.” Aguas Provinciales de Santa Fe S.A., Suez, Sociedad General de Aguas de Barcelona S.A. and InterAguas Servicios Integrales del Agua S.A. v. the Argentine Republic, ICSID Case No. ARB/03/17, Order in Response to Petition for Participation as Amicus Curiae, 17 March 2006, available at http://icsid.worldbank. org/ICSID/FrontServlet?requestType=GenCaseDtlsRH&actionVal=ListPending.


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respond to public interest rather than by human rights considerations.”81 While these tribunals were more concerned with increasing transparency in response to public interest, it seems that their decisions to allow amicus briefs reinforce the trend to accord more attention to public interest issues, including human rights. As discussed above, one of the significant factors influencing the approach of investment tribunals towards human rights instruments relates to the extent of the exposure of these tribunals to the public, as well as the involvement of public interest groups in the legal proceedings. Generally, increasing public transparency and participation of NGOs in investment proceedings is likely to exert further pressure on investment arbitrators to accord a greater weight to broader public interests, including human rights. V. Concluding Remarks Recent trends in a growing number of international treaties (both on investment and human rights), and an increased resort to international investment arbitration, enhance the prospects for interactions between rules established in investment and human rights laws. Thus, it is not surprising that various arguments regarding the application of international human rights treaties to investment disputes are increasingly raised by all parties to arbitral investment proceedings (host States, foreign investors and NGOs). Investment tribunals that encounter questions regarding inconsistent obligations may search for guidance in the principles developed in general international law regulating inconsistencies among international legal rules (jus cogens, lex specialis, etc.).82 Investment tribunals often incorporate into their decisions various rules of general international law (e.g., on treaty law and State responsibility); but they are generally reluctant to rely on aforementioned general principles regarding inconsistent obligations arising from non-investment instruments. An analysis of investment tribunals’ case law reveals that when these tribunals encounter arguments regarding human rights treaties, these tribunals are markedly inclined not to accord a significant role to human rights treaties. So far, no investment tribunal has absolved a party from its investment obligations or reduced the amount of compensation due to the injured party. Several factors may explain the general reluctance of investment tribunals to attach significant weight to the provisions of international human rights treaties. This chapter mainly addresses the different private/public conceptions 81 82

Reiner and Schreuer, above n 42, at p. 93. See Section II above.

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that underlie these two spheres of international law. While international investment and human rights laws aim to cope with similar structural pattern of asymmetric relations (between sovereign States and individuals), they have evolved along different conceptual paths. International human rights law has largely evolved within the public law sphere and international investment law has focused on the private law aspects of the relations between host governments and foreign investors. Thus, investment tribunals are inclined to emphasize reciprocal promise-based as well as reliance-based obligations that are primarily formed during the negotiations and the ‘entry stage’. The private/public divide is also discernable from examination of the institutional features of the tribunals active in these spheres. Investors’ rights are primarily protected by ad hoc tribunals that are premised on the parties’ autonomy and consent, so these tribunals tend to adopt the private inter partes model that characterizes international commercial arbitration. Unlike investment tribunals, human rights tribunals present clear public features: they are permanent courts and their proceedings are regularly open to the public. The prevalent private features of investment tribunals, and their emphasis on the private-commercial aspects of investment relations, may well explain those tribunals’ deep-rooted tendency not to focus on public policy issues (such as human rights and environmental protection) that are involved in investment disputes. Most investment tribunals that did refer to human rights jurisprudence cited the case law of the European Court of Human Rights in order to protect investors’ rights. The inclination of investment tribunals to emphasize the private law aspects of investment disputes constitutes also a de-politicization strategy, enabling these tribunals to evade ideological controversies that are often involved in international human rights protection. Some contemporary developments in international investment law indicate that the existing reserved approach of investment tribunals may change in the future. Recent decisions of investment tribunals indicate that investment adjudicators pay increasing attention public aspects involved in investor-State disputes, and that this enhanced awareness is likely to influence the content of their decisions. This trend is discernable, for instance, from recent investment tribunals’ decisions regarding corruptive practices, amicus submissions by non-parties and transparency of arbitral investment proceedings. If continued, the ongoing process of increasing awareness of investment tribunals of public interests may lead tribunals to accord greater weight to broader public interests, including those reflected in human rights instruments.

PUBLIC OR PRIVATE DISPUTE SETTLEMENT? THE CULTURE CLASH IN INVESTMENT TREATY ARBITRATION AND ITS IMPACT ON THE ROLE OF THE ARBITRATOR Stephan W. Schill* I. Introduction Investment treaty arbitration between foreign investors and host States is a relatively young field that has emerged to its full force only during the last decade.1 With the substantive law governing investor-State disputes primarily being international treaties,2 it merges public international law with arbitration as a dispute settlement mechanism that is, at present, most widely spread in the context of international commercial transactions between private parties, even though it has a long-standing record in inter-State dispute settlement as well.3 In practice, this hybridization in international investment law brings together practitioners, as counsel and arbitrators, with different professional and formative backgrounds: one group joining the field from private commercial law and arbitration, the other coming from public international law and inter-State dispute settlement. While this combination is often fruitful for resolving factually and legally complex disputes under

* Senior Research Fellow, Max Planck Institute for Comparative Public Law and International Law, Heidelberg; Rechtsanwalt (admitted to the bar in Germany); Attorney-at-Law (New York); formerly International Arbitration Law Clerk to The Hon. Charles N. Brower, Arbitrator, 20 Essex Street Chambers, London and Law Clerk to Judge Abdul G. Koroma, International Court of Justice, The Hague; LL.M. in European and International Economic Law (Universität Augsburg, 2002); LL.M. International Legal Studies (New York University, 2006); Dr. iur. (Johann Wolfgang Goethe-Universität Frankfurt am Main, 2008). 1 The number of investor-State arbitrations under investment treaties has risen just within the last decade to almost four hundred. See UNCTAD, ‘Latest Developments in Investor-State Dispute Settlement’, IIA Issues Note No. 1, pp. 1–2 (2011), available at http://www.unctad. org/en/docs/webdiaeia20113_en.pdf (last accessed 22 April 2011) (recording an aggregate of 390 investment based disputes by the end of 2011). 2 However, the governing law is not necessarily limited to international law. Instead, national law often plays an important role in many investment treaty arbitrations. Cf. Article 42 ICSID Convention. See generally Spiermann, O., ‘Applicable Law’, in: Muchlinski, P., Ortino, F., Schreuer, C., [Eds.], The Oxford Handbook of International Investment Law, OUP (2008) 89. 3 See Brower, C.H., ‘The Functions and Limits of Arbitration and Judicial Settlement under Private and Public International Law’, 18 Duke J. Int’l & Comp. L. (2008) 259, at pp. 265–291; Grey, C., Kingsbury, B. ‘Developments in Dispute Settlement: Inter-State Arbitration Since 1945’, 63 BYIL (1992) 97.

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investment treaties, it also results in a veritable culture clash between different epistemic communities, as private commercial and public international lawyers often have different perspectives on and different philosophies about the role of law, the State, and the function of dispute resolution.4 The difference between private commercial and public international lawyers comes to light, for example, in different approaches to the interpretation of investment treaties: the latter driven by the application of the Vienna Convention on the Law of Treaties as the authoritative tool for treaty interpretation,5 the former occasionally influenced by drawing analogies between the interpretation of treaties and the interpretation of contracts.6 The difference between private commercial and public international lawyers also manifests itself in different depths and emphases in the reasoning of arbitral awards: the latter regularly driven by a more principled approach to ascertaining the normative content of treaty standards, the former characterized primarily by a case-by-case approach that focuses more on the facts of the case than on principled legal analysis.7 Most importantly, however, the differences between private commercial and public international lawyers involve very different approaches to understanding the nature and function of dispute settlement and the role of the decision-maker therein, including its relation to the parties, its qualifications, and its professional and ethical obligations. Whereas a commercial arbitration perspective conceptually suggests that arbitrators are responsible only to the parties in resolving a specific dispute and are subject only to lim4 Note that the description of the ethos of private commercial and public international lawyers in the text is deliberately stereotypical in order to squeeze out the essence of how the different communities perceive arbitration and its function. Needless to say that reality is more complex and nuanced. The mindsets, however, are quite similar to the different perceptions of dispute settlement under the old GATT system and under the WTO Dispute Settelement Understanding. See Weiler, J., ‘The Rule of Lawyers and the Ethos of Diplomats’, 35 J.W.T. (2001) 191, at pp. 194–197. 5 Vienna Convention on the Law of Treaties (adopted 23 May 1969) 1155 U.N.T.S. 331. The rules of interpretation under the Vienna Convention are reflective of the customary international law rules on treaty interpretation. See most recently Case Concerning Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment, 20 April 2010, para. 65, available via http://www.icj-cij.org (last accessed 22 April 2010). 6 See generally Wälde, T., ‘Interpreting Investment Treaties: Experiences and Examples’, in: Binder, C., Kriebaum, U., Reinisch, A., Wittich, S., [Eds.], International Investment Law for the 21st Century—Essays in Honour of Christoph Schreuer, OUP (2009) 724. For an example of the latter approach see Plama Consortium Ltd. v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 Feb. 2005, para. 200 (analogizing investment treaties with “ordinary contracts” for purposes of deciding whether the most-favored-nation clause in the BIT between Cyprus and Bulgaria allowed the investor to incorporate Bulgaria’s broader consent to investor-State arbitration under some of Respondent’s third-country investment treaties). 7 See Paulsson, J., ‘Avoiding Unintended Consequences’, in: Sauvant, K., ChiswickPatterson, M., [Eds.], Appeals Mechanism in International Investment Disputes, OUP (2008) 241, at pp. 262–263. See also Wälde, supra note 6, at pp. 725–727.

public or private dispute settlement?

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its agreed by the parties, many public international lawyers are inclined to stress that the settlement of disputes under international law operates in a broader framework that has an ordering function for international relations more generally and thus is not under the exclusive control of the parties to the proceedings.8 While those with a commercial arbitration background tend to stress the private nature of dispute settlement in resolving an individual dispute between two parties based on party autonomy and backed by confidentiality,9 public international lawyers emphasize the implications of investment treaty arbitration for a public international order by determining the international legality of State conduct and by making States comply with their public international law obligations. In this latter perspective, investment treaty arbitration thus contributes to objectives of the international community as a whole.10 This article will analyze the conceptual differences in approaches to investor-State dispute resolution by private commercial and public international lawyers, arguing that investment treaty arbitration involves several dimensions of publicness, that is, effects and impact beyond the settlement of a specific dispute as such. Consequently, investor-State arbitration should not be viewed as a sub-species of commercial arbitration but rather as a specific dispute settlement mechanism under international law that forms part of international law’s public order function. Furthermore, this article discusses with respect to some selective examples, to which extent this categorization normatively shapes the understanding of the role of the arbitrator in investment treaty cases, its professional and ethical obligations, and the way arbitrators must exercise their procedural powers in conducting proceedings.

8 On the private and public function of dispute settlement under international law see Brown, C., ‘The Inherent Powers of International Courts and Tribunals’, 76 BYIL (2006) 195, at pp. 229–237. 9 See Legum, B., ‘Investment Treaty Arbitration’s Contribution to International Commercial Arbitration’, 60(3) Disp. Resol. J. (2005) 71, at p. 73 (noting that “for most international practitioners today, private international commercial arbitration is the only form of the genre they have ever known. The private arbitration model, thus, has naturally become the default template for all kinds of international arbitration today—including investment treaty arbitration”). 10 See, for example, Van Harten, G., Loughlin, M., ‘Investment Treaty Arbitration as a Species of Global Administrative Law’, 17 EJIL (2006) 121, at pp. 145–150; Van Harten, G., Investment Treaty Arbitration and Public Law, OUP (2007), pp. 58 et seq.; Wälde, T., ‘The Specific Nature of Investment Arbitration’, in: Kahn, P., Wälde, T., [Eds.], Les Aspects Nouveaux du Droit des Investissements Internationaux/New Aspects of International Investment Law, Martinus Nijhoff (2007) 43, at pp. 112 et seq.; Schill, S., ‘Crafting the International Economic Order: The Public Function of Investment Treaty Arbitration and its Significance for the Role of the Arbitrator’, 23 Leiden J. Int’l L. (2010) 401, at pp. 409–418 (stressing the public nature of investment treaty arbitration). See now also Glamis Gold, Ltd. v. United States of America, UNCITRAL/NAFTA, Award, 8 June 2009, paras. 3–9 (stating at para. 5 that “Chapter 11 of the NAFTA contains a significant public system of private investment protection”).

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stephan w. schill II. Dimensions of Publicness in Investment Treaty Arbitration

The culture clash between private commercial and public international lawyers crystallizes in the issue of whether investment treaty arbitration constitutes a private order dispute settlement mechanism like commercial arbitration or instead forms part of a public order dispute resolution system. For orders of the former kind, there is little need for dispute resolvers to take into account the potential impact of their decision on non-parties. Instead, arbitration in private order contexts involves mainly questions pertaining to the breach of contract between two private individuals or corporations, resulting, for example, in an award requiring the payment of damages, ordering specific performance, or determining the interpretation of contractual terms. Dispute resolution in this context is purely a private matter without impact on third parties. Whether the arbitrators correctly find the applicable law, correctly determine the relevant facts, correctly apply the law to the facts, and adequately reason their decision, is purely of concern to the disputing parties. Such private order dispute settlement is no more than “a vehicle for settling disputes between private parties about private rights.”11 Public order dispute settlement, by contrast, focuses, as aptly put by Chayes, not [exclusively] on the fair implications of private interactions, but on the application of regulatory policy to the situation at hand. The lawsuit does not merely clarify the meaning of the law, remitting the parties to private ordering of their affairs, but itself establishes a regime ordering the future interactions of the parties and of absentees as well.12

In such public order dispute settlement mechanisms, the decision-maker must be aware of his or her broader “audience” and of the broader implications of a decision, which potentially affects not only the disputing parties, but impacts other stakeholders who make use of the dispute settlement system, in particular unrelated investors and third States, and adapt their behavior and conduct in light of the emerging jurisprudence of investment tribunals. In addition, potential mistakes in a public order dispute settlement system are more serious, as they impact actors beyond the specific dispute. Investment treaty arbitration involves several dimensions of publicness. A first dimension of publicness relates to the fact that one of the disputing parties in an investor-State dispute is not a private commercial actor, but

11 Chayes, A., ‘The Role of the Judge in Public Law Litigation’, 89 Harv. L. Rev. (1976) 1281, at p. 1282. 12 Ibid., at p. 1281.


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a State that is responsible to its constituency and to its tax-payers.13 Thus, decisions in investment treaty arbitration often not only have effects for the State party as such and its treatment of a foreign investor, but can directly affect the State’s population. For example, an arbitral award preventing a State from lowering water or electricity tariffs because of the State’s promise to this effect can cut off parts of the host State’s population from access to those fundamental utilities. Similarly, investment treaty arbitrations increasingly involve complaints by foreign investors about general regulatory policies concerning, for example, the protection of the environment and human health,14 or anti-discrimination policies.15 Decisions by arbitral tribunals on these matters directly affect the social fabric in the host State and thus are of public interest. Finally, damages awards against a host State affect the taxpayers’ interests and the budgetary basis of the State. This dimension of publicness, defined in relation to the public in the host State, also explains the repeated demands for increased democratic legitimacy of investment treaty arbitration.16 A second dimension of publicness concerns the international level. This dimension of publicness arises out of what can be understood as the emergence of a treaty-overarching system of international investment protection which impacts investor-State relations rather independently of the specificities of distinct bilateral investment treaties (BITs). In other words, what we can observe, despite the fragmentation of international investment law into a myriad number of bilateral treaties and their implementation through one-off arbitral tribunals, is a framework governing international investment relations that comes close to a multilateral system. This framework is characterized by the existence of rather uniform principles of international investment law and arbitration that apply rather independently of the origin and destination of foreign investment flows.17 In this dimension, investment

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See Van Harten, G., Investment Treaty Arbitration and Public Law, OUP (2007), pp. 46 et seq.; Van Harten, G., ‘The Public-Private Distinction in the International Arbitration of Individual Claims Against the State’, 56 ICLQ (2007) 371, at pp. 378 et seq. 14 Methanex Corporation v. United States, UNCITRAL/NAFTA, Final Award of the Tribunal on Jurisdiction and Merits, 3 Aug. 2005; Chemtura Corporation ( formely Crompton Corporation) v. Canada, UNCITRAL/NAFTA, Award 2 Aug. 2010. 15 Piero Foresti, Laura de Carli and others v. Republic of South Africa, ICSID Case No. ARB(AF)/07/1, Award, 4 Aug. 2010. 16 Cf. Sampliner, G., ‘Arbitration of Expropriation Cases under U.S. Investment Treaties— A Threat to Democracy or the Dog that Didn’t Bark?’, 18 ICSID Rev.-FILJ (2003) 1; Choudhury, B., ‘Recapturing Public Power: Is Investment Arbitration’s Engagement of the Public Interest Contributing to the Democratic Deficit?’, 41 Vand. J. Transnat’l L. (2008) 775; see further Schneiderman, D., Constitutionalizing Economic Globalization: Investment Rules and Democracy’s Promise, CUP (2008). 17 See extensively Schill S., The Multilateralization of International Investment Law, CUP (2009).

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treaty arbitration is public to the extent that awards affect interests of States and investors that are not party to the specific investment dispute nor are even covered by the specific investment treaty at issue. Thus, the international public dimension arises out of the impact arbitral decisions have, within a quasi-multilateral regime, in influencing the conduct of third States and investors without connection to the specific dispute and its governing treaty.18 In fact, if investment treaty arbitration was a purely private dispute settlement mechanism, the United States or China, for example, should care little about a water dispute between a French investor and Argentina or a waste dispute between a Spanish investor and Mexico. One would expect disinterest of unrelated third States in investment arbitrations because the substantive and procedural law of international investment protection is built to avoid the development of any treaty-overarching principles of investment protection. Not only is the substantive law enshrined in bilateral treaties that directly only affect bilateral investor-State relations, but the procedural framework is drafted to ensure that the effects of investment treaty arbitration are strictly limited to the parties to the arbitration. Article 1136(1) NAFTA, for example, explicitly provides for the relative effect of arbitral awards by stating that “[a]n award made by a Tribunal shall have no binding force except between the disputing parties and in respect of the particular case.”19 Likewise, from a formal perspective, decisions of arbitral tribunals do not constitute binding precedent for subsequent arbitral proceedings.20 The reality of investment treaty arbitration, however, looks quite different. Far from conforming to the private litigation model where only the two disputing parties are affected by, or even interested in, the dispute, investment treaty arbitration displays numerous features attesting to its interna-

18 See also Kingsbury, B., Schill, S., ‘Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality, and the Emerging Global Administrative Law’, IILJ Working Paper 2009/6 (Global Administrative Law Series), available at http://www.iilj.org/ publications/documents/2009-6.KingsburySchill.pdf (last accessed 22 April 2010). 19 Similarly, Article 53(1) of the ICSID Convention provides that “[t]he award shall be binding on the parties.” This provision does not only lay down the obligation of the parties to the dispute to comply with the award, but also excludes any binding effect of an ICSID award on any other Contracting State. See Schreuer, C., Malintoppi, L., Reinisch, A., Sinclair, A., The ICSID Convention: A Commentary, CUP (2nd ed. 2009), Article 53, para. 16 (noting that in the preparatory works of the ICSID Convention nothing suggests the applicability of a stare decisis doctrine). 20 See, for example, AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 23; SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction, 29 Jan. 2004, para. 97 (all holding that the ICSID Convention does not make earlier ICSID decisions binding on subsequent tribunals). See also Schill, supra note 17, pp. 288–292.


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tional public dimension. This international public dimension is connected, first and foremost, to the fact that investment treaty awards, unlike their pendants in commercial arbitration, are regularly made public via the internet21 and in print journals.22 This allows investment treaty jurisprudence to develop into a public good around which expectations of interested but not directly affected parties can evolve and around which investment tribunals can build a system of jurisprudence much like in the context of institutional, court-based dispute resolution.23 The interest of actors that are not parties to specific proceedings in the jurisprudence of investment treaty arbitration is also mirrored in the recently changed ICSID Rules24 that allow, unlike in traditional commercial arbitrations, which is usually based on confidentiality, public hearings25 and the intervention of third parties as amici curiae,26 and require ICSID to “promptly include in its publications excerpts of the legal reasoning of the Tribunal.”27 Indeed, the publicness of investment treaty arbitrations and awards is the prerequisite of the important position precedent has assumed in the pleadings of the parties and in the decision-making of arbitral tribunals. References to ICSID decisions can be found in virtually all recent ICSID decisions on

21 See http://icsid.worldbank.org; http://ita.law.uvic.ca; http://www.investmentclaims.com; http://www.transnational-dispute-management.com; http://www.naftaclaims.com. 22 These are above all the ICSID Review, ICSID Reports, and International Legal Materials. 23 On the development of a system of de facto precedent see Schill, supra note 17, pp. 321–361. Rogers, C., ‘The Vocation of the International Arbitrator’, 20 Am. U. Int’l L. Rev. (2005) 956, at pp. 999–1005. 24 See Antonietti, A., ‘The 2006 Amendments of the ICSID Rules and Regulations and the Additional Facility Rules’, 21 ICSID Rev.-FILJ (2007) 427. 25 See Article 32(2) of the ICSID Rules. Some tribunals have already allowed public hearings even before the amendments of the ICSID Rules. See Sampliner, G., Teitelbaum, R., ‘Investor-State Treaty-Based Arbitration in 2004’, 4 LPICT (2005) 465, at p. 487 (referencing the NAFTA cases Methanex Corp v. United States and Canfor Corporation v. United States). See also Knahr, C., Reinisch, A., ‘Transparency versus Confidentiality in International Investment Arbitration—The Biwater Gauff Compromise’, 6 LPICT (2007) 97. 26 See Article 37(2) of the ICSID Rules. See further Zoellner, C., ‘Third-Party Participation (NGO’s and Private Persons) and Transparency in ICSID Proceedings’, in: Hofmann, R., Tams, C., [Eds.], The International Convention for the Settlement of Investment Disputes (ICSID)—Taking Stock After 40 Years, Nomos (2007), 179; Tams, C., Zoellner, C., ‘Amici Curiae im internationalen Investitionsschutzrecht’, 45 Archiv des Völkerrechts (2007) 217; Knahr, C., ‘Transparency, Third Party Participation and Access to Documents in International Investment Arbitration’, 23 Arb. Int’l (2007) 327. 27 Rule 48(4) of the ICSID Rules. What this amendment presupposes is that the public has an interest in the legal reasoning of arbitral awards, as compared to the fact-specific application and the identity of the parties. Although investment treaty arbitration is not exclusively conducted under the ICSID Convention, the Convention nevertheless accounts for the greatest number of investment treaty disputes. See UNCTAD, supra note 1, at p. 2 (stating that of 390 known investment dispute by the end of 2010 245 were filed with ICSID).

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jurisdiction and awards on the merits.28 In this context, “citations to supposedly subsidiary sources, such as judicial decisions, including arbitral awards, predominate” not only in quantitative terms;29 citations to earlier arbitral awards also reflect the qualitative impact of precedent on subsequent decisions. While arbitral tribunals emphasize the lack of de iure stare decisis,30 they nevertheless heavily turn to earlier decisions for guidance, in particular when it comes to interpreting and applying the standard substantive investor rights that feature in virtually all BITs.31 For example, in interpreting the standard of fair and equitable treatment, arbitral tribunals often engage more in discussion of how this standard was applied in arbitral case law in the past than in an independent interpretation of the governing treaty. For example, in the NAFTA arbitration in Waste Management v. Mexico, the Tribunal extensively described prior investment treaty awards on fair and equitable treatment in order to extrapolate a case-sensitive definition of that standard. Thus, the Tribunal defined fair and equitable treatment by recurring to earlier NAFTA awards: Taken together, the S.D. Myers, Mondev, ADF and Loewen cases suggest that the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety—as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process.32

Notably, instead of critically analyzing the earlier decisions, what primarily mattered for the Tribunal was, similar in style to a system of stare decisis, the application of the facts of the case to the standard developed from earlier

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Commission, J., ‘Precedent in Investment Treaty Arbitration—A Citation Analysis of a Developing Jurisprudence’, 24 J. Int’l Arb. (2007) 129; Fauchald, O., ‘The Legal Reasoning of ICSID Tribunals—An Empirical Analysis’, 19 EJIL (2008) 301. 29 Commission, supra note 28, at p. 148. In particular, Commission’s results show a “marked increase of citation to ICSID decisions by ICSID tribunals” (ibid., at p. 149). While ICSID tribunals between 1990 and 2001 cited, on average, approximately two earlier ICSID decisions and awards, this number increased to an average of more than seven within the period between 2002 and 2006. ICSID decisions on jurisdiction even cited to an average of nine earlier ICSID decisions or awards. Similar trends are also present with regard to decisions under the ICSID Additional Facility and non-ICSID investment treaty awards (see Tables 3–5, ibid., at pp. 149–150). 30 See Schill, supra note 17, pp. 291–292 (with references to arbitral decisions). 31 See also Kaufmann-Kohler, G., ‘Arbitral Precedent: Dream, Necessity or Excuse?’, 23 Arb. Int’l (2007) 357. 32 Waste Management, Inc. v. The United Mexican States, ICSID Case No. ARB(AF)/00/3 (NAFTA), Award, 30 Apr. 2004, para. 98.


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NAFTA decisions, not its own and independent interpretation of the text of NAFTA itself according to principles of treaty interpretation.33 While the earlier case law taken into account in Waste Management exclusively consisted of NAFTA awards, the development in arbitral jurisprudence relating to fair and equitable treatment through reliance on precedent functions largely identically with respect to case law generated under wholly unrelated treaties. Thus, for purposes of interpreting fair and equitable treatment the definition of that standard by the Tribunal in Tecmed v. Mexico, for example, which concerned a dispute under the BIT between Spain and Mexico,34 already has become a locus classicus that other tribunals adopted or refined in relation to the application of fair and equitable treatment—clauses in BITs between countries as diverse as Chile and Malaysia,35 Ecuador and the United States,36 or Germany and Argentina.37 This dynamic of generating a treaty-overarching investment jurisprudence, equally can be observed in arbitral jurisprudence concerning other standards of treatment, such as direct and indirect expropriation, full protection and security, national treatment, or most-favored-nation clauses.38 Parties to investment treaty arbitrations, in fact, fuel this dynamic by relying heavily in their pleadings on investment arbitration precedent in order to frame their arguments concerning the interpretation of investment treaties.39 This suggests that expectations develop among States and investors that arbitral tribunals not only take note of precedent cited by the parties but reason and ground their decisions within the discursive framework created by arbitral precedent. Parties to investment treaty disputes, in other words, come to expect that tribunals decide cases not by abstractly interpreting the governing BIT, but by embedding their decision-making into the preexisting discourse 33

Ibid., paras. 99 et seq. Tecnicas Medioambientales Tecmed S. A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 154. 35 MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004, paras. 113 et seq. 36 Occidental Exploration v. Ecuador, Final Award, 1 June 2004, para. 185. 37 Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Award, 6 Feb. 2007, paras. 298–299. 38 See for a discussion of the standards of international investment protection and the case law that has developed in that respect McLachlan, C., Shore, L., Weiniger, M., International Investment Arbitration—Substantive Principles (2007); Dolzer, R., Schreuer, C., Principles of International Investment Law (2008); A. Reinisch, Standards of Investment Protection (2008); Newcombe, A., Paradell, L., Law and Practice of Investment Treaties—Standards of Investment Protection (2009). 39 See, for example, AES Corporation v. Argentina, supra note 20, para. 18 (observing that the claimant relied on earlier investment awards “more or less as if they were precedents, [tending] to say that Argentina’s objections to the jurisdiction of this Tribunal are moot if not even useless since these tribunals have already determined the answer to be given to identical or similar objections to jurisdiction”). 34

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among investment treaty awards.40 Consequently, investment jurisprudence develops into a public good that is independent of the respective BIT in question and that contributes to the treaty-overarching concretization and development of principles of international investment law and arbitration. Similarly, the interpretation techniques used by arbitral tribunals illustrate that they perceive the various BITs as part of a uniform and overarching system of international investment law and dispute settlement that is of a public nature even in relation to those States that are unaffected by a specific investment arbitration or the underlying treaty. Thus, numerous examples illustrate that investment tribunals do not confine themselves to strictly bilateral methods of BIT interpretation, but interpret investment treaties against the background of a treaty-overarching framework. Notably, arbitral tribunals frequently draw, in interpreting the governing BIT, conclusions from the drafting of third-party BITs. This method of treaty interpretation was resorted to already in the first known investment treaty award in Asian Agricultural Products Ltd (AAPL) v. Republic of Sri Lanka, where the Triunal recognized: “[w]hen there is need of interpretation of a treaty it is proper to consider stipulations of earlier or later treaties in relation to subjects similar to those treated in the treaty under consideration.”41 This method of inter-

40 On the emergence of expectations in the reference to, application of, and justified departure from precedent see also Japan—Taxes on Alcoholic Beverages WT/DS8/AB/R, WT/DS10/ AB/R, WT/DS11/AB/R, Appellate Body Report, 4 Oct. 1996, p. 14 (observing that “[a]dopted panel reports are an important part of the GATT acquis. They are often considered by subsequent panels. They create legitimate expectations among WTO Members, and, therefore, should be taken into account where they are relevant to any dispute. However, they are not binding, except with respect to resolving the particular dispute between the parties to that dispute.”). Similarly Saipem S.p.A. v. The People’s Republic of Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007, para. 67 (“The Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.”). See also International Thunderbird Gaming Corporation v. The United Mexican States, UNCITRAL/NAFTA, Arbitral Award, 26 Jan. 2006, Separate Opinion by Thomas Wälde, para. 16 (“While individual arbitral awards by themselves do not as yet constitute a binding precedent, a consistent line of reasoning developing a principle and a particular interpretation of specific treaty obligations should be respected; if an authoritative jurisprudence evolves, it will acquire the character of customary international law and must be respected.”). See also ibid., paras. 129–130. 41 Asian Agricultural Products Ltd (AAPL) v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award, 27 June 1990, para. 40 (citing The United States of America on Behalf of Genie Lantman Elton v. The United Mexican States, Opinion, 13 May 1929, in: Opinions of Commissioners under the Convention concluded September 8, 1923, Vol. 2, U.S. Government Printing Office (1929) 301, at p. 307). Subsequently, this method of treaty interpretation


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pretation, called interpretation in pari materia,42 shows that arbitral tribunals presuppose the existence of a system of international investment law that overarches both the treaty subject to interpretation as well as the third-party treaty used for clarification. Finally, the increasing interaction between the dispute settlement activity of arbitral tribunals and investment treaty-making by States demonstrates the public character of investment treaty arbitration and the impact it has on third parties not directly involved in the proceedings.43 Thus, one can observe that even States that are not directly involved in a specific disputes react to investment treaty awards they disagree with by recrafting their investment treaty practice. The interpretation of MFN clauses in Maffezini v. Spain,44 for example, has led to “anti-Maffezini”-clauses in investment treaties among wholly unrelated States.45 Similarly, broad interpretations of fair and equitable treatment or the concept of indirect expropriation have led several States, including the United States, to introduce more nuanced wording of these provisions in their recent BIT practice.46

played a role in the decisions of various other arbitral tribunals. See, for example, Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction, 25 Jan. 2000, paras. 52–60; Compañia de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, para. 55; Aguas del Tunari S. A. v. Republic of Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 Oct. 2005, paras. 289– 314.; Suez, Sociedad General de Aguas de Barcelona, S.A. (AGBAR) and Vivendi Universal, S.A. v. The Argentine Republic, ICSID Case No. ARB/03/19, Decision on Jurisdiction, 3 Aug. 2006, para. 58; L.E.S.I. S.p.A. et Astaldi S.p.A. v. République algérienne démocratique et populaire, ICSID Case No. ARB/05/3, Decision, 12 July 2006, para. 84(ii); L.E.S.I.–DIPENTA v. République algérienne démocratique et populaire, ICSID Case No. ARB/03/8, Sentence, 10 Jan. 2005, para. 25(ii); Plama v. Bulgaria, supra note 6, para. 204; Salini Costruttori S.p.A and Italstrade S.p.A. v. The Hashemite Kingdom of Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 15 Nov. 2004, para. 116; Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, paras. 34 et seq.; International Thunderbird Gaming v. Mexico, supra note 40, para. 106. See further Schill, supra note 17, pp. 293–321. 42 O’Connell, D. P., International Law, Vol. I, Stevens (2nd ed. 1970), p. 260. 43 See also UNCTAD, ‘Investor-State Dispute Settlement and Impact on Investment Rulemaking’ (2007), available at http://unctad.org/en/docs/iteiia20073_en.pdf. 44 Maffezini v. Spain, supra note 41, paras. 38–64. 45 See Article 10.4(2) footnote 1 of the Draft of the Central America—United States Free Trade Agreement, dated 28 Jan 2004, available at http://www.sice.oas.org/TPD/USA_CAFTA/ Jan28draft/Chap10_e.pdf (last accessed 22 April 2010). Likewise, Panama and Argentina exchanged diplomatic notes after Siemens AG v. Argentina, ICSID Case No ARB/02/8, Decision on Jurisdiction, 3 Aug. 2004, in order to clarify that the MFN clause in their BIT did not extend to issues of dispute settlement, see National Grid Plc v. The Argentine Republic, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para. 85. 46 See Gagné, G., Morin, J., ‘The Evolving American Policy on Investment Protection: Evidence from Recent FTAs and the 2004 Model BIT’, 9 J. Int’l Econ. L. (2006) 357; Schwebel, S., ‘The United States 2004 Model Bilateral Investment Treaty: An Exercise in the Regressive Development of International Law’, 3(2) TDM (2006); Kantor, M., ‘The New Draft Model U.S. BIT: Noteworthy Developments’, 21 J. Int’l Arb. (2004) 383.

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The impact of individual decisions, just as the resort to precedent and interpretation in pari materia, illustrate the international public dimension of investment treaty arbitration and the nature of this form of dispute resolution as a public order dispute settlement mechanism. If BIT arbitration was purely private and concerned only the State and the investor that are party to the dispute, third parties would care little about investment treaty arbitrations in which they are not involved. Yet, investment treaty arbitration actually impacts third parties and their behavior intensely, as the outcome of arbitrations, in particular the reasoning and the interpretation of the principles of international investment law, affect the future interpretation and application of virtually all investment treaties rather independently of the contracting parties. In this respect, investment treaty arbitration is embedded firmly into the category of public order dispute settlement and differs fundamentally from commercial arbitration, which, as a form of private order dispute resolution, merely backs up contractual ordering between commercial actors with little systemic impact. ΙΙΙ. Publicness and the Role of the Arbitrator The publicness of investment treaty arbitration and the differences from international commercial arbitration arguably have normative implications for the role of arbitrators. While in purely private dispute settlement mechanisms the arbitrator represents “an adjunct to private ordering, whose primary function [is] the resolution of disputes about the fair implications of individual interactions,”47 and whose obligations are consequently limited to performing this function for the parties and based on their agreement, arbitrators in public order dispute settlement systems have a different role. It consists in an objective determination of the legality of the host State’s conduct according to substantive standards that are pre-established in an international investment treaty. This role involves a different set of obligations of arbitrators, namely one that is, to a certain extent, beyond the reach of the disputing parties. Because of the publicness of investment treaty arbitration, arbitrators in investment treaty cases arguably have obligations not only towards the parties to the proceedings, and to the two States whose treaty relation is at issue, but towards the larger international community that has an interest in the functioning of the international investment order and in the proper applica-

47

Chayes, supra note 11, at p. 1285.


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tion and interpretation of the principles of investment protection that are part of the BIT system. This impact of publicness on the role and obligations of the arbitrator can be illustrated in respect of certain issues that have surfaced in more recent debates. By way of example, this section addresses questions concerning rules on conflict and disclosure in investment treaty arbitration, the qualifications of arbitrators, the manner in which arbitrators interpret and apply the governing law and find the relevant facts, and the way arbitrators give reasons for their decisions. First, as regards the rules on arbitrator conflicts, the public nature of investment treaty arbitration explains so-called “issue conflicts,” that is, conflicts arising when an arbitrator in one investment treaty arbitration serves as counsel in another investment treaty arbitration that involves the same issue of fact or law.48 While such conflicts are not entirely unknown in commercial arbitrations,49 they come to bear much more in public order dispute settlement settings. This is because a situation where the same individual serves in different roles within a dispute settlement system, that is, as party representative in one and decision-maker in another proceeding, can raise the perception of a lack of independence and impartiality of that individual in its capacity as decision-maker. Indeed, serving as counsel and arbitrator in different cases that involve the same or a similar issue can give rise to the perception that the individual’s decision-making as arbitrator is influenced by the position that individual needs to take, in the interest of his or her client, in another arbitration. These issue conflicts are not only more likely to occur in settings where awards become public and thereby influence the decision-making of other tribunals, they are also more harmful in public order settings, as the perception that the jurisprudence and the development of the law are potentially tainted by personal interests of the decision-maker can undermine the legitimacy of the entire dispute resolution system.50

48 See Levine, J., ‘Dealing with Arbitrator “Issue Conflicts” in International Arbitration’, 61(1) Disp. Res. J. (2006) 60 (discussing, inter alia, a challenge for issue conflict in an investorState arbitration where the Dutch court hearing the challenge required the arbitrator to resign his service as counsel or else be removed as arbitrator). 49 But see ASM Shipping Ltd. v. TTMI Ltd, [2005] All ER (D) 271 (Nov) (concerning the conflict of serving as arbitrator in a commercial arbitration when prior involvement as counsel concerned a case involving the same witness whose honesty in the earlier case had been in question). 50 Cf. Buergenthal, T., ‘The Proliferation of Disputes, Dispute Settlement Procedures and Respect for the Rule of Law’, 22 Arb. Int’l (2006) 495, at p. 498 (claiming that serving as arbitrator in one case, while at the same time serving as counsel in other investment treaty arbitration, should be prohibited “in order to ensure that an arbitrator will not be tempted,

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The understanding of investment treaty arbitration as a public order dispute settlement mechanism thus requires, in view of the importance of the independence and impartiality of arbitrators, that issue conflicts, and the perception thereof, are avoided. This does not necessarily require a strict rule forbidding individuals to act contemporaneously as arbitrator and counsel in unrelated investment treaty arbitrations.51 Yet, such a development may become necessary in the future with the rising number of investment treaty arbitrations and the limited number of legal issues regularly at play. Second, the qualifications of individuals serving as arbitrator in investment treaty cases might, even though there is considerable overlap, differ from those necessary for serving as arbitrator in commercial cases. In particular, the significant influence arbitrators in investment treaty arbitrations have on the development of the entire system of investment law and jurisprudence suggests the necessity of some specific qualifications that are not necessary in commercial arbitrations. Thus, arbitrators in investment treaty arbitrations, while of course required to solve the specific dispute at hand, also have an important position in relation to the concretization and development of international investment law for future cases, as their decisions almost inevitably influence the decision-making of other tribunals. This shows that arbitrators in investment treaty arbitrations must be knowledgeable about the international legal framework they operate in, and its underlying policy choices in order to render an award that is accurate in law.52 consciously or unconsciously, to seek to obtain a result in an arbitral decision that might advance the interests of a client in a case he or she is handling as counsel”). 51 In fact, none of the arbitration rules applicable in investor-State arbitration contains an express prohibition of mixing the roles of arbitrator and counsel in different proceedings. This holds true in particular under Article 14(1) in connection with Articles 40(2) and 57 of the ICSID Convention. See on challenges for lack of independent judgment under the ICSID Convention Schreuer et al., supra note 19, Art. 57, paras. 20–34. It equally holds true under Article 10 of the UNCITRAL Arbitration Rules. Similarly, the IBA Guidelines on Conflicts of Interest in International Arbitration, approved 22 May 2004, available via http://www.ibanet. org/Publications/publications_IBA_guides_and_free_materials.aspx (last accessed 22 April 2010), which parties often choose in investment treaty arbitrations to concretize questions relating to arbitrator conflict, do not generally prohibit acting in different roles in unconnected arbitrations. 52 Cf. Park, W., ‘Arbitrators and Accuracy’, 1 J. Int’l Disp. Settlement (2010) 25. In cases where the governing law is largely vague, as is the case for example with the principles of international investment law, such as fair and equitable treatment or the concept of indirect expropriation, accuracy cannot be understood in terms of a single correct decision, but rather in terms of systemic consistency with the principal bases of international law. Systemic consistency as understood here would still permit that arbitral tribunals differ about how certain principles of international investment law should properly be understood, as amply illustrated by various conflicting decisions; it would require, however, that all investment treaty awards speak the language of international law, are embedded in a public international law framework, and consequently accept international law’s basic premises, above all interpretation of investment treaties according to the rules on international treaty interpretation. Notably, the rationales of public international law may differ from rationales of contract interpretation and commercial law.


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Interestingly, Article 1124(4) NAFTA requires qualifications for arbitrators “in international law and investment matters.” This provision appears as an appropriate guidepost for investment treaty arbitrations more generally, at least to the extent they involve legal issues of concern to an audience wider than the parties to the proceedings. Qualifications as commercial arbitrator without public international law expertise, by contrast, are at times not sufficient in order to live up to the expectations vested in investment treaty arbitrators, namely to resolve the dispute at hand by correctly applying the international law in question. Although not formally required under most procedural frameworks, for example under Article 14(1) ICSID Convention,53 parties to investment treaty arbitrations, as well as candidates approached to serve as arbitrator in such cases, should critically consider whether they possess relevant international law qualification and experience in order to meet the expectations of the relevant global public. Likewise, appointing authorities should take into account this consideration when making appointments in investment treaty disputes. At the same time, it is important to note that knowledge of international law by itself is not a sufficient qualification for a good arbitrator in investment treaty cases. Instead, what is equally needed are qualities regularly present in individuals with a background in commercial arbitration, namely an understanding of international business transactions and a thorough familiarity with the procedural law governing arbitral proceedings including the expertise in complex fact-finding.54 These factors are equally essential for an arbitrator to resolve the specific dispute at hand as the parties to the dispute expect a context-related and business-minded implementation of international investment law by arbitrators who are able to find the facts of a case and know what effect their decision-making has on foreign investment projects more generally. By contrast, if arbitrators contribute the most precious expertise in general public international law, but misunderstand the business structures that underpin foreign investment projects, or are unable to conduct arbitral proceedings effectively, they will fail to meet one important part of their obligations, namely resolving the individual dispute at hand, just as an arbitrator who only contributes familiarity with arbitral proceedings and business transactions may be unable to meet the expectations vis-à-vis his or her decision-making in relation to the aspects of publicness in investment treaty arbitration.

53 See recently Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Decision on Respondent’s Proposal to Disqualify Arbitrator Dr. Yoram Turbowicz, 19 March 2010, paras. 67–71. 54 See Brower, C.N., ‘W(h)ither International Commercial Arbitration?—The Goff Lecture 2007’, 24 Arb. Int’l (2008) 181, at pp. 191–194.

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Third, in view of the public order dimensions of investment treaty arbitration and the impact awards have on the development of international investment law, it is crucial that the legal reasoning—the aspect that is most influential in shaping the behavior of third parties—is based on an informed, well-researched, and comprehensive understanding of the international legal issues involved. Similar to proceedings in other international dispute settlement fora, such as the International Court of Justice, the finding and application of international law is arguably subject to the principle iura novit curia.55 This suggests that arbitrators in investment treaty cases cannot rely solely on the pleadings of the parties regarding aspects of international law, a position that is entirely acceptable in commercial arbitration in relation to the law governing the dispute, but have a duty to engage in independent legal research in that respect. This is necessary because the relevant international law is, unlike the facts of the case, not within the disposition of the parties to the dispute. Instead, it is the two contracting State parties, or, to the extent general international law is concerned, even the international community, who “own” the public international law governing the dispute. Independent legal research, however, must not result in confronting the parties with a legal assessment of their case that the parties neither pled nor foresaw. If independent legal research reaches unexpected results, the arbitrators therefore have to disclose the outcome of their research to the parties and allow them to comment on it before making a final decision.56 Under special circumstances, the public order dimensions of investment treaty arbitration may even require a more active approach to fact-finding by arbitrators than is customary in commercial arbitration. While the facts in investment treaty arbitration, in principle, are owned by the parties, and it is thus the parties’ obligation to present facts supporting their case, arbitrators arguably are under an obligation to make use of the fact-finding powers conferred on them under most arbitral rules proprio motu, if questions relating to international public policy are involved.57 For example, if arbitrators have

55 On this principle see Cheng, B., General Principles of Law as Applied by International Courts and Tribunals, Stevens (1953), pp. 299 et seq. 56 See also Cordero Moss, G., ‘Tribunal’s Powers versus Party Autonomy’, in: Muchlinski, Ortino, Schreuer, supra note 2, 1207, at pp. 1241–1242. 57 On proprio motu powers of international courts and tribunals in the taking of evidence see the seminal work of Benzing, M., Das Beweisrecht vor internationalen Gerichten und Schiedsgerichten in zwischenstaatlichen Streitigkeiten, Springer (2010), pp. 129–288. On the impact of community interests on fact-finding powers see also Benzing., M., ‘Community Interests in the Procedure of International Courts and Tribunals’, 5 LPICT (2006) 369, at pp. 383–388. ICSID tribunals dispose of certain proprio motu fact-finding powers under Article 43 ICSID Convention. Cf. also Wälde, T., ‘Procedural Challenges in Investment Arbitration under the Shadow of the Dual Role of the State’, 26 Arb. Int’l (2010) 3 (concerning the structurally comparable case that arbitral tribunals should pro-actively make use of their


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manifest grounds to suspect that an investment project was fraught with corruption, international public order aiming at suppressing corruption, as enshrined in various international instruments,58 militates for a duty of arbitrators to engage in more active fact-finding, for example, by making use of their powers to request, on their own initiative, documents or to examine witnesses. The rationale for such an approach would be that arbitrators do not only fulfill a function in settling the specific dispute at hand, but also are agents of the international community who, in consequence, have to act in accordance with the fundamental principles of that community.59 In not looking beyond the parties’ submission, by contrast, they could fall short of fulfilling their public order function, as none of the parties may have an interest in pleading the existence of corruption. Finally, the reasoning of arbitral awards in investment treaty arbitration has to live up to standards that are different from commercial arbitration. While awards in commercial arbitration are exclusively written for the parties to the proceedings, the reasoning of investment treaty awards should be cast to enable the wider audience of the award, including those indirectly affected, to understand the ratio decidendi and how the award fits into the system of investment jurisprudence. This will usually require a discussion, in the reasons, of the relevant sources of international law and an attempt to make the legal standards applied by a tribunal clear and explicit.60 Reasoning that extensively recounts the facts of a case, but is sparse in explaining the normative content of a principle of international investment law, a technique that is quite common in the drafting of commercial arbitration awards, by contrast, is problematic in public order dispute resolution because it makes it difficult to extrapolate the legal standards that are applied retrospectively to the behavior of the parties to the dispute but may affect prospectively any third State and investor.61

procedural powers in order to achieve an objective that not only concerns the parties to the arbitration but the international community at large, here the fair administration of justice in view of the host State’s abuse of its dual role as both party to the arbitration and sovereign State with wide-ranging sovereign powers that can negatively affect the private party in bringing and supporting its claim, for example, by initiating criminal proceedings to intimidate witnesses or obstructing effective legal representation). For a recent example of a tribunal using provisional measures to protect the integrity of arbitration proceedings against undue interference through criminal investigations see Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Decision on Provisional Measures, 26 Feb. 2010, paras. 139 et seq. 58 Cf. the discussion in Duty Free Company Limited v. The Republic of Kenya, ICSID Case No. ARB/00/7, Award, 4 Oct. 2006, paras. 138–157. 59 Benzing, Beweisrecht, supra note 57, p. 284. 60 See Glamis Gold v. United States, supra note 10, para. 8. 61 For this reason, the approach taken by the Tribunal in Eastern Sugar B.V. v. The Czech Republic, SCC Case No. 88/2004, Partial Award, 27 March 2007, paras. 222–343, in interpreting

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Similarly, as regards the increasingly notorious problem of inconsistent decisions in investment treaty arbitration,62 it appears worth considering whether arbitrators do not have a specific duty to provide reasons in case they diverge from arbitral “precedent,” because of the potentially disruptive effect inconsistent decisions have for the predictability and stability of international investment law.63 While arbitral tribunals in many cases of inconsistent decision-making extensively discuss earlier awards,64 other tribunals sometimes are reluctant to engage in refuting inconsistent precedent. The Tribunal in LG&E v. Argentina, for example, did not even mention the outcome and resoning of the award in CMS v. Argentina when it departed from the interpretation in the latter award of the plea of necessity,65 even though the LG&E Tribunal frequently concurred with the CMS Tribunal and even cited it affirmatively regarding the substantive standards of investment protection.66 Such use of precedent that fails to mention the existence of deci-

and applying, inter alia, the fair and equitable treatment standard under the Dutch-Czech BIT is problematic. While the award extensively recounts the facts relevant to the claim for a violation of fair and equitable treatment in over 100 paragraphs, ultimately finding a violation of that standard, the reasons never make clear what legal standard the Tribunal applied in determining fair and equitable treatment. Notably, the Tribunal did not make reference to arbitral precedent, nor international law scholarship on this point, nor did it visibly apply the methods of treaty interpretation laid down in Articles 31 and 32 of the Vienna Convention on the Law of Treaties. 62 See, for example, Franck, S., ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions’, 73 Fordham L. Rev. (2005) 1521; Schill, supra note 17, at pp. 284–287, 339–355. 63 See Glamis Gold v. United States, supra note 10, para. 8 (with further references to investment jurisprudence). 64 See only the discussion, relating to the interpretation of an umbrella clause, in SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction, 29 Jan. 2004, paras. 119–126, of the earlier interpretation of a comparable clause in SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction, 6 Aug. 2003, paras. 163–174. 65 LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3 Oct. 2006, paras. 226–266. Compare with CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Award, 12 May 2005, paras. 323–331, 353–394. See for a more detailed comparison of both decisions Schill, S., ‘International Investment Law and the Host State’s Power to Handle Economic Crises’, 24 J. Int’l Arb. (2007) 265; Reinisch, A., ‘Necessity in International Investment Arbitration—An Unnecessary Split of Opinions in Recent ICSID Cases? Comments on CMS v. Argentina and LG&E v. Argentina’, 8 J. World Inv. & Trade (2007) 191 ; Waibel, M., ‘Two Worlds of Necessity in ICSID Arbitration: CMS and LG&E’, 20 Leiden J. Int’l L. (2007) 637. 66 LG&E v. Argentina, supra note 65, paras. 125, 128, 171 (approving of CMS v. Argentina with respect to the interpretation of fair and equitable treatment and the umbrella clause and using it as a persuasive authority in that context). Similarly, the award in Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award, 22 May 2007, frequently cited the Decision on Liability in LG&E v. Argentina as support for its interpretation of fair and equitable treatment and the umbrella clause (see ibid., paras. 260,


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sions reaching an entirely different result is counterproductive in furthering the certainty and predictability of international investment law.67 While inconsistent decisions in general are undesirable and compromise the predictability and stability of international law, the only solution to arrive, on the long run, at a jurisprudence constante, which is accepted by investors and host States, is for tribunals to set out clearly their arguments and to refute counterarguments contained in other arbitral awards in order to reach, in a deliberative fashion, convincing results about the proper interpretation of international investment law. For the same reason, namely to contribute to the emergence of a jurisprudence constante, and thus to more predictability in international investment law, arbitrators who disagree with the findings of their colleagues should make use of their “sacred freedom”68 to issue a dissenting opinion.69 Doing so is not only a good tradition in many other international dispute settlement fora, above all at the International Court of Justice; it also has an important function in further developing international law in general and international investment law in particular. In the absence of a central and permanent judicial institution that decides investment disputes, the only way of arriving at convincing and accepted solutions will be by transparently providing the arguments for differing solutions also within a tribunal and by trying to convince the parties, as well as other observers, including States, investors, academics, and the general public, that the adopted solution is preferable over competing approaches.70 Part of this is for arbitrators to disclose dissent and to explain divergent reasoning. IV. Conclusion This chapter has argued that investment treaty arbitration differs significantly from international commercial arbitration. It is not a dispute settlement mechanism that is strictly bipolar in nature and exclusively adjudicates

262, 263, 274), but failed to mention that this decision diverged significantly as regards the application of Argentina’s necessity defense (ibid., paras. 288–345). 67 Similarly Shahabuddeen, M., Precedent in the World Court, CUP (1996), pp. 130–131. 68 Sovereignty over Pulau Ligitan and Pulau Sipadan (Indonesia/Malaysia), Judgment, 17 Dec. 2002, Dissenting Opinion of Judge Franck, I.C.J. Reports 2002, pp. 691, 694, para. 12. 69 This is permitted, for example, under 48(4) ICSID Convention. 70 See Sovereignty over Pulau Ligitan and Pulau Sipadan, supra note 68, Dissenting Opinion of Judge Franck, para. 11 (arguing that the function of the dissent also lies in the fact that a dissent “presents to the law’s universal market place of ideas certain principles of law and nuances of analysis which, even if not adopted in the instant case, may be of use in another, as yet unforeseen, context”).

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retrospectively the distribution of mutual rights and obligations in a twoparty relationship. Instead, it also involves aspects relating to interests of the international community as a whole. Unlike commercial arbitration, investment treaty arbitration constitutes a public order dispute settlement mechanism that contributes to shaping the legal and economic structure of the international community. This is the case, above all, because awards in investment treaty arbitration are made public and heavily influence, rather independently of the parties and the specific investment treaty involved, the decision-making process of other arbitral tribunals as persuasive precedent. In this perspective, investment treaty arbitration does not only affect the parties to a specific dispute but contributes to the clarification and further development of international investment law more generally. Consequently, in understanding the nature and functioning of international investment law and arbitration, analogies to court-based dispute settlement mechanisms engaged in judicial review of government conduct, under international as well as domestic administrative and constitutional law, are more appropriate than drawing parallels to international commercial arbitration between private commercial actors.71 The public nature of investment treaty arbitration also has normative repercussions for the role and function of arbitrators in deciding investment disputes and their professional and ethical obligations. Arbitrators in investment treaty disputes do not only—as is the case for commercial arbitration— have obligations vis-à-vis the parties to the proceedings, but also vis-à-vis the international community as a whole. This suggests different rules on issue conflicts in investment arbitrations, militates for the need for different qualifications of arbitrators, and suggests that the dispute settlement function occasionally needs to be discharged differently from commercial arbitrations, in particular as regards conducting independent legal research and making use, in certain circumstances, of fact-finding powers independently of the parties’ request.72 Finally, as regards the reasoning of an award, arbitrators should keep the public order dimensions of investment treaty arbitration in mind and address, to the fullest extent possible, the sources of international law and investment treaty precedent, and transparently lay out the reasons for their decision, including refuting conflicting awards and disclosing dis-

71 International Thunderbird Gaming v. Mexico, supra note 40, Separate Opinion by Thomas Wälde, para. 13. 72 Relevant in practice, of course, is the question of who should bear the costs for such additional research or fact-finding in investment cases. This could be resolved by applying one-way pro-investor cost-shifting approaches with certain exceptions, for example for spurious and frivolous claims. See Schill, S., ‘Arbitration Risk and Effective Compliance: CostShifting in Investment Treaty Arbitration’, 7 J. World Inv. & Trade (2006) 653.


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sents within a tribunal. Understanding and emphasizing the public order dimension in investment treaty arbitration can help to make this form of dispute resolution more transparent, to increase the quality of reasoning of awards, and to ensure the concretization and further development of international investment law in ways that are acceptable to States and foreign investors alike.

THE TRANSNATIONAL LAW OF CONTRACTS: WHAT IT CAN AND WHAT IT CANNOT ACHIEVE Giuditta Cordero-Moss* I. Introduction Among the many qualities that made Thomas Wälde so valuable in the landscape of international law, was the ability to think innovatively and not to be trapped in structures and concepts dictated by national or doctrinal tradition. Maybe more importantly, he coupled this with a deep insight in how the law actually works and is applied. His visionary disposition, therefore, was always subject to the reality check of the living law. As a homage to Thomas’ qualities, I will attempt in this paper to verify the effectiveness of the transnational commercial law, a much discussed alternative to the traditional system of subjecting international contracts to a national law chosen by the parties or selected on the basis of conflict rules.1 The sources of the transnational commercial law include (i) spontaneous rules developed by practice—trade usages and customs (which are the scope of the lex mercatoria in the proper sense of the term);2 (ii) generally recognised principles (which may to a certain extent overlap with the principles of public international law); (iii) compilations of rules, codes of conduct, guidelines and similar codifications (which often go under the name of soft law and include also, according to a not uncontroversial view, standard contracts); (iv) restatements of rules of contract law with the aim of mediating the differences among the systems and proposing “best rules” (which, depending on the instrument applied, may result in binding international conventions, regional regulations or non-binding restatements of soft-law); and (v) theories about international contracts being detached from the traditional national legal dimension and governed instead by the variety of * PhD (Moscow), Dr. Juris (Oslo). Professor, University of Oslo. 1 Literature on the subject-matter is very vast. Among the works most frequently referred to are F. De Ly, International Business Law and Lex Mercatoria, T.M.C. Asser Institute, 1992, K.P. Berger, The Creeping Codification of the Lex Mercatoria, The Hague 1999, of which a revised edition was published in 2010 and O. Lando, The Lex Mercatoria in International Commercial Arbitration, International and Comparative Law Quarterly 34/1985, 747–768. For extensive references see R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law—Texts, Cases and Materials, Oxford 2007, pp. 24ff. 2 Substantiating this position see R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., pp. 25ff.

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sources mentioned above (which often go under the name of the autonomous or detached contract, or the superiority of the will of the parties). Using these sources as an illustration, the sections below will verify to what extent the transnational commercial law may be considered effective. Effectiveness will be examined from the perspective of the transnational law’s ability to achieve harmonisation of specific sectors (section II below), of different legal traditions regarding the general contract law (section III below) and of different areas of the law (section IV below). Finally, the transnational law’s ability to replace the governing law in full will be analysed (section V below). The analysis will show that specific sectors of the law may effectively be harmonised by the transnational law, but the other mentioned tasks are more difficult to achieve. II. What can be Achieved: Harmonisation of Specific Sectors Specific areas of international commercial law have proven to be particularly favourable for harmonisation. Harmonisation can be achieved in various ways: (i) through binding instruments such as the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG)—that creates a uniform law for certain aspects of sale contracts; (ii) through instruments issued by international bodies but without binding effect, such as the 1985 UNCITRAL Model Law on International Commercial Arbitration, revised in 2006,3 or the UNCITRAL Arbitration Rules of 1976, currently under revision; and (iii) through instruments issued by private organisations such as the International Chamber of Commerce (ICC) and without binding effect unless the parties to the contract adopt them—such as the INCOTERMS or the UCP 600 (former 500). Common to these instruments is the fact that they have a specific scope of application: certain aspects of the contract of sale for the CISG, the procedural aspects of arbitration for the Model Law on Arbitration and the UNCITRAL Arbitration Rules, the passage of risk from seller to buyer and other specific obligations between the parties for the INCOTERMS, the mechanism of documentary credits for the UCP 600. These instruments do not have the goal to regulate all aspects of the relationship between the parties, such as the validity of the contract, its interpretation, or all remedies for breach of contract. Thanks to this specific scope of application, the enforceability of these instruments is easy to predict and achieve: if they are incorporated into the contract, they will be binding on the parties and enforceable as long as they 3 This instrument is not binding, as it is a model for legislators. If adopted, it will be binding in the system that has enacted it.

the transnational law of contracts

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do not violate mandatory rules of the applicable law. Because their scope of application is specified and usually well within the scope of the freedom of contract, they are generally enforced without any difficulties. If the instruments are not incorporated by the parties, they may nevertheless be applicable as expression of trade usages. In spite of the undeniably wide recognition of these sources, however, they are not unanimously considered as trade usages; in some countries, they are considered as standard terms of contract that become effective between the parties only if they were expressly incorporated.4 Furthermore, not all publications issued, e.g., by the ICC, enjoy the same degree of recognition as the INCOTERMS and the UCP 600; thus, the simple fact that there is an ICC publication is not sufficient evidence that there is a corresponding trade usage. A. The International Commercial Terms (INCOTERMS) The International Commercial Terms (INCOTERMS), a publication by the International Chamber of Commerce, illustrate transnational harmonisation supplementing national law. The INCOTERMS apply to cross-border delivery of goods, and list 11 different terms of delivery, all expressed by three-letters acronyms. Each of these abbreviations corresponds to an allocation between the seller and the buyer regarding the responsibility for customs clearance, the arranging and paying of transportation and insurance, the definition of the place of delivery, and the consequent passage of risk from the seller to the buyer. By writing the abbreviation in the contract and specifying the place of delivery, the parties incorporate the corresponding allocation of obligations, and do not need to regulate all these matters in the contract. A dispute regarding whether the seller is obliged to clear the goods for export, who bears the risk of loss until delivery or who was supposed to pay for the insurance under transportation, will be easily solved by verifying which term of the INCOTERMS the parties have chosen. Other disputed matters, such as the validity of the contract or what remedies are available in case of default, are not regulated by the INCOTERMS. Even matters that are within the scope of the INCOTERMS may be subject to different regulation by the governing law. For example, the question of liability for damages to the goods under transportation, normally directly regulated by the INCOTERMS, may be decided differently under the governing law in case of

4 See for references, H. van Houtte, The Law of International Trade (2nd ed.), London 2002, Section 8.15. On the challenges that courts may face in applying the UCP in spite of their general acknowledgement, see C. Twigg-Flesner, Standard Terms in International Commercial Law—The Example of Documentary Credits, in R. Schulze (ed.), New Features in Contract Law , Munich 2007, pp. 325–339.

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exceptional circumstances beyond the parties’ control, discharging the seller from the obligations that the contract has imposed on it. B. The Uniform Customs and Practices for Documentary Credits (UCP 600) The Uniform Customs and Practices for Documentary Credits (UCP 600), a publication by the ICC regulating the payment mechanism of letters of credit, are another example of soft law supplementing the governing law. Like the INCOTERMS, they regulate a specific mechanism and do not have the goal to cover general matters of contract law. However, they have a larger scope of application and in some situations they may conflict with mandatory rules of the governing law, as will be seen in Section V.B below. Letters of credit are a widely used method of payment, applied when the creditor does not intend to take the commercial risk connected with the creditworthiness of the debtor. A letter of credit is structured as follows: the debtor (applicant) requests a bank (the issuing bank) to issue a letter of credit in favour of the creditor (the beneficiary). The application contains the instructions for the issuing bank, and must state the precise amount of money that has to be paid, as well as the documents, upon the presentation of which, the bank has to effect payment. This is the main characteristic of a letter of credit: the bank has to effect payment upon presentation by the beneficiary of the documents that are named in the instructions. The bank has simply to verify the conformity on the face of the presented documents, and is not requested to assess the proper performance of the underlying transaction, or any other matter. The autonomous character of the bank’s payment obligation is one of the most characteristic aspects of a letter of credit, and is codified in the UCP 600, Articles 4 and 5. The UCP 600 contain a series of technicalities on the relationship between the parties and the mechanism of payment, such as the involvement of an advising or a confirming bank, the modalities of payment, the examination of the presented documents, etc. The UCP 600 enjoy a general recognition as regulation of letters of credits; they are, at the same time, a source of regulation, and codification of generally acknowledged practices within that area. C. The Convention on Contracts for the International Sale of Goods (CISG) The Convention on Contracts for the International Sale of Goods was drafted by the United Nations Commission on International Trade Law (UNCITRAL) and adopted in Vienna in 1980.5

5 The full text can be found on the UNCITRAL’s homepage, http://www.uncitral.org, that also contains an updated list of the countries that have ratified it, the reservations that were made, etc.


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The CISG has been signed by 74 parties, and it is looked upon with extreme interest especially in academic circles,6 as the first example of uniform law that not only creates binding law as international convention that was ratified by so many States. It gives recognition to the spontaneous rules born out of commercial practice7 and becomes itself an autonomous body of international regulation that adapts to the changing circumstances independently from the legal systems of the ratifying States.8 For the sake of completeness, however, it must be mentioned here that the CISG has not been ratified by such an important country in international commerce as the United Kingdom, or by several States in Central and South America, as well as most Arabic and African countries, India and other South-Asian countries. The CISG is a binding instrument; therefore its rules are the prevailing law in the countries that ratified it—unless the parties made use of the possibility, contained in Article 6, to exclude application of the Convention—writing in their contract that the CISG shall not be applied. The CISG covers the formation of contracts and the substantive rights and obligations of the buyer and the seller arising out of contract of sale, such as delivery, conformity of the goods, payment and remedies for breach of the related obligations. D. Summing up Rules regulating specific aspects of a legal relationship are a useful complement to the governing law and are enforceable, if they are incorporated into the contract by the parties, and do not violate mandatory rules of the governing law. If these rules represent trade usages, they will be applicable even without incorporation by the parties, since most of the legal systems refer to trade usages. If these rules are enacted in binding instruments, such as national laws or international conventions, they also may have the ability to prevail over mandatory rules. III. What cannot be Achieved: Harmonisation of Legal Traditions A trend of the last decade is the attempt to achieve harmonisation of legal traditions by addressing the general contract law. Two prominent examples of soft law instruments are the UNIDROIT Principles of International

6 See, for example, B. Audit, The Vienna Sales Convention and the Lex Mercatoria, in E., Carbonneau, (ed.), Lex Mercatoria and Arbitration, Juris Publishing 1998, pp. 173–194. 7 This is because of the convention’s many references to trade usages. 8 This is because of the particular rules on the convention’s interpretation laid down in its article 7, that require an autonomous interpretation based on the principles underlying the convention. On the opinion that the CISG is so widely recognised that it is applicable even without having been ratified, see below.

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Commercial Contracts (UPICC)9 and the Principles of European Contract Law (PECL).10 These are non-binding restatements of principles; they are partially a codification of generally adopted principles of international contracts, and partially original regulations resulting from the work of a large group of scholars from various parts of the world. Because the outcome of the work is not binding, and conflicting mandatory rules or principles of the governing law prevail, the working group could agree to rules and formulations more easily than if it were drafting a convention destined to become binding. Moreover, the work did not require unanimity, and controversial matters could be regulated more easily than if a large consensus was expected—as it happens when drafting a convention. These two aspects rendered it easier to codify “best rules” in a restatement rather than in binding instruments; however, these same aspects render such a restatement less representative than an instrument based on a larger consensus and to which most members are committed.11 These Restatements have multiple goals, mentioned in their respective preambles. Because they are the result of an extensive comparative study and offer modern and functional solutions, they may be used by legislators as a source of inspiration when legislating in the field of general contract law. Because of the persuasive authority that derives from the high quality of the working group that prepared them, they could be used by courts or arbitrators to interpret existing international instruments. Moreover, as a guide to the drafting, they may be used by contractual parties during the preparation of their contract. The parties to an international contract might decide to subject their contract to the regulation of the restatements, as an expression of a balanced, international set of rules, rather than choosing a national governing law (on this particular use of the principles it is necessary to make some reservations, see below, Section V). The Restatements might be useful for arbitrators, especially when deciding a dispute on the basis of the transnational law: rather than having to search for what could constitute international usages of trade, or similar undefined concepts, arbitrators could rely on a readily available set of rules. Finally, the Restatements aspire at being used by courts or arbitrators instead of the governing law, should the content of the law be impossible or extremely difficult to establish. A significant 9

UNIDROIT Principles of International Commercial Contracts, International Institute for the Unification of Private Law, Rome, 2004. 10 O. Lando, H. Beale, (eds.), Principles of European Contract Law, Parts 1 and 2, Kluwer Law International, 2002, and O. Lando, H. Beale, (eds.), Principles of European Contract Law, Part 3, Kluwer Law International, 2003. 11 See, extensively, R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., pp. 509 and 528ff., explaining, in this light, why the principle of good faith and fair dealing was given such a central role in the UNIDROIT Principles but not in the CISG.


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difference between the two Restatements is that the UPICC have no specific territorial scope and apply to any international contract, whereas the PECL have defined Europe as their scope of application. This has prompted higher goals for the PECL: in addition to aspiring to the status of source of soft law as described above, the PECL aspire to become the prevailing (on a long term binding) contract law within the European Union and replace the national laws that exist in every State today. The PECL have actually been used as a basis for the Academic Draft Common Frame of Reference (DCFR), a compilation in the frame of the work towards a common European contract law that will be analysed below. These Restatements, together with the CISG, are sometimes referred to as the “Troika”, a body of transnational soft law particularly apt to govern commercial contracts.12 The CISG is a binding convention; nevertheless, it is sometimes referred to as having, in addition to its direct binding effect, an authoritative effect that goes beyond its territorial and substantive scope of application, and supposedly makes it one of the most important sources of soft law for general contract law. A characteristic goal of the Troika is to act as the general contract law that governs all aspects of the legal relationship between the parties, and thus replace the State governing law. As will be seen below, this creates various challenges in terms of enforceability that should not be underestimated. An instrument with the task of harmonising different legal traditions must be precise and leave little to the judge’s discretion; otherwise, the harmonised rules are applied differently by the different countries’ courts.13 In the frame of a process initiated in the beginning of this millennium,14 the European Commission (EC) is presently encouraging the preparation of an instrument called ‘Common Frame of Reference’ (CFR).15 The CFR is intended to be used as a set of non-binding guidelines by lawmakers at the Community level on a voluntary basis, as a common source of inspiration or reference in the lawmaking process. It is intended to be a set of definitions, general principles and model rules in the field of contract law, to be derived

12 See, for example, O. Lando, CISG and Its Followers: A proposal to Adopt Some International Principles of Contract Law, American Journal of Comparative Law, 53 (2005) 379ff. For further references see R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., 46ff. 13 H. Eidenmüller, F. Faust, H.C. Grigoleit, N. Jansen, G. Wagner, R. Zimmermann, The Common Frame of Reference for European Private Law—Policy Choices and Codification Problems, Oxford Journal of Legal Studies, vol. 28, 4, pp. 659–708. 14 Resolution of the European Parliament of March 16, 2000, OJ C 377, p. 323. 15 Communication by the European Commission “European contract law and the revision of the acquis: the way forward”, COM(2004) 651 final.

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from a variety of sources—such as a systematisation of the existing EC law and comparative analysis of the member States’ laws. The ongoing work resulted so far in the so-called Draft Common Frame of Reference (DCFR),16 referred to as “academic” to underline that it is the result of the work of two academic groups (the Study Group on a European Civil Code and the European Research Group on the Existing EC Private law (Acquis Group))17 and is not to be confused with what will be the final result of the political European process. The DCFR is based on the PECL and gives ample room to “good commercial practice”—seemingly considering this as one of the most important sources for European commercial contracts. If the European Court of Justice will have jurisdiction in respect of the CFR, overtime a choerent jurisdiction will develop and the CFR will become a source capable of harmonising European contract law. Until then, good commercial practice does not seem to be substantially different from the transnational law as is analysed here. The sections below illustrate the difficulty in harmonising legal traditions through soft instruments of general contract law. A. Convergence between Civil Law and Common Law Traditionally, common law is held to be concerned with preserving the parties’ freedom to contract and to ensure that their contracts are performed accurately according to their precise wording. An English judge is less concerned with providing means for ensuring a balanced relationship between the parties; the judge’s task is rather to enforce the deal that the parties have voluntarily entered into. The parties are expected to take care of their own interests, and they expect from the system a predictable possibility for enforcing their respective rights in accordance with the terms of the contract. A correction or integration of these terms would run counter to these expectations, and the English judge does not consequently assume that role (unless specific statutory rules requires him to do so, which happens mainly in the context of consumer contracts). On the contrary, the civilian judge is traditionally deemed to have a larger power to evaluate the fairness of the contract and intervene to reinstate the balance of interests between the parties; he or she is more concerned with creating justice in the specific case than with implementing the deal in the most predictable manner. In doing so, the civilian judge is guided by general 16 C. Von Bar, E. Clive, H. Schulte-Nölke et al. (eds.), Principles, Definitions and Model Rules of European Private Law—Draft Common Frame of Reference (DCFR), 2008. 17 The Acquis Group also published the Acquis Principles, a systematisation of the existing European law: Research group on the Existing EC Private Law (Acquis Group), Principles of the Existing EC Contrcat Law (Acquis Principles)—Contract II: General Provisions, Delivery of Goods, Package Travel and Payment Services, Munich 2009.


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clauses and principles of good faith and fair dealing. The English law of contract does not have a general principle of good faith. Modern comparative studies have shown that the absence of a general rule on good faith does not mean that English law cannot reach, in particular contexts, the same results that can be reached in other systems applying the rule of good faith.18 Other legal techniques are applied to reach results that are, in part, similar to a general duty of good faith. This convergence of legal traditions is not sufficient to assume that a contract will have the same effects irrespective of which law governs. As will be seen in the sections immediately below, these piecemeal solutions19 do not necessarily always have the same scope of application as a general principle.20 1. Convergence of particular rules may not be generalised It is not always justified to generalise particular rules and elevate them to the status of expressions of a principle underlying the whole system, considering them as symptoms of a general convergence between common law and civil law. Admittedly, if the general principle of good faith does not exist in the English law on commercial contracts, it does not necessarily mean that other

18 “The Common Core of European Private Law Project”, under the general editorship of M. Bussani and U. Mattei, is perhaps the most systematic enterprise aiming at assessing the common core within European private law. Among the books published in the frame of this project is R. Zimmermann, S. Whittaker (eds.), Good Faith in European Contract Law, Cambridge 2000, that has particular relevance to the topic of this paper. 19 This expression is taken from an often quoted decisions by Brimham LJ: Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd. [1988] 2 W.L.R. 615. 20 That the English approach is not equivalent to a general clause as known in the civil law is shown by S. Whittaker, Theory and Practice of the “General Clause” in English Law: General Norms and the Structuring of Judicial Discretion, S. Grundmann, D. Mazeaud (eds.), General Clauses and Standards in European Contract Law, cit., pp. 57–76, 64ff. and H. Collins, Social Rights, General Clauses, and the Acquis Communitaire, in S. Grundmann, D. Mazeaud (eds.), General Clauses and Standards in European Contract Law, cit., pp. 111–140, 117ff. The same is affirmed also by Lord J. Mance, Is Europe Aiming to Civilise the Common Law?, European Business Law Review (EBLR) 2007, pp. 77–99, p. 94 and fn. 45. As was recently observed, under the influence of, particularly, European law, “good faith may have made its mark on the surface of the law of contract, but it has hardly captured the hearts and minds of English common layers” (R. Brownsword, Positive, Negative, Neutral: the Reception of Good Faith in English Contract Law, in R. Brownsword, N.J. Hird and G. Howells, Good Faith in Contract, Burlington 1999, pp. 13–40, 15). The author supports a positive view of good faith, as it permits the judges to avoid what he defines as “contorsions or subterfuges in order to give effect to their sense of the justice of the case” (p. 25). However, the author points out that this view is “probably shared by no more than a minority of English contract lawyers” (ibid.). See, for example, M. Bridge, Good Faith in Commercial Contracts, in R. Brownsword, N.J. Hird and G. Howells, Good Faith in Contract, Burlington 1999, pp. 139–164, affirming that good faith gives too much power to the individual judges freed from the disciplined tradition of contract law, and pointing out that “visceral justice was, and remains in my view, an emotional spasm” (p. 140), and that “law is a discipline, not a reflex” (p. 150).

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areas of English law do not operate with a principle of good faith.21 However, this shall not induce into assuming the converse, i.e., that the presence of the good faith notion in the context of certain fiduciary obligations entails that the principle is applicable also to commercial contracts. Many situations that would be covered by a general principle are left out by the specific rules of English law and thus remain unregulated. For example, witholding relevant information during the negotiations conflicts with the general principle of good faith in the civilian tradition, but is not specifically regulated in English contract law, 22 nor does it fall within the scope of the doctrine of misrepresentation.23 2. Convergent solutions may be avoided by clear contract language The above mentioned convergence between the two legal families, moreover, may be observed on an abstract level, but seems to disregard the effects that the contract may have in the specific case on the applicability of the various piecemeal solutions. In many instances English law permits to avoid the effects that are leading to a convergence with the civilian tradition, if sufficiently clear expressions of intention were made by the parties in the contract. Many of the contract clauses that are typical for commercial contracts, such as “Entire Agreement”, “No Waiver”, “No Oral Amendments”, “Sole Remedy”, are specifically written with the purpose of avoiding the remedies or other default mechanisms existing in the system. Therefore, these clauses are responsible for annulling the convergence between the common law and the civil law systems. The original intention of the clauses, in other words, is to permit the harsh legal effects that mostly distinguish the common law, in the strict sense, from the civil law.24

21 That relying on a monolithic view of legal systems may be misleading is convincingly argued by M. Graziadei, Variations on the Concept of Contract in a European Perspective: Some Unresolved Issues, in R. Schulze (ed.), New Features in Contract Law, cit., pp. 311–324, who shows, on pp. 321ff., that notions of good faith are to be found in English law when looking beyond the narrow borders of contract law, notably in the field of fiduciary obligations. The author underlines, thus, that the absence of a general notion of good faith in the restricted context of contracts (defined as commercial contracts) does not exclude its presence in the wider picture of English law. 22 In some situations a duty of care arises between the parties; it does not seem, however, that negotiations of commercial contracts are within that number, see, for example, Denning LJ in Chandler v. Crane, Christmas & Co, [1951] 2 K.B. 164 and see Ackner LJ in Walford v Miles, [1992] 1 All ER 453, House of Lords. 23 H. Beale (ed.), Chitty on Contracts, Vol. I, General Principles, 29th ed., London 2004, pp. 436ff. 24 For an extensive analyses of these clauses and their different effects dpending on the governin law, see G. Cordero-Moss (ed), Boilerplate Clauses, International Commercial Contracts and the Applicable Law, Cambridge 2011.


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B. General Principles General principles are traditionally listed in scholarly writings as one of the important sources of transnational law that may contribute to the harmonisation of different legal traditions. There does not seem to be a consensus on the definition of these principles;25 the most acknowledged criteria to identify what principles are generally recognised seem to be the reliance on a convergence among various legal systems, case-law and scholarly works. A widely appreciated paper by Lord Mustill identified, two decades ago, twenty-five principles that, in arbitration practice and literature, were considered as generally recognised.26 According to Lord Mustill’s evaluation, these principles are “so general that they are useless”,27 and it is tempting to agree on this evaluation: principles such as pacta sunt servanda or rebus sic stantibus can hardly be of guidance when solving a dispute with specific questions of a technical legal character. Moreover, Lord Mustill found that several of these principles cannot be deemed to be generally recognised because they are not known in the common law system; for example, the principle prohibiting the abuse of a right and that requesting good faith in the pre-contractual phase,28 both of which are part of the Restatements and of the DCFR. As seen above, there are few principles in respect of good faith and fair dealing that may be considered common to civil law and common law systems; even among civil law systems there are considerable differences.29 Assistance in identifying and specifying these general principles might be sought in database and digests on transnational law, such as the TranslexPrinciples, formerly known as CENTRAL Transnational Law Database. The idea behind this database is to enhance the “creeping codification of the lex mercatoria”30 by creating a comprehensive digest of principles and rules of the transnational commercial law, based on a variety of sources such as “international arbitral awards, domestic statutes, international conventions,

25 For an overview of the various theories see F. De Ly, International Business Law and Lex Mercatoria, cit., pp. 193ff. R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., pp. 50ff., 100f., convincingly argues that their meaning and content is so uncertain, that they are rarely invoked in practice. 26 Lord J. Mustill, The New Lex Mercatoria: the First Twenty-Five Years, Arbitration International 4/1988, pp. 86–119. 27 Ibid., p. 92. 28 Ibid., p. 111, respectively fn. 85 and 87. 29 Even R. Zimmermann, S. Whittaker, Good Faith in European Contract Law, cit., p. 678, despite the observation that the principle of good faith is relevant to all or most of the doctrines of modern laws of contract, conclude that each system draws a different line between certainty and justice. 30 The idea was introduced in K.P. Berger, The creeping codification of the lex mercatoria, cit.

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standard contract forms, trade practices and usages, other sample clauses and academic sources”.31 The principle of good faith and fair dealing is listed there as one of the main principles of international contract practice. This is substantiated by reference to various sources: legal literature, arbitral awards, court decisions, international instruments, model laws and contract terms.32 A careful consideration, however, shows that these sources do not give a uniform view on the scope and function of this principle, nor do they have a degree of detail that may contribute to specify its content.33 C. Restatements: UPICC, PECL and DCFR Since the compilation made by Lord Mustill, a number of initiatives flourished to collect, systematise or restate generally acknowledged principles, thus aiming to reduce the gap between the different legal traditions. These restatements may contain principles and rules that do not reflect generally acknowledged standards, but represent what the restatements’ authors considered to be the best rule. Hence, they may not be used as evidence of the general acknowledgement of the principles contained therein; however, they could become evidence if they are used consistently and widely in practice.34 The UPICC and the PECL have clearly endorsed the role of good faith and fair dealing that is characteristic of civil law systems, both in respect of the interpretation and of the performance of the contract, as will be seen below.35 More recently, the already mentioned Draft Common Frame of Reference (DCFR) reflects the civil law approach to the role of good faith and fair dealing in contract law36 and, in addition, extends the consumer protection

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http://www.CENTRAL.de/content.php?what=8, last visited on June 2nd, 2009. http://www.CENTRAL.de/output.php?docid=901000, last visited on June 2nd, 2009. 33 For a more extensive analysis see G. Cordero-Moss, Consumer protection except for good commercial practice: a satisfactory regime for commercial contracts?, in R. Schulze, CFR and existing EC contract law, 2009, pp. 85–128 80–84. 34 See S. Symeonides, Party Autonomy and Private-Law Making: The Lex Mercatoria that Isn’t (19 November 2006), available at SSRN: http://ssrn.com/abstract=946007; S. Ferreri, points out, in The Italian national report, XVII Congress of the International Academy of Comparative Law, Section II-B1, Private International Law, Utrecht, July 16th–26th, 2006, item 6a: “Paradoxically the success of such soft law instruments depends [. . .] on their success [. . .]”. See also R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., pp. 521ff. 35 For a more detailed analysis see G. Cordero-Moss, International Contracts bewteen Common Law and Civil Law: Is Non-State Law to Be Preferred? The Difficulty of Interpreting Legal Standards such as Good Faith, (2007) Global Jurist: vol. 7: iss. 1 (Advances), Article 3 pp. 1–38. 36 This is confirmed in the House of Lords Sub-Committee G Report on European Contract Law, cit., Sections 24ff., and, particularly, 27, 28, 32 and 33. See also Sections 78 and 79, stating the disagreement in principle on a generally interventionist law of contracts as taken in 32


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rules and policies emanated by the European Community to commercial contracts. Civil law-inspired rules, for example, provide that parties must negotiate according to good faith and fair dealing, impose liability for having negotiated contrary to good faith and have a duty of information during the precontractual phase. These rules may be found in the UPICC (Art. 1.7, and 2.1.15), the PECL (Art. 1:201, 2:301 and 4:106), and are not fully compatible with the English law of commercial contracts. In the phase of negotiations prior to the conclusion of the contract, expecting that a party also takes into consideration the needs and expectations of the other party, runs counter to the very essence of a negotiation, where each of the parties positions itself, opens alternative possibilities, and plays the various possibilities against each other to achieve the best economic result for itself. In an often quoted House of Lords decision, Lord Ackner states that “[. . .] the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations.”37 Thus, the PECL and UPICC rule on good faith in the pre-contractual phase may not be generalized as relying on the convergence of the legal systems.38 It also seems to contradict contract practice, as Section V. D below will show. The DCFR has a more moderate approach, without, however, avoiding challenges similar to those just mentioned. The DCFR does not state a general duty of good faith; however, it states the duty to negotiate in good faith (Article II-3:301) and to inform during the pre-contractual phase (Article II-3:101). This latter duty is mitigated, in respect of commercial contracts, by a reference to good commercial practice. As Section V. D. 2 below will show, however, the exception for good commercial practice does not seem to constitute a sufficiently precise regime. A general rule of good faith entails also that, under certain circumstances, contractual remedies may not be exercised in accordance with the wording

the DCFR, and criticizing the generalization of consumer protection as made in the DCFR. Attached to the Report is a Memorandum by S. Vogenauer, Professor of Comparative Law, University of Oxford, which singles out several areas where the DCFR certainly deviates from English contract law (Section 22)—including also the areas discussed in this paper. For similar criticism, see also Eidenmüller, Faust, Grigoleit, Jansen, Wagner, Zimmermann, The Common Frame of Reference for European Private Law, cit. and G. Cordero-Moss, Consumer protection except for good commercial practice, cit. 37 Ackner LJ in Walford v Miles, cit. 38 That a generalization of the consumer rule to general contract law may raise political issues is admitted even in the comments to these articles made in the Acquis Principles, see Part A, Section 3 (“Political Issues”) in the comments on each of Art. 2:101 and 2:103. On the difficulty to see a general duty to disclose in European law see also G. Howells, Consumer Concepts for a European Code? in R. Schulze (ed.), New Features in Contract Law, cit., pp. 119–135, pp. 122ff.

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of the contract if a literal exercise would lead to results that are deemed to be unfair. This does not correspond to the English law approach, that permits an accurate application of the contract for speculative purposes,39 and even if the particular terms of the contract permit to cumulate it with other remedies and the result is unfair.40 International contract practice seems to suggest that the parties intend the contract to be interpreted on the basis of its own terms and applied without interference by external elements or exercise of discretion.41 This corresponds to the expectations created by English contract law, but seems to contradict the policy underlying the Restatements. This discrepancy creates uncertainties as to the precise content of the restatements: how is the principle of good faith to be interpreted? Both Restatements stipulate that the interpretation has to be made autonomously and without regard to the various legal traditions. Until a coherent body of case law has developed, however, it will be difficult to have sufficiently precise indications to be used as guideline for a uniform interpretation.42 D. Trade Usages Trade usages are often referred to as an important source of the transnational commercial law.43 Assessing a trade usage might be quite demanding. In respect of the principle of good faith, for example, that the above analysis showed is so important in the interpretation and performance of a contract, there does not seem to be evidence of a uniform usage that might be valid for all types of contracts on an international level or for one single type of contract. Even evidence that certain conduct is common in a certain branch of the trade does not necessarily mean that there is a binding usage to that effect.44

39 Moore & Co Ltd v Landauer Co [1921] 2 K.B. 519, Arcos Ltd v. Ronaasen [1933] A.C. 470. See also the Union Eagle case [1997] 2 All ER 215, where an immaterial delay of 10 minutes was considered sufficient to rescind the contract. As Lord Hoffmann stated, “if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced” (pp. 218ff.), and “to build an argument on the basis that the purchaser was only ‘slightly late’ would be to encourage litigation about ‘how late is too late’ ” (p. 222). 40 Lombard North Central plc v. Butterworth [1987] 1 All ER 267, Court of Appeal. 41 For a more extensive analysis see G. Cordero-Moss (ed), Boilerplate Clauses, cit., pp. 115ff. 42 The UNIDROIT created Unilex, a database to support a harmonised case law on the UPICC. For an analysis see G. Cordero-Moss, Does the use of common law contract models give rise to a tacit choice of law or to a harmonised, transnational interpretation? in G. Cordero-Moss (ed), Boilerplate Clauses, cit., pp. 37ff. 43 R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., pp. 39ff., convincingly argue that trade usages are not self-validating and require an external validation, usually in the form of a reference contained in the governing law. 44 Ibid., pp. 39ff., referring to Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728. On the establishment of uncodified usage and the lex mercatoria see R. Goode, Usage and its


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Commercial contracts often contain clauses that recur in all types of transactions and present relatively constant language, so-called boilerplate clauses such as: No Waiver, No Oral Amendments, Entire Agreement, No Reliance, Liquidated Damages, Sole Remedy, Assignment, Representations and Warranties, and several others.45 Their main aim is to create a self-sufficient system for the contract so that it can be interpreted solely on the basis of its terms and without reference to external elements such as principles of the governing law. The purpose of these clauses is, in other words, to avoid interference by principles such as good faith and fair dealing. While each of these clauses is quite common in commercial contracts, there is no evidence that any of these clauses has specific legal effects that may be considered to be generally recognised on an international level. These terms are typically adopted from common law contract models, and can be incompatible with the civilian model based on good faith and fair dealing, as seen in this paper. Even within English law, and even more so within the common law legal family in general, there is not necessarily one single generally acknowledged interpretation of the scope of each of these clauses. There seems to be no basis, therefore, to assume the existence of a uniform interpretation of these contract terms that could elevate them to the status of trade usages.46 E. Summing up Transnational sources with the goal of harmonising the general contract law are not easily enforceable: the observed convergence of legal systems is not primarily relevant to commercial contracts; general principles, restatements of contract law principles and trade usages in the field of general contract law are not sufficiently specific or systematic to create a harmonised regulation.

Reception in Transnational Commercial Law, International and Comparative Law Quarterly, 46/1997, 1–36. 45 For an extensive analysis of these clauses see G. Cordero-Moss (ed), Boilerplate Clauses, cit., pp. 115ff., as well as the research project that I run at the Oslo University on Anglo-American Contract Models: http://www.jus.uio.no/ifp/english/research/projects/anglo/index.html. 46 One clause that seems to have reached a uniform interpretation, at least in the field of maritime law, is the clause “time is of the essence”, that thus transplants into civilian systems the English law formalistic power to repudiate a contract for a breach that might be immaterial: see T. Sandsbraaten, Begrepene “Conditions, Warranties, representations, Covenants”, in Anglo-American Contract Models No. 5, in Publications Series of the Department of Private Law, University of Oslo (with abstract in English), 179/2009, p. 59.

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giuditta cordero-moss IV. What cannot be Achieved: Harmonisation of Legal Areas

Generally recognised principles are referred to as sources in a variety of contexts: public international law disputes between States, investment protection disputes between States and foreign investors, commercial disputes between private parties. The generally acknowledged principles that apply to commercial disputes, however, are not necessarily the same general principles that apply to disputes between States or between foreign investors and the host country. It is necessary to distinguish between international disputes involving public international law and those involving commercial law. Not only disputes between States, but also between States and foreign investors are often, if not necessarily always, based on rules or general principles of public international law. Disputes between a foreign investor and the host State are mainly based on an alleged breach by the State of a rule of international law, be it a treaty-based standard of treatment or a customary principle. The point with these allegations is that the host State has used its sovereign powers in a manner that violates rules and principles binding on States. This is the only, or the most effective, defence available to a foreign investor against the host country: in the absence of rules and principles of public international law, the State would be free from restrictions on the use of its public powers because it could pass legislation that renders any abusive or discriminatory act legal within its territory. Public international law is the dimension above national sovereignty that sets fundamental and generally recognised (or agreed to) criteria limiting the national States’ otherwise unrestricted use of their respective sovereign powers.47 Rules and principles of public international law are not necessarily equivalent to rules and principles of commercial law, whether international or not. Commercial disputes mainly regard obligations of private law between private parties (or, at least, parties acting as private). They do not regard any use of public or sovereign powers, therefore they do not require any dimension superior to the sovereign State to restrict the latter’s otherwise unlimited powers. They mainly regard contractual behaviour that is restricted by the contract and by the governing law. An example of principle of public international law that may not automatically be deemed applicable also to commercial contracts is Australia v.

47 That recent trends seem (not uncontroversially) to extend the jurisdiction of investment arbitral tribunals to purely commercial disputes, mainly via the fictio of an umbrella clause in an investment treaty that elevates breach of commercial obligations to breach of public international obligations, does not change to the point that will be analysed here.


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France.48 This decision is rendered in connection with Australia’s reaction against France carrying out nuclear tests in the South Pacific in spite of having made declarations that it would not do so. It is obviously dealing with a dispute between two sovereign States, but is also mentioned as a sources relating to commercial contracts.49 In the part of the decision emphasised as relevant to commercial disputes, the ICJ analyses whether unilateral declarations made by a State with the intention of being bound, are binding on such State. The Court observes that one of the basic principles governing legal obligations is that of good faith, and continues by affirming that “[j]ust as the very rule of pacta sunt servanda in the law of treaties is based on good faith, so also is the binding character of an international obligation assumed by unilateral declaration”.50 The ICJ decision in Australia v. France is a decision rendered by a court of public international law and deals with public international law obligations between States. If it extended its relevance to commercial contracts, it would mean that, as a general principle of international law stated by the ICJ, a private party making a commercial offer to another private party is bound by that offer, particularly if the offer is presented as irrevocable. Unilateral declarations do not always have a binding character in contract law. Among other legal systems, English law does not consider unilateral promises as enforceable. English law of contract has an additional requirement for considering a promise as enforceable: the requirement of the consideration. The consideration can be briefly described as the necessity that both parties have reciprocal benefits and detriments.51 In the absence of a mutual benefit and detriment, a unilateral promise that gives benefit only to the promisee and detriment only to the promisor would be unenforceable. In most typical contracts the consideration is identified with the price: in a sale agreement, for example, the seller promises to sell the thing (thereby creating for itself the detriment of depriving itself of the thing, and the benefit for the buyer of conveying it the thing), and the buyer promises to pay the

48 Nuclear Tests Case (Australia v. France) Judgement, 20 December 1974, ICJ Reports 1974, p. 253. 49 See the Trans-lex digest: http://trans-lex.org/output.php?docid=380700&markid=901000, last visited on June 2nd 2009. 50 Ivi, para. 46. 51 The consideration has a common origin with the causa that can be met in French and Italian law, as they all descend from the doctrinal elaboration of Roman law: see R. Zimmermann, The Law of Obligations, 1996, pp. 554ff. While the criterion has lost most of its substantial significance in Italian law, and has disappeared from German law, it survives and is still central in the English law of contracts.

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price (thereby creating for itself the detriment of paying the price, and for the seller the benefit of transferring the money).52 Following the above, English law of contracts does not consider a unilateral offer as binding, not even if the offer, by its own terms, is irrevocable for a certain period: it is necessary to have a consideration; otherwise the promise to keep the offer firm is not enforceable.53 The requirement of consideration has consequences that may seem unjustified, and steps are being taken by courts to mitigate it: for example, recognising that a benefit or a detriment may be merely practical, such as saving the time and trouble connected with replacing a performance, etc.54 Another significant mitigation of the rule of consideration is the remedy of the promissory estoppel. The promissory estoppel is a so-called equitable remedy, which, under certain circumstances, prevents a promisor from going back on its promise, even if the promise was given without consideration and is therefore not enforceable at common law. The criteria that would have to be met are: that the promise is clear and unequivocal, that it must be inequitable for the promisor to go back on the promise, and that the promisee must have altered its position in reliance on the promise made.55 The effects of the estoppel would, however, only be suspensive, and the promisor would be able, by giving notice, to go back on the situation prior to the promise.56 The promissory estoppel, moreover, is not available in case of revocation of an irrevocable offer, because English law admits it only for the eventuality that contractual rights have arisen between the parties. In the case of an offer, however, no contract has been entered into, therefore no contractual rights have arisen, and the promissory estoppel is not admitted as a remedy.57 How can the unenforceability of irrevocable offers in English law of contracts be reconciled with the ICJ clear statement that unilateral declarations are a sufficient source of binding obligations? Is the English rule of consideration in contrast with the principle of good faith in public international law? Could a case be brought against England in the International Court of

52 The doctrine of consideration is very extensive and has various rules, such as, that the consideration needs not being adequate, but it must be real. For an extensive analysis of the various aspects of the doctrine, as well as reference to judicial practice, see J. Beatson, W.R. Anson, Anson’s Law of Contract, 28th ed. 2002, 88ff. and E. Peel, G.H. Treitel, Treitel On the Law of Contract, 12nd ed., 2007, 3–001ff. 53 Offord v. Davies (1862) 12 C.B.N.S. 748. 54 Williams v. Roffey Bros. & Nicholls (Contractors) Ltd. [1991] 1 Q.B. 1 However, the impact of this step is deemed to be quite uncertain in English legal doctrine: Anson, cit., pp. 107ff. 55 Ibid., pp. 114ff. 56 That the limited effects of promises without consideration do not give the full consequences of a binding promise, is emphasised in Peel, Treitel, cit., 3–012. 57 Ibid., pp. 118ff.


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Justice because English contract law violates public international law? Or, even more drastically, could a private party be considered liable for breach of its obligations contained in an irrevocable offer, notwithstanding that the offer is not binding under the (English) law governing it? It seems quite evident that English contract law does not violate basic principles of public international law. It simply has a different scope of application. It does not relate to obligations between States or to unilateral declarations by a State not to carry out atmospheric nuclear explosions off the coast of another State. Similarly, the ICJ was not aiming at creating a precedent for regulation of commercial offers between private parties. That the words “good faith” or “binding unilateral declaration” may be used both in public international law and in commercial law does not justify the conclusion that they have the same assumptions, functions and meaning in both spheres. Accordingly, the concepts are not interchangeable. A. Summing up Generally acknowledged principles of public international law are not necessarily capable of creating obligations between private parties and do not represent, therefore, a source of harmonised transnational commercial law. V. What cannot be Achieved: Replacing the Governing Law Some of the strongest supporters of a spontaneous transnational law seem to have turned their backs on their earlier position and now prefer more structured, semi-legislative instruments. This became apparent in the ongoing process on a European contract law. The Communication from the Commission of the European Communites that initiated the process on a common European contract law asked stakeholders to express which sources should be preferred to harmonise the contract law in Europe.58 In their joint response, the academic group defining itself as Commission on a European Contract Law (the author of the PECL, chaired by the Danish professor Lando) and its successor, the Study Group on a European Contract Law (the co-author of the DCFR), bluntly dismissed the primary source of transnational law—the spontaneous development by market forces of appropriate regulations and models—as not sufficient to bring about a uniform regulation of private law.59 Earlier, this was prized as the most adequate source of

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11.7.2001, COM (2001) 398 final. Response to the Commission Communication by the Commission on European Contract Law and the Study Group on a European Civil Code, at http://ec.europa.eu/consumers/ 59

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regulation for international commerce.60 The PECL, that represent (together with the UPICC) one of the best and most comprehensive codifications of trans-national law, were also dismissed, with the observation that for the moment such a restatement cannot be reckoned to replace State law: what it lacks, in addition to a more comprehensive and detailed scope, is the legal basis for being considered binding also in competition with mandatory rules of State laws. Hence, the joint response encouraged an “enactment” of the Restatement,61 and it proposed to extend the conflict rules of European private international law, so as to permit to choose the Restatement as a governing law.62 The same doubts as to the effectiveness of a free development by market forces as well as to the usefulness of a restatement were expressed in its response to the Communication by the International Chamber of Commerce—for numerous decades one of the most convinced supporters of the transnational law as an efficient alternative to State laws. The ICC’s Department of Policy and Business Practices expressed “concerns as to whether non-binding principles are sufficient”,63 though emphasising the importance of the Principles as a first step towards harmonisation. Two of the most transnational law-friendly entities, the authors of the PECL and the ICC, consider thus the spontaneous development by the market forces as well as a restatement of European law (without enactment or legal basis within private international law) as insufficient to replace State law. Even stronger doubts seem to apply in respect of the other sources of trans-national law mentioned earlier, which (apart from the UPICC, that in this respect can be compared to the PECL) do not even have the goals of being comprehensive or of restating the law, but simply provide a regulation of specific types of contract or of specific areas. The sections below analyse the ability of transnational law to govern a contractual relationship to the exclusion of any national law. A. Private International Law The first question to be addressed is the legal basis for claiming that transnational sources may govern a contract to the exclusion of any other governing

cons_int/safe_shop/fair_bus_pract/cont_law/comments/5.23.pdf, last vistited on June 2nd, 2009, p. 44, p. 26. 60 See, for example, O. Lando, The Lex Mercatoria in International Commercial Arbitration, cit., and O. Lando, Lex Mercatoria 1985–1996, Festskrift til Stig Strömholm, Iustus Förlag, Uppsala, 1997, pp. 567ff. 61 Response to the Commission Communication, cit., p. 35. 62 Response to the Commission Communication, cit., p. 37. 63 Document 15 October 2001 AH/dhh Doc. 373/416, p. 3.


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law. If they are to replace the governing law, these sources will not be subject to any mandatory rules or principles of the otherwise applicable law, with the exception of overriding mandatory rules. If, on the contrary, they are simply incorporated into the contract and become contract terms, they remain subject to any mandatory rules of the applicable law so they will be interpreted according to the governing law’s underlying principles and will be integrated by the governing law’s default rules. The wording of Article 1.4 of the UPICC seems to suggest the latter alternative: “Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law”. Also the European Regulation on the Law Applicable to Contractual Obligations, known under the name of Rome I, excludes that the parties may select, to govern their contract, sets of rules that are not national laws (with an exception for possible future European instruments of contract law).64 The Rome I Regulation is a conversion of the previous 1980 Rome Convention on the Law Applicable to Contractual Obligations. According to the prevailing opinion, the Rome Convention permitted the parties to choose, as governing law, a national law, but not transnational sources. In connection with its conversion, proposals were made to extend the scope of party autonomy;65 however, they were not accepted, and this has finally clarified that the parties may only choose a national law. Incidentally, an extension of the party autonomy would only have given a partial solution: the parties’ choice would have had effect only within the scope of party autonomy, thus leaving unaffected areas where other conflict rules are applicable: whenever the legal relationship has implications that go beyond the mere contract law, party autonomy does not apply and other conflict rules step in to select the governing law. Thus, if the contract has implications of property law (a pledge as security for a party’s obligations), of company law (a shareholder agreement regulating the competence of corporate bodies) or of insolvency law (a loan agreement with an early termination clause that would affect the solvency of 64 Council Regulation No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) (OJ L 177, 4.7.2008), Article 3. The Preamble, in item 13, confirms that nothing prevents the parties from incorporating into the contract transnational instruments of soft law; as a consequence of such incorporation, however, the soft law is given the status of a term of contract, not of governing law. See also R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., pp. 515ff. 65 The Green Paper on the conversion of the Rome Convention, COM (2002) 654 final, Section 3.2.3, asked whether the rule on party autonomy should be changed so that the parties are allowed to choose an international convention or general principles of law instead of a national law. The original proposal by the Commission, COM (2005) 0650 final, contained a rather restrictive access to do so, but this formulation was deleted in the finally approved text of the Regulation.

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the debtor), just to name some very common situations, the law applicable to those aspects will be selected on the basis of specific conflict rules, and not on the basis of the choice made by the parties. Transnational sources, thus, may be incorporated into the contract by the parties, but may not be selected to govern the contract to the exclusion of any national law, not even in mere contractual matters. This applies to disputes submitted to courts. In commercial arbitration, on the contrary, arbitration laws66 and arbitration rules67 often give the parties the possibility to choose “rules of law” to govern the dispute; these words, as opposed to “law”, are sometimes interpreted to extend beyond national laws and to also cover transnational sources. This does not necessarily mean that the parties enjoy a much larger flexibility in arbitration: as the sections below will show, transnational law does not have the ability to govern a relationship to the full exclusion of national laws. Therefore, there is little difference between incorporating the transnational law as if it were terms of contract, and choosing it as a governing law: ultimately, a national law will necessarily be applicable. B. Sources Conflicting with the Governing Law In many situations, as described in Section II above, transnational sources will be applied as a supplement to the governing law—either because they regulate details not regulated by the governing law, or because they regulate matters not regulated by mandatory rules of the governing law. In some situations, transnational sources might conflict with mandatory rules of the applicable law. The relationship between contractual terms and transnational law on one side, and State law on the other side, becomes then apparent. As seen above, the UCP 600 is a successful source of soft law regulating letters of credit. In some cases the mechanism of the letter of credit has been considered to conflict with rules of the governing law, and has been overridden by State law. The principle of autonomy of the payment obligation, for example, was deemed to conflict with the principle against abuse of right by the Swiss Supreme Court.68 The Bank had refused payment under a letter of credit because not all the documents listed in the instructions had been presented. In particular, a “receipt signed and proving delivery of the goods” was listed as one of the documents to be presented, and was not presented. The beneficiary claimed that payment was due in spite of the lack of these documents, because the delivery could be proven by other means. According

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See, for example, the UNCITRAL Model Law, article 28. See, for example, the Arbitration Rules of the ICC, Article 17. 68 Société de Banque Suisse v. Société Generale Alsacienne de Banque, BGE 105 II 67 (1989). 67


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to the principles that rule documentary credits, as seen above, the obligation of the bank to pay is strictly dependent upon the instructions that it has received. If the instructions provide for payment upon presentation of specific documents, then payment has to be effected upon presentation of those documents (irrespective of any supervening circumstance), and only upon presentation of exactly those documents. Payment on presentation of documents different from those listed in the instructions, can expose the bank to liability towards the applicant. In the case described here, the receipt was one of the listed documents, and was not presented.69 An application of the principles governing the documentary credits, therefore, should lead to the conclusion that payment was not to be effected by the bank. The creditor maintains its claims towards the debtor, but the bank cannot effect a payment in violation of the instructions. The creditor will have to satisfy its claim directly with the debtor. However, the Swiss Supreme Court decided that the bank had to effect payment. Invoking the instructions to refuse payment, in spite of the presence of other documentation showing that payment was due, would be an abuse of right in contrast with Article 2 of the Swiss Code of Obligations, which is mandatory. C. Gaps in Transnational Sources In some situations, transnational sources do not provide a regulation. The doctrine of autonomous interpretation, meant to prevent different interpretations of transnational provisions, was developed also to permit filling gaps without impairing the uniformity of the transnational law. Thus, the CISG aspires to being interpreted in a way that is not affected by the rules and principles of the system within which it is being applied—which would undermine its goal of representing a uniform regulation. Article 7 of the CISG provides for an autonomous interpretation of its provisions: “(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.” When it comes to lacunas, the CISG ultimately makes reference to the national governing law: “(2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based

69 The inclusion of a signed receipt among the documents to be presented is a rather inefficient means: if the receipt has to be signed by the buyer, who is also supposed to make the payment, it will easily be able to stop any possibility of effecting payment by withholding the signature on the receipt. It is an important principle that the production of none of the listed documents should be in the power of none of the parties. Otherwise, the parties may influence the circumstances that trigger payment, and the neutrality and independence that a letter of credit should provide is seriously undermined.

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or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.” Similarly, the UPICC (Art. 1.6) and the PECL (Art. 1:106) contain guidelines for interpretation and application. In their first paragraphs, both articles establish the principle of autonomous interpretation: the Restatements shall be interpreted having regard to their international character, and bearing in mind their purpose to promote uniformity in their application. In other words, this paragraph aims to avoid that the Restatements are interpreted in the light of State laws. The second paragraph of both Articles provides that, in the case of lacunas, the interpreter will have to apply, to the extent possible, the general principles underlying the Restatements. The autonomous interpretation is enhanced by this provision: lacking an express regulation of a certain aspect, the interpreter will first have to look at the principles that inspire this codification, and construe them so as to elaborate a regulation in line with the fundamental ideas upon which the principles are based. It cannot be excluded, however, that even the underlying principles are not sufficient to provide the regulation of a certain aspect. In these cases, lacunas will have to be filled by applying the governing law, as is expressly stated in the PECL, Art. 1:106(2). The ideal of uniformity that inspires the Restatements, consequently, might fail, if the solutions provided by State laws differ from State to State. 1. The UPICC Assume that a seller that has entered into a plurality of contracts with several buyers for the supply of the products manufactured by the seller. If a force majeure event prevents the production of part of the volume that the seller has committed to the totality of its buyers, the position of the seller will vary according to the governing law. If the governing law is Norwegian, the seller will be under the obligation to supply, to the fullest possible extent, the first commitment in time, and it will be excused towards the other buyers.70 If the governing law is Italian or German, the seller will be entitled to reduce the supplies to each buyer pro rata.71 If the governing law is English, the seller will not be excused by frustration of the contract: the judge will consider that the non-performance is self-induced, and not caused by an external event outside of the seller’s control:72 the non-performance is the consequence of

70 Rt. 1970 s. 1059, p. 1064; see V. Hagstrøm, M. Aarbakke, Obligasjonsrett, Oslo 2003, pp. 268ff. 71 The eventuality of a partial impossibility and of a corresponding partial excuse is regulated expressly by the Codice Civile in art. 1258, and it can be inferred from the wording of §275(1) BGB. 72 J. Lauritzen A.S. v. Wijsmuller B.V. (The Super Servant Two) [1990] 1 Lloyds’s Rep. 1.


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the seller’s commitment to deliver part of its production to other buyers, and therefore the impediment was not outside of the control of the seller. One of the most important functions attributed to transnational law is to eliminate discrepancies such as these, and to provide a uniform and reasonable treatment that can be used to govern international contracts in the respect of the expectations of the parties. Would the UPICC succeed in giving a harmonised solution? The matter is within the freedom of contract, and therefore is capable of being harmonised by transnational sources. However, the UPICC do not contain an answer to the situation arising in case of partial impediment and plurality of creditors. Article 7.1.7 of the Principles regulates force majeure circumstances, both preventing in total and in part the contractual performance, but it does not regulate the allocation of risk in case of plurality of creditors. How can this lacuna be filled? In the case of partial impediment and plurality of creditors, it does not seem that the interpretation rules contained in Article 1.6, or even the reference to usages of Art. 1.9 of the UPICC, can offer any specific help. Principles underlying the codification, referred to in Article 1.6, do not seem to be relevant to this particular situation. It could be possible to interpret Article 7 on the basis of an analogy with the solution presented by civil law systems, that provide for a corresponding reduction of the performance in case of partial impediment, and are construed to permit a pro rata reduction among the various creditors. However, how could such an interpretation by analogy with State laws of the civil law system be compatible with the above mentioned article 1.6, that wishes to avoid that the Principles are interpreted in light of State laws? As far as article 1.9 is concerned, referring to usages and practices, it does not seem easy to determine what generally recognised usages might say in this situation. The principle “rebus sic stantibus”, which is the expression of the force majeure rule in the trans-national law, does not seem to have generally recognised rules on partial impediments and plurality of creditors. Therefore, the consequences of the situation arising in our scenarios have to be solved by applying the governing law. In this situation, in conclusion, transnational law has not achieved its aim of providing uniform and reasonable regulation of international contracts. 2. The CISG as expression of transnational law The CISG is taken into such a high consideration, that it is sometimes invoked as a source of transnational law, beyond its scope of application as a binding international convention. The genesis of the CISG and the ideals that inspired it actually confirm that the goal of the Convention is to provide a “universal” uniform treatment for the most important type of contract within international trade, thus eliminating the barriers to international business

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that might arise as a consequence of different national regulations. The actual success of the CISG slightly contradicts the universality of its goals, since the number of States that ratified it (74) is not overwhelming, compared to other conventions (the New York Convention on arbitration has been ratified by 144 States), and taking into consideration that a State of the paramount importance within international trade and international commercial law like England has not ratified it. There are good reasons for questioning the appropriateness of an approach that extends the applicability of international conventions beyond their scope of application:73 a convention is a binding instrument and is the result of careful negotiations that reflect the extent to which the various States are willing to be bound. The negotiations on the text of the convention sometimes result in wording that is so general or unclear that it can be interpreted to permit each of the conflicting positions supported during the negotiations.74 In other situations, and perhaps more openly admitting the impossibility to reach an agreement, conventions may be silent on certain aspects of the matter that they regulate.75 In yet other situations, they may make open reference to the applicable national law for supplementing or regulating specific aspects.76 Sometimes conventions permit the ratifying States to make reservations against the applicability of certain rules in the

73 See R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., p. 47, criticising the ICC award 5713 of 1989, that applied the CISG as if it was a directly applicable source of transnational law, in spite of the circumstance that the convention had not been ratified by any of the involved states and without giving regard to the applicable law. 74 See, for example, Article 4 of the Rome Convention on the Law Applicable to Contractual Obligations. The first subsection stated that a contract is governed by the law of the country with which it has the closest connection; the second subsection had a presumption for what the closest connection is (the permanent residence of the party making the characteristic performance); the fifth subsection made an exception to the presumption: should the circumstances as a whole show that there is a closer connection with another country, this country’s law shall be applied. The relationship between the presumption and the exception was interpreted differently in the various European countries: the Dutch Supreme Court (Société Nouvelle des Papeteries de L’Aa Sa v. BV Machinefabriek BOA, IPRax 1994, 243) and the German Supreme Court (BGH 25.2.1999, Neue Juristische Wochenschrift, 1999, pp. 2442f.) deemed the presumption to be strong, English (Crédit Lyonnais v. New Hampshire Insurance Company [1997] 2 C.M.L.R. 610, CA, and Ferguson Shipbuilders Ltd v. Voith Hydro GmbH & Co KG [2000] S.L.T. 229) and Danish courts (UfR 1996, 937, see A. Philip, First Danish Decisions on the Rome Convention, IPRax 1994, pp. 150f.) deemed it to be weak. The Rome I Regulation, into which the Rome Convention was converted, took a clearer approach and stated directly that the connecting factor is the residence of the party making the characteristic performance. 75 An example is the matter of overdue interests, that could not be regulated in detail in the CISG, see for an extensive explanation R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., pp. 528 and 301ff. 76 For example, the CISG refers in Article 28 to national law to determine whether the remedy of specific performance is applicable.


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convention.77 Conventions also contain detailed description of their scope of application, both territorially78 and in respect of the subject-matter.79 All these, and many others, are techniques used to obtain a commitment by the ratifying States to at least the minimum regulation that is contained in the convention. A State, for example, may be willing to commit to a convention only if its reservation against the application of a certain rule is accepted. If a State is not willing to commit to a convention notwithstanding the possibility to reserve against application of certain rules, it does not ratify it—and the convention will not become binding for that State. How can all these restrictions be disregarded simply by stating that, by some States ratifying a convention, the principles underlying that convention make transnational rules that may be applied beyond their precise scope of application? Would this mean that the whole convention is to be considered as transnational law and therefore applicable, notwithstanding that a State has made certain reservations or has decided not to ratify it? What is, then, the effect of making the reservations or not ratifying? In addition to these systemic objections to the applicability of a convention beyond its scope, there are situations where the convention—having been drafted for the purpose of regulating a certain specific area—presents lacunas or refers to the national governing law. The CISG refers to national law in a series of respects: validity of the contract and effects of the sale on property (Art. 4), gaps in the Convention (Art. 7), specific performance (Art. 28), industrial property claims (Art. 42), payment modalities (Art. 54), retention’s effects towards third parties (Art. 71), calculation of interest (Art. 78).

77 For example, the CISG allows the ratifying states can make reservations against the application of parts of the convention. The Scandinavian countries, for example, have excluded applicability of Part II of the Convention, on formation of contracts (so called Article 92 reservation), and have excluded the applicability of the Vienna Convention to inter-Scandinavian contracts (so called Article 94 reservation). Several countries (including also Argentina, Chile, China, Russia and the Ukraine) have reserved against the provisions that permit contracts to be created, modified or terminated by other means than in writing (so called Article 96 reservation). These and other reservations render the application of the Vienna Convention less uniform than it would have been desirable for a uniform law, even among countries that have ratified it (for a full list of the reservations and of the states that have made them see http://www.uncitral.org). 78 For example, the Rome Convention on the Law Applicable to Contractual Obligations (now converted into the Rome I Regulation) is universal and is applied even in relationships where the other party’s country has not ratified it, whereas the Lugano convention on jurisdiction and enforcement of judgements in civil and commercial matters assumes that both involved countries have ratified it, at least in the part regarding enforcement of judgements. 79 For example, the CISG applies only to contracts of sale, and not to all contracts of sale; its scope of application is specified in Article 2.

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An ICC arbitral award80 illustrates a case of lacuna. The dispute was between a Korean seller and a buyer from Jordan. The seller was to issue a performance guarantee, and the buyer was to open a letter of credit for the payment of the goods; the buyer also had to issue a performance guarantee in favour of the final buyer of the goods, an Iraqi buyer. Due to several delays, the delivery was rescheduled and the duration of the letter of credit was extended; a dispute then arose on whether the actual delivery was delayed in respect of the extensions, and whether payment was due under the guarantees. The claimant asked the arbitral tribunal to solve the dispute applying the transnational law, in this case defined as lex mercatoria, and affirmed that in that case the lex mercatoria was to be deemed equal to the CISG. The arbitral tribunal first noticed that the applicability of the lex mercatoria was not undisputed. However, assuming that in that case the lex mercatoria could be identified with the CISG, it would have been impossible to solve the dispute on that basis. The tribunal noticed that in that dispute it might be necessary to evaluate situations such as the unjust enrichment or limitation of rights, which are not regulated by the CISG. Therefore, the tribunal decided to apply choice-of-law rules for the purpose of identifying the national governing law, and resolved to apply Korean law to the dispute. 3. Summing up Transnational law lacks the detail and exhaustiveness (as well as the formal force of a governing law) necessary to replace national laws. D. The Autonomous Contract International contracts are often drafted without having in mind what law will govern the contract. The clause choosing the governing law is often negotiated after the parties have agreed on all the commercial aspects of the transaction, and after the regulation of such commercial content has been drafted. Sometimes, the parties do not reach an agreement on what governing law to choose, and therefore they do not write a choice-of-law clause in their contract. At times, the parties do not attach significant importance to the choice of the governing law, and agree on the proposal of one of the parties without paying attention to the implications of that choice. Other times, the parties do not even think of the question of the governing law. In all these aforementioned situations, the result is that a contract was drafted without the awareness of the legal system that the contract is subject to. In other words, the parties assumed that the contract represented a sufficient 80 ICC award made in case No. 6149 of 1990, in Yearbook Commercial Arbitration XX (1995), 41ff.


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regulation of their relationship, that it would be enforceable without any problems in all relevant jurisdictions, and that it would not be affected by rules or principles external to the contract, other than those that the parties may have made reference to. This blind trust in the self-sufficiency of the contract has led some to affirm that international commercial contracts are autonomous and not subject to any national law.81 The autonomous contract, is, according to this theory, detached from domestic law and has to be interpreted and applied autonomously in the light of its own language and non-state principles and rules of international trade. It will be shown below that this is an erroneous conception. The theory of the autonomous or detached contract may, to a certain extent, be connected with the doctrine of the internationalisation of contracts entered into between foreign investors and States. These contracts prompt the necessity to restrict the State’s role as a sovereign that may introduce new legislation and thus unilaterally and unduly modify the conditions of the investment. To avoid such abuses, the 1965 Washington Convention on the Settlement of Investments Disputes Between States and National of Other States provides, in Article 42, that the arbitral tribunal is to apply (in the absence of a choice of law made by the parties) “the law of the host countries [. . .] and such rules of international law as may be applicable”. This formulation is usually interpreted to mean that the national law of the host country is to be applied in as much as it does not violate international law.82 Investment agreements formalising oil investments in Libya contained governing law clauses according to this principle; following nationalisation, three arbitral proceedings were initiated and led to three different results: in the Liamco case the tribunal applied Libyan law, amended with a general principle regarding the necessity of providing compensation if assets are nationalised;83 in the BP case, the tribunal found that there were no principles common to both Libyan and international law, and proceeded to apply general principles of law;84 and, in the Texaco case,

81 For a recent suggestion to promote autonomous agreements that are not affected by the differences among the various Contract Laws, see H. Collins, The Freedom to Circulate Documents: Regulating Contracts in Europe, European Law Journal, 10/2004, pp. 787–803. For an incisive analysis of how standard contract terms would not be capable of being autonomous because they are subject to, among other things, the governing law’s influence in respect of the normative context and the interpretation, see S. Whittaker, On the Development of European Standard Contract Terms, European Review of Contract Law 1/2006, pp. 51–76. 82 See C. Schreuer, L. Malintoppi, A. Reinisch, A Sinclair, The ICSID Convention: A Commentary, 2nd ed., Cambridge 2009, pp. 598ff. 83 Libyan American Oil Company v. The Government of the Libyan Arab Republic, (1982) 62 I.L.R. 140. 84 British Petroleum (libya) Ltd. V. The Government of the Libyan Arab Republic, (1979) 53 I.L.R. 297.

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the tribunal assumed that the parties had wished to submit the agreement to public international law.85 As already seen in Section IV above, however, principles and doctrines developed in the sphere of investment protection are not necessarily automatically transferrable to the sphere of commercial contracts. In the Libyan cases, the arbitrators could easily apply a public international law principle about compensation on expropriation; in a commercial dispute, in contrast, the arbitrators may need to find sources on quite technical questions, such as the conditions for excluding liability or the relevance of the negotiations and the subsequent conduct of the parties in the interpretation of the contract. Section III above showed that transnational principles are not sufficiently specific and systematic to harmonise the various laws and create a set of general principles that may govern all aspects of general contract law; in this Section V it is shown that transnational sources do not have the ability to fully replace a governing law. Hence, and as will be illustrated below, commercial contracts may not be subject to “internationalisation” and thus escape from the scope of the governing law to the same extent as investment contracts with States may. 1. Standard contracts The European Commission seemed to encourage, albeit for a short period,86 standard contracts as a tool towards harmonisation of the various State contract laws.87 It was soon realised, however, that contracts, even if they are standardised, are subject to a governing law and cannot derogate from this law’s mandatory rules. Therefore, a standard contract, to be effective on the whole territory of the EC, would necessarily have to comply with the strictest of the criteria set by the various member States. This, in turn, would have prevented the standard contracts from adopting any more flexible criteria offered in other member States, hence preventing progress in contract practice. This would not have led to a harmonisation that seems desirable. That a contract, even a standard contract, is subject to a governing law— and that the governing law, even for an international contract, is a national law, has impact even beyond that law’s mandatory rules. As shown in this paper, national laws differ from one another in respect of how contracts

85 Texaco Overseas Petroleum Company, California Asiatic Oil Company v. The Government of the Libyan Arab Republic, award of January 9th, 1977, (1978) 17 I.L.M. 3. 86 First Annual Progress Report on European Contract Law and the Acquis Review, COM(2005) 456 final. 87 See the Action Plan on a More Coherent European Contract Law, COM(2003) 68 final and European Contract Law and the Revision of the Acquis: The Way Forward, COM(2004) 651 final.


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are to be interpreted, and this may lead to standard contracts being interpreted differently and having different legal effects depending on the governing law.88 Standard contracts, therefore, do not seem to be the appropriate tool to harmonise commercial contract laws. Moreover, there is an abundance of standard terms issued by a large number of organisations such as the ICC, branch associations such as International Federation of Consulting Engineers (FIDIC), the Europeaan Engineering Industries Associations (Orgalime) or the International Swaps and Derivatives Association (ISDA), or even by commercial companies. Standard contracts prepared by FIDIC and Orgalime compete to regulate similar contractual relationships within the same branch of construction; the very fact of this competition speaks against their ability to reflect a harmonised transnational law. The wealth of documents issued by a disparity of sources creates an additional uncertainty, since it creates the risk of attaching normative value to terms written by organisations or institutions that do not act impartially.89 2. The DCFR and good commercial practice The already mentioned Academic Draft Frame of Reference seems to indirectly endorse the idea of the autonomous contract. They have a double approach to commercial contracts: they extend rules of consumer protection to commercial contracts, and then moderate them by reserving for contrary good commercial practice. Reference to good commercial practice as the only corrective to the applicability to commercial contracts of rules designed for consumer protection, assumes that the interpreter is in a position to define good commercial practice and to assess its content. It may be assumed that the sources of good commercial practice do not differ significantly from the sources of the transnational commercial law that were analysed above: scholarly works on the convergence of legal systems, general principles, restatements, and trade usages. As seen above, these sources are not capable of giving a clear and harmonised picture of the transnational law of commercial contracts; hence, they do not give a clear picture of what good commercial practice is. In addition to those sources, contract practice may be given particular attention and is analysed immediately below.

88 See also Collins, The Freedom to Circulate Documents: Regulating Contracts in Europe, cit; Whittaker, On the Development of European Standard Contract Terms, cit.; G. CorderoMoss, Imported Contract Drafting, cit. 89 See R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., and S. Symeonides, Party Autonomy and Private-Law Making, cit., p. 6, who wishes a “check to the unbounded euphoria that seems to permeate much of the literature on the subject” of non-state norms as a source of the new lex mercatoria.

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Contract practice generally adopts contract models prepared on the basis of English law or at least of common law systems, which, according to the traditional conception seen above, do not contemplate good faith and fair dealing as a standard, and are therefore quite distant from the principles underlying the DCFR. Even if, as seen above, the system of English law in its totality might contain features that mitigate this aspect, common law contract models are clearly drafted on the assumption that the contracts shall be interpreted literally and without influence from principles such as good faith. As a consequence of the broad adoption of this contractual practice, the regulations between the parties move more and more away from the assumption of a standard of good faith and fair dealing even in countries whose legal system does recognise an important role to good faith. To what extent this contract practice may be taken as a clear intent by the parties to embrace the interpretation of contracts made by English courts, however, is highly uncertain:90 contracts are interpreted according to the law that governs them, and this may lead to strongly differing legal effects for the same wording, depending on the principles of interpretation that have been used. This plurality is not necessarily an evil that deserves to be overcome: informed parties do appreciate the interplay between the governing law and the wording of the contract, and count on the legal effects that follow from it. This assumes that the applicable rules of private international law (conflict of laws) are consulted to identify the governing law. Foreseeability of the governing law is the proper solution to the pluralism of laws that otherwise would create a confusing situation. Even standard terms of contract, to the extent that they at all can be elevated to the status of some binding practice,91 do not have an autonomous existence but must necessarily be interpreted in the light of the governing law. Clauses that have a clear linguistic meaning do not necessarily have the same legal effects once they are read on the background of the interpretation 90 For a more extensive analysis of the matter see G. Cordero-Moss, Tacit choice of law, partial choice and closest connection: the case of Common Law contract models governed by a civilian law, in J. Giertsen, T. Frantzen, G. Cordero-Moss (eds.), Rett og toleranse—Festskrift Helge Johan Thue, Gyldendal 2007, pp. 367–378 and G. Cordero-Moss, Does the use of Common Law contract models give rise to a tacit choice of law?, cit. 91 For a convincing criticism of the “rather extravangant claims” that standard contract terms represent a legal norm, in spite of the large variety of such terms, see R. Goode, H. Kronke, E. McKendrick, Transnational Commercial Law, cit., p. 33 and S. Symeonides, Party Autonomy and Private-Law Making, cit.


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doctrine and the general principles of the governing law. Therefore, even if the language of the contract is the same, the effect of the contractual regulation varies as a consequence of the interplay between the contract and its governing law. Contract practice, consequently, does not represent a source of uniform regulation for commercial contracts. VI. Conclusion The foregoing shows that transnational instruments are a useful supplement to the governing law for specific and technical aspects of commercial relationships. If they are enacted as binding instruments, they will apply directly; if they are soft law, they will need to be incorporated by the parties unless they reflect trade usages. The legal effects of a contract do not arise simply out of the contract itself, but are a result of the combination between the contract and the governing law. In addition, the governing law will play an important role in filling any gaps that the contract might have; moreover, mandatory rules of the governing law will override any regulation to the contrary that the contract might contain. This does not mean that the undeniable special characteristics of international contract drafting are, to a certain extent, not capable of rendering the contracts autonomous. Contract laws usually do not contain many mandatory rules; therefore the parties might not even notice that the contract is regulated by a certain governing law. In the absence of mandatory rules, i.e., within the scope of the freedom of contract granted by the governing law, the parties are free to use their contract to develop practical mechanisms to respond to the needs of the specific case. Within this scope, the autonomous contract and transnational sources thrive: commercial practice and transnational sources provide useful regulations and models, and the parties develop mechanisms for the regulation of their respective interests that do not depend on the governing law and may be used across the borders. What the contract and the incorporated transnational law might not achieve, however, is to harmonise the general interpretation and application of contracts. These depend on the general contract law, which in turn is a result of each system’s legal tradition. Unless transnational law is interpreted and applied by a centralised court that, overtime, may create a coherent body of jurisprudence, its application will be tainted by the interpreter’s own legal tradition, thus impairing the desired harmonisation. Aspirations to create a

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coherent jurisprudence by avoiding national courts of law and submitting disputes to international commercial arbitration are doomed to fail because of the fragmentation of arbitration92 and the ultimate control of judicial courts on arbitral awards.93

92 Commercial arbitration is carried out in a large variety of institutions in all regions of the world, and many proceedings are ad hoc and therefore outside of the framework of any institution; the more or less systematic publication of commercial awards organised by some institutions is not capable of giving any significant harmonisation to such a fragmented picture. A significant part of commercial disputes is decided by arbitrators appointed by private parties according to the most disparate criteria, and awards are written with the sole purpose of solving the particular dispute and with the awareness that they will not be read by anyone else besides the involved parties. Sometimes awards do not even need to be motivated. Not only is coherence of arbitration practice not a goal that the commercial tribunals wish to pursue in a particularly high degree; even if it was a goal, it would be impossible to achieve in such a multifaceted system. 93 Courts may not review the awards, either in the merits or in regard of the application of the law. However, if the award disregards particularly important principles of the legal system, it may be deemed, i.a., to violate public policy and thus be ineffective. For an analysis of the matter, see G. Cordero-Moss, International Arbitration and the Quest for the Applicable Law, (2008) Global Jurist: Vol. 8: Iss. 3 (Advances), Article 2 pp. 1–42 and see G. Cordero-Moss, Arbitration and Private International Law, (2008) International Arbitration Law Review, vol. 11 Issue 4, pp. 153–164.

CODIFICATION OF THE NEW LEX MERCATORIA THROUGH THE INTERNET: THE TRANSLEX PRINCIPLES AT WWW.TRANS-LEX.ORG Klaus Peter Berger I. Introduction Of the many qualities of Thomas Wälde, two really stood out: his natural tendency to adopt a transnational perspective and his preference for the virtual world of the Internet. Thomas was a truly transnational lawyer. No matter what problem of international business or investment law he was facing, Thomas refused to think in categories. He was interested in the broader picture.1 Both in his work as an academic teacher and as an arbitrator and author of legal opinions, he always adopted transnational and interdisciplinary approaches in order to achieve results that would stand up against the challenges of a globalized business world. It is not surprising, therefore, that Thomas has participated in the lively, sometimes even ‘tumultuous’2 debate about the existence and doctrinal justification of the New Lex Mercatoria (NLM), the idea of a transnational, ‘a-national’ business law.3 The NLM theory transcends the boundaries of the traditional theory of legal sources and accepts that law may develop ‘bottom-up’, i.e. out of the contract practice, customs and habits of international business instead of ‘top-down’, i.e. through the democratic authority of domestic legislatures. For a scholar like Thomas Wälde, whose legal thinking always transcended traditional dogmatic and doctrinal boundaries, the existence of the NLM was a matter of great interest and utmost importance:

1 Thomas has criticized what he called the ‘atomistic character to legal scholardom’. In his view, there are only few scholars and academic schools that ‘transcend this narrow focus, often borne out of the desire to build up confidence by mastering perfectly a mini-area’, see Wälde, T.W., book review of: ‘Souveraineté étatique et marchés internationaux à la fin du 20ème siècle—Mélanges en l’honneur de Philippe Kahn, Dijon 2000’, www.dundee.ac.uk/ cepmlp/journal/html/Reviews/review56.html (last checked 3 May 2011). 2 Kahn, Ph., ‘La lex mercatoria et son destin’, in: Fouchard, Ph., Vogel, L., [Eds.], L’actualité de la pensée de Berthold Goldman, Éd. Panthéon-Assas (2004) 25. 3 See Berger, K.P., The Creeping Codification of the New Lex Mercatoria, 2nd ed., Kluwer Law International (2010), p. 53 et seq.

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klaus peter berger The idea that the “state” is an essential part of any “law” is a product of the statist period in European (mainly) history—say from 1648 to 1945 and somewhat beyond. It is deeply anchored in our mental apparatus because we have been brainwashed to see the state as an essential part of law. But—Jan Dalhuisen’s book is I think the best explanation of this—this is not written in stone, but the product of a particular period in history. States did exist before 1648 and are likely to exist after 2003, but it seems they do have a somewhat lessened role in omnipotent regulation of everything in transnational business relationships. This process—can be called globalisation—is what explains why the lex mercatoria concept is re-emerging, with the idea that as in other sectors of society, many relationships are in the process of privatisation, or de-nationalisation. This does not mean that the state—or states acting in coordination through international organisations are about to disappear, but simply that we have to understand that the current and evolving organisation of transnational business relationships involves less of a role of the state and the states than it used to be. And this, naturally, requires an intellectual concept to free oneself from the intellectual concepts we are used to and which reflect a now past organisation of the economic relationships. Karl Marx, were he a neo-liberal global economist would have no problem in understanding that as the economic relationships and the role of state changes, so the understanding of the system of legal rules governing such relationships has to change as well.4

Apart from his natural tendency to approach legal problems from a transnational and interdisciplinary perspective, Thomas Wälde was also a great believer in the virtues of the Internet. OGEMID and TDM are both proof of Thomas’ firm conviction that the ‘Open Access’ environment of the Web provides the ideal basis for a worldwide forum on international business and investment law. It was but another proof of his remarkable foresight that Thomas understood very early on that the Internet has an enormous ‘potential for user-friendly, rapid and effective searches and availability of large databases to [the] users’.5 At the Center for Transnational Law (CENTRAL) at Cologne University,6 a research team has merged these two ideas—the transnationalization of international business and the Open Access environment of the Internet combined with modern database technology—into a new concept, a web-based platform for the ‘Creeping Codification’7 of the NLM, the ‘TransLex Principles’ at www.trans-lex.org.

4 See the edited version of an email discussion with Thomas Wälde on the NLM between 5 November 2003 and 11 November, 2003, www.trans-lex.org/content.php?what=15 (last checked 3 May 2011). 5 See ‘Why—A Transnational Dispute Management Intelligence Service?’, www.transnational-dispute-management.com/article.asp?key=1 (last checked 3 May 2011). 6 See www.central-koeln.de. 7 See for this concept Berger, supra note 3, p. 255 et seq.

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II. The Concept of the ‘Creeping Codification’ of the New Lex Mercatoria A. Escaping the Codification Dilemma For many years, academics and practitioners alike have acknowledged that the idea of the ‘Creeping Codification’8 through the drafting of a comprehensive list of rules and principles of the NLM may provide an escape out of the codification dilemma of transnational commercial law, a dilemma which has trapped the NLM doctrine for decades.9 It has been argued by renowned international arbitrators that the process of privatized law-making ‘has aptly been described as the “Creeping Codification of the lex mercatoria” ’10 and that: [The Creeping Codification of the NLM through a] list [. . .] is a tremendous achievement [. . .] It perfectly represents the trend associated with the development of what has been identified as the new, new lex mercatoria. For its scholarship, detail and thoroughness, the list puts the lie to the claim that it is not possible to point to, and thus not possible to consider basing commercial relationships on, a discrete body of transnational commercial norms. Berger’s “creepy code” is undeniably a major contribution to the field of transnational law [. . .] the most significant contribution is not the list per se, but the technique that gave rise to it and is meant to ensure its open-endedness and continuing evolution: the technique of Creeping Codification. [. . .] it is evident that the idea of “the list” [. . .] is as close as we’ve come, in recent generations, to tackling the lex and wrestling it into usable shape.11 [Insertion and emphasis added]

8 See for the introduction of this terminology Berger, K.P., International Economic Arbitration, Kluwer (1993), p. 543; Berger, K.P., ‘Party Autonomy in International Economic Arbitration: A Reappraisal’, 4 Am. Rev. Int’l Arb. (1993), 1, at p. 29; see also Lando, O., The Harmonization of European Contract Law through a Restatement of Principles, Centre for the Advanced Study of European and Comparative Law (1997), p. 20. 9 See e.g Lando, O., ‘CISG and its Followers: a Proposal to Adopt some International Principles of Contract Law’, 53 Am. J. Comp. L. (2005) 379, at p. 384: ‘[The] list is well documented and a remarkable achievement; its usefulness cannot be underestimated’; Molineaux, C., book review of: ‘Klaus Peter Berger, The Creeping Codification of the Lex Mercatoria’, 17 J. Int’l Arb. 1 (2000) 147, at p. 150: ‘. . . the list looks forward and provides an incentive for the future evolution of transnational commercial law as an open legal system . . . There can be no doubt that this is a list which will become a sine qua non reference and . . . a launch point for research for international arbitration practitioners and arbitrators’; Pryles, M., ‘Application of the Lex Mercatoria in International Commercial Arbitration’, 18 Mealey’s Int’l Arb. Rep. 2 (2003) 1, at p. 21, 25 et seq. 10 Brower, C.N., Sharpe, J.K., ‘The Creeping Codification of Transnational Commercial Law: An Arbitrator’s Perspective’, 45 Va. J. Int’l L. (2004) 199. 11 Fortier, L.Y., ‘The New, New Lex Mercatoria, or, Back To The Future’, 17 Arb. Int’l (2001) 121, at p. 127 (= ICSID Rev.-FILJ 2001, 10, at p. 18).

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The Creeping Codification has been the subject of comparative academic research.12 The list reproduces all those rules and principles of the NLM as black-letter law which have been accepted in international arbitral and contract practice together with comprehensive comparative references. The list unifies the various sources that have fostered the evolution of a transnational commercial legal system into one single, open-ended set of rules and principles: reception of general principles of law; codification of international trade law by ‘formulating agencies’;13 case law of international arbitral tribunals; the law-making forces of international model contract forms and general conditions of trade; and the analysis of comparative legal science. Scientific research in this area of highly practical law is of particular relevance because many authors of case notes, articles and books on transnational commercial law are themselves active in the field of international commercial arbitration.14 It is, therefore, not necessary to advocate the acceptance and promotion of the efforts of international practice through legal doctrine.15 The often heard prejudice that the NLM doctrine is purely theoretical16 is unjustified as long as the list reflects comparative research and the comprehensive case load of international arbitral tribunals which play a pivotal role in the evolution of transnational commercial law. It is this comprehensive coverage of all possible sources of the NLM which provides the necessary legitimacy and authority to the rules and principles contained in the list. With this approach, the idea of the list stands in the tradition of the Digests of common law published in the first half of the 20th century. What was stated by Edward Jenks in the Preface of his ‘Digest of English Civil Law’ of 1921 applies with equal justification to the idea of the Creeping Codification through a comprehensive list of principles and rules of the NLM: A Digest differs from a Code, mainly in that it professes merely to state the rules which are covered by existing authority. It claims—at least, when it is the work of purely private authors—no other respect than that which is derived from a

12 See e.g. the Master Thesis by Lamaud, E., ‘Comparison between the CENTRAL List and the Vienna Convention for the International Sale of Goods—Specific Topics’, www.trans-lex .org/850000. 13 Cf. Berger, supra note 3, p. 88 et seq. 14 Thus, Paulsson and Mustill (see infra notes 44 and 45), who have both drafted lists of general principles and rules of transnational commercial law, are both active in the practice of international commercial arbitration. 15 Cf. Langen, E., Studien zum Internationalen Wirtschaftsrecht, Beck (1963), No. 11. 16 Cf. also from the perspective of public international law Baade, H.W., ‘Codes of Conduct for Multinational Enterprises: An Introductory Survey’, in: Horn, N., [Ed.], Legal Problems of Codes of Conduct for Multinational Enterprises, Kluwer (1980) 407, at p. 413: ‘. . . whenever the volume of learned comment outstrips the supply of “hard” decisional law, and especially wherever scholarly discussion starts to feed on itself, it loses touch with reality’.


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belief that it represents an honest, intelligent, and industrious attempt to reduce the chaos of existing materials to simplicity and order. [. . .] The chief intellectual effort demanded of the authors of the work has been to extract, by appropriate treatment, from this formless heap of statutes and judicial decisions, the rules which such authorities enunciate and expound, and to arrange those rules in the most convenient and accessible form.17

The emphasis on arbitral case law distinguishes the list from the UNIDROIT Principles of International Commercial Contracts.18 For the work of the UNIDROIT Working Group, awards of international arbitral tribunals played only a subordinate role. Even though they provide a clear, detailed and analytical picture of the present state of international commercial contract law, the UNIDROIT Principles are characterized by a certain degree of ‘analytical indifference’ resulting from the fact that the international business community and its dispute settlement techniques were not a major focus of its research. It has already been emphasized above that international commercial arbitration provides a particularly fertile ground for the development and evolution of principles and rules of transnational commercial law because it is an inherent characteristic of the arbitral process itself that counsel and arbitrators alike present arguments based on comparative research.19 In this manner, arbitration showcases views, arguments and background information which are necessary for a topical method of the finding of the law.20 Arbitral procedures therefore perform a dual function in the context of the Creeping Codification of the NLM. First, parties and arbitrators are the primary addressees of the rules and principles contained in the list. Secondly, international arbitral procedures provide the procedural substratum for the ‘discovery’ of new rules and principles of the NLM which will then be included in the list. This open-end character requires the constant updating and extension of the list and thus meets the needs of the NLM as dynamic ‘law in action’. 17 Jenks, E., [Ed.], A Digest of English Civil Law, Butterworth (1921), p. iii et seq.; see also Broom, H., A Selection of Legal Maxims, Sweet & Maxwell (1939), at v: ‘If, then, it be true that a knowledge of first principles is at least as essential in Law as in other sciences, certainly in none is a knowledge of those principles, unaccompanied by a sufficient investigation of their bearing and practical application, more likely to lead into grievous error.’ 18 See for the policy considerations underlying the drafting of the UNIDROIT Principles Bonell, M.J., An International Restatement of Contract Law, 3rd ed., Transnational Juris Publ. (2005), p. 9 et seq. 19 Cf. Berger, K.P., Internationale Wirtschaftsschiedsgerichtsbarkeit, de Gruyter (1992), p. 371. 20 For ‘per omnes locos tractare’ cf. Zippelius, R., Juristische Methodenlehre, 10th ed., Beck (2006), p. 81; cf. also Stein, Lex mercatoria: Realität und Theorie, Klostermann (1995), p. 168.

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Conversely, it could also restrict the effectiveness and usefulness of the list. Practical problems will arise in those cases where an arbitrator or international practitioner is faced with a legal problem and finds no relevant rule or principle in the list. Similar to the UNIDROIT Principles21 however, the ‘new’ rule or ‘new’ legal principle that is necessary to solve the issue may be derived out of the material that is already contained in the list. The principal purpose of the list is not only to look back and provide a picture of the status quo of the NLM, but also to look forward and provide an incentive for the future evolution of transnational commercial law as an open legal system.22 A danger may also arise if parties to an international arbitration base their transnational legal arguments on different lists, thereby initiating a ‘battle of lists’.23 In view of the special character of the NLM, however, the scenario should rather be considered as a chance for the further evolution and development of transnational commercial law. If the lists do not just reflect rules and principles of the NLM in abstracto but contain comprehensive comparative references, arbitrators and counsel are given the opportunity to analyse these references and to come to the conclusion that in spite of textual discrepancies the rules and principles contained in both lists are equal in substance. Admittedly, even the Creeping Codification through a list of principles and rules of the NLM may not remove all the uncertainties connected with the application of transnational commercial law. These uncertainties are a natural consequence of the openness of the NLM as ‘law in action’. The constant evolution and changing picture of international trade and commerce require a corresponding flexibility of the applicable transnational law. Another basic difference between the UNIDROIT Principles on the one hand and the Creeping Codification through a list of principles and rules on the other relates to the fact that the list is not limited to the field of international commercial contract law. Rather, the list follows the decisionmaking practice of international arbitration and therefore contains legal principles that are related to those fields of law which play a predominant role in international arbitral case law, such as international company law, conflict of laws, rules of evidence, the international law of expropriation and general arbitration law. The list thereby provides an additional indication for a wider understanding of the notion of ‘international economic law’.24 At the same time, the idea of an open-ended list which covers not only international contract law but also international arbitration, expropriation and means of

21

Cf. Berger, supra note 3, p. 202 et seq. Cf. for details Berger, supra note 3, p. 118 et seq. 23 See Brunner, Ch., Force Majeure and Hardship under General Contract Principles, Kluwer Law International (2009), p. 21. 24 Cf. Berger, supra note 3, p. 195 et seq. 22


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evidence shows that the progressive Creeping Codification of the NLM is not adequately reflected in the international restatements of contract law. The Creeping Codification of the NLM through the drafting of lists of rules and principles of transnational commercial law may not be substituted by the publication of restatements of international contract law. Each project has different objectives. The restatements only provide valuable incentives and starting points for the extension and evolution of the list. B. Previous Efforts to Draft Lists of General Principles and Rules of the New Lex Mercatoria Even in the ancient law merchant, collections of rules and principles of the lex mercatoria were published for use by the community of merchants. The most famous among them are the fifteenth century Catalonian compilation edited by the Consulate of Barcelona and known as ‘The Consulate of the Sea’25 and the ‘Little Red Book of Bristol’ published in the thirteenth century and containing the famous text ‘Incipit lex mercatoria, que, quando, ubi, inter quos et de quibus sit’ (‘Here begins the lex mercatoria; what, when, where, among whom and concerning what it is’).26 The ‘Rôles d’Oléron’, a compilation of maritime principles and decisions dating back to the 11th century consolidated principles and rules defining the rights and obligations of the parties to an outward sea voyage carrying a cargo of wine from La Rochelle or Bordeaux to Brittany, Normandy, England, Scotland or Flanders.27 Drafting lists of general principles and rules of transnational law also has a certain tradition in the context of the NLM. However, the far-reaching consequences of this procedure for the ‘Creeping Codification’ of transnational law have never been realized. In almost all of these cases, the lists merely served as a means to prove that the NLM is not devoid of content.28 In many cases these

25

See Iglesia Ferreirós, A., ‘El lobro del consulado del mar’, in: Petit, C., [Ed.], Del Ius Mercatorum Al Derecho Mercantil, Marcial Pons (1997) 109, at p. 112 et seq.; cf. also Goode, R., ‘Usage and its Reception in Transnational Commercial Law’, 46 ICLQ (1997) 1, at p. 17. 26 See Coquillette, D.R., in: Petit, C., [Ed.], Del ius Mercatorum Al Derecho Mercantil, Marcial Pons (1997) 143 et seq.; facsimile of the first page reproduced at www.Trans-Lex .org/000008. 27 See Shephard, J.W., ‘The Rôles d’Oléron: A lex mercatoria of the Sea?’, in: Piergiovanni, V., [Ed.], From lex mercatoria to commercial law, Duncker & Humblot (2005) 207, at p. 212 (with a compilation of the texts of the various versions id., at p. 213 et seq.); cf. also http:// chapiteaux.free.fr/les%20roles.htm; see for the Flemish version www.tzwin.be/waterrecht.htm (last checked 3 May 2011). 28 Cf. Bonell, M.J., ‘Das autonome Recht des Welthandels—Rechtsdogmatische und rechtspolitische Aspekte’, 42 RabelsZ (1978) 485, at p. 498, note 41; Bucher, A., ‘Transnationales Recht im IPR’, in: Schwind, F., [Ed.], Aktuelle Fragen zum Europarecht aus der Sicht in- und ausländischer Gelehrter, Verlag der Österreichischen Akademie der Wissenschaften (1986) 11, at p. 15 et seq.

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lists were not included in a special annex, but rather formed part of the text of the study. Consequently, a codifying effect of these lists was never discussed and no attempts were ever made to develop these list procedures into an independent and autonomous codifying technique for transnational commercial law. In fact, international legal practice has criticized the fact that the existing lists were not found in the normal places to which judges, arbitrators and lawyers could turn: ‘[t]he occasional law review article is no substitute for a code or, in common law jurisdictions, line of judicial opinions’.29 Lists of this kind were drafted both in the field of public international law (on the basis of Article 38(1)(c) of the ICJ Statute) and in the area of transnational commercial law. The first substantial effort in this direction was made by Georges Ripert. In 1933 he presented a comprehensive collection of general principles of private law which, in his view, could also be utilized in the field of public international law.30 He referred to ‘modern trends towards the unification of domestic private laws’ and referred in this context to the work of the newly founded UNIDROIT and the drafting of the Franco-Italian Obligation Law.31 Ripert regarded these developments as a strong indication for the existence of common principles and rules (‘fonds commun’) in the legal systems of the world.32 In 1956, Josef Esser, who was strongly influenced by the works of Ripert,33 was amazed to see ‘what a long list of such universal institutions could be found in the field of private law alone’34 and used this research for his own collection of general principles of private law.35 In 1953 Bin Cheng devoted a maius opus to the collection of general principles of public international law.36 This collection included principles that were derived not only from private law but also from general procedural law and public international law. All of these studies were limited to the collection of general principles of law which are mentioned in Article 38(1)(c) of the ICJ Statute. They do not take account of the economic aspects of transnational law such as customs, usages and the case law of international arbitral tribunals which play such a pivotal role in the evolution and

29 Selden, B.S., ‘Lex Mercatoria in European and U.S. Trade Practice: Time to Take a Closer Look’, 2 Ann. Surv. Int’l & Compl. L. (1995) 111, at p. 119. 30 Ripert, G., ‘Les règles du droit civil applicables aux rapports internationaux’, 44 Rec. Cours 1933-II, 569, at p. 588 et seq. 31 Ripert, id., p. 585; as to UNIDROIT see Berger, supra note 3, p. 180 et seq.; see for the draft of a Franco-Italian Law of Obligations Berger, id., p. 152 et seq. 32 Ripert, supra note 30, p. 586. 33 Cf. Esser, J., Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts, 4th ed., Mohr (1990), p. 14, note 40, p. 37, note 119 and p. 379, notes 191–194. 34 Esser, id., p. 37. 35 Esser, supra note 33, p. 346 et seq. 36 Bin Cheng, General Principles of Law as applied by International Courts and Tribunals, Stevens & Sons (1953), reprinted by Cambridge Univ. Press (1987).


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development of the NLM.37 These lists therefore only reflect one aspect of the NLM doctrine: the reception of general principles of law.38 Nevertheless, for this limited purpose, these studies present valuable guidelines for the development of a modern theory of ‘Creeping Codification’ of transnational commercial law. In the field of international commercial arbitration, various attempts have been made in the past to draft lists of general principles and rules of an autonomous world trade law. In 1993, the ‘Institute of International Business Law and Practice’ of the ICC and the Committee for International Commercial Arbitration of the International Law Association presented a study on ‘transnational rules in international commercial arbitration’ which contained a detailed analysis of various principles of the NLM.39 The fathers of the NLM doctrine, Goldman,40 Fouchard41 and Schmitthoff,42 always included in their theoretical considerations a list of rules and principles of transnational commercial law. These lists have been completed and refined43 through the studies of Mustill,44 Paulsson,45 Blessing46 and other authors from the field of international commercial arbitration.47 Molineaux has presented a

37 Cf. Esser, supra note 33, p. 342: ‘The evolution of principles that are freed from the constraints of domestic legal history and law, is directly connected with international arbitral practice’; cf. also Stein, supra note 20, p. 169 et seq. 38 Cf. Berger, supra note 3, p. 73 et seq. 39 Cf. the contributions of van Houtte (changed circumstances and pacta sunt servanda), Bowden (L’interdiction de se contredire au détriment d’autrui), Bernardini (Duty to cooperate), O’Neill/Salam (Exceptio non adimpleti contractus), Rivkin (Force majeure), Hanotiau (Principles on calculation of damages) and Karrer (Interest) in: Gaillard, E., [Ed.], Transnational Rules in International Commercial Arbitration, ICC (1993), p. 105 et seq. 40 Goldman, B., ‘The Applicable Law: General Principals of Law—The Lex Mercatoria’, in: Lew, J.D., [Ed.], Contemporary Problems in International Arbitration, Centre for Commercial Law Studies (1986) 113, at p. 125 et seq. 41 Fouchard, Ph., L’arbitrage commercial international, Dalloz (1965), p. 423 et seq. 42 Schmitthoff, C., International Trade Usages, ICC (1987), p. 47. 43 Cf. Kahn, Ph., ‘Conclusion’, in: Gaillard, E., [Ed.], Transnational Rules in International Commercial Arbitration, ICC (1993) 237, at p. 241. 44 Mustill, M., ‘The New Lex Mercatoria: The First Twenty-Five Years’, 4 Arb. Int’l (1988) 86 et seq. (reprint from: Liber Amicorum for Lord Wilberforce, 1987). 45 Paulsson, J., ‘La Lex Mercatoria dans l’arbitrage C.C.I.’, Rev.d’Arb. (1990) 55, at p. 82 et seq. (limited to the case law of ICC arbitral tribunals). 46 Blessing, M., ‘Das neue internationale Schiedsgerichtsrecht der Schweiz—Ein Fortschritt oder ein Rückschritt?’, in: Böckstiegel, K.-H., [Ed.], Die internationale Schiedsgerichtsbarkeit in der Schweiz (II), Heymanns (1989) 13, at p. 68 et seq. 47 Braeckmans, H., ‘Paralegale normen en lex mercatoria’, 23 Tijdschrift voor Privaatrecht (1986) 1, at p. 55 et seq.; Lowenfeld, A.F., ‘Lex Mercatoria: An Arbitrator’s View’, 6 Arb. Int’l (1990) 133, at p. 148; Crook, J.R., ‘Applicable Law in International Commercial Arbitration: The Iran-US-Claims Tribunal Experience’, 83 Am.J.Int’l L. (1989) 278, at 292 et seq.; Langen, E., Transnationales Recht, part I, Verlagsgesellschaft Recht und Wirtschaft (1981), No. 19 et seq.; Craig, W.L., Park, W.W., Paulsson, J., International Chamber of Commerce Arbitration, 3rd ed., Oceana Publ. (2000), p. 621 et seq.; ‘General Principles of Law in International Commercial Arbitration’, 101 Harv. L. Rev. (1988) 1816 et seq.; Seidl-Hohenfeldern, I., ‘General

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list of principles that is said to be part of a ‘lex constructionis’ as a distinct legal area from or within the NLM.48 Magnus, Ferrari and others have derived general principles from the CISG.49 Academics from the Garrigues Chair of Global Law at the University of Navarra in Spain have published a voluminous list of 1,000 principles, rules and aphorisms of ‘Global Law’.50 It is this process of refinement and consolidation which makes the idea of an open-ended list of the NLM so valuable for international legal practice. In its January 1997 Newsletter, the Cairo Regional Centre for International Commercial Arbitration (CRCICA) presented a list of 26 legal principles that were up to then adopted by the arbitral tribunals in cases arbitrated under the auspices of the Centre.51 Interestingly enough, the structure of CRCICA’s list is very similar to the TransLex Principles at www.trans-lex.org. Starting with such basic notions as ‘pacta sunt servanda’ and ‘good faith’, the list also comprises more concrete rules relating to such basic and fundamental issues as ‘penal clauses’, ‘force majeure’, ‘navigation agents of shipping lines’, ‘interest for delay’, ‘the causality relation’, ‘responsibility of the consulting engineer’ and ‘contractual liability’. It is important to note that this is the first time that a renowned international arbitral institution has made use of the list-idea to publish a compilation of principles without recourse to any domestic legal system. A more recent list has not been published by the Centre. However, since 1985, the awards rendered under the auspices of the CRCICA have been published in two collections,52 thereby creating more transparency with respect to the way in which the arbitral tribunals acting under the rules of the Centre have reached their conclusions. Finally, in an ICC Award rendered in 1996, the arbitral tribunal applied the NLM and listed 8 principles and rules which, in its view, form part of

Principles of Law as Applied by the Conciliation Commissions Established under the Peace Treaty with Italy or 1947’, 53 AJIL (1959) 853, at p. 854 et seq. 48 Molineaux, C., ‘Moving Towards a Construction Lex Mercatoria, A Lex Constructionis’, 14 J.Int’l Arb. 1 (1997) 55, at p. 64 et seq.; see also for the application of ‘international rules of construction contracts’ in arbitral practice ICC Award No. 4650 (1985), YCA 1987, p. 111 et seq. 49 Magnus, U., ‘Die allgemeinen Grundsätze im UN-Kaufrecht’, 59 RabelsZ (1995) 469, at p. 475 et seq.; Ferrari, F., ‘Das Verhältnis zwischen den Unidroit-Grundsätzen und den allgemeinen Grundsätzen internationaler Einheitsprivatrechskonventionen, 103 JZ (1998) 9, at p. 11 et seq. 50 Domingo, R., Ortega, J., Rodríguez-Antolín, B., Zambrana, N., Principios de Derecho Global, 1000 reglas, principios y aforismos jurídicos comentados, 2nd ed., Garrigues Cátedra (2006), p. 31 et seq. 51 The Cairo Regional Centre for International Commercial Arbitration [Ed.], A Newsletter of CRCICA (January 1997), p. 2 et seq., also available at www.trans-lex.org/400300. 52 Alam-Eldin, M.E., Arbitral Awards of the Cairo Regional Centre for International Commercial Arbitration, 2 Volumes, Kluwer Law International (2000/2003).


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the NLM.53 This is the first international arbitral award, in which the arbitral tribunal did not content itself with a mere definition of the NLM and the restatement of one single rule which it needed for the resolution of the particular legal issue before it. Instead, it listed a whole number of these principles and rules in order to make its award more palatable and persuasive for the parties and the courts which will be called upon to enforce the award.54 The inherent potential of this codification technique is not only reflected by its adoption by international arbitral institutions but also in the substantial growth which these lists have witnessed in the past years. While the initial lists contained only five, seven or nine principles,55 Mustill was able to present a list in 1987 that included twenty principles and rules of transnational commercial law.56 Goldman’s view57 that the principles and rules contained in these lists would provide sufficient material to solve the overwhelming majority of legal issues that occur in international commercial disputes appears overly optimistic. Mustill himself acknowledged that his list merely reflects the contents of the NLM as it is alleged by the proponents of transnational commercial law. He had considerable reservations about some of the principles which he found too vague and too general.58 C. Contribution of the Lists to the Discussion of the New Lex Mercatoria Doctrine The lists do not only perform an important function as a bridge over the ‘abyss between doctrinal formula and practical thinking’.59 They also have an independent scientific value for the further evolution of transnational commercial law. Through abstraction from the various sources of transnational

53 ICC Award No. 8365, 124 Clunet (1997) 1078, at p. 1079 et seq.; the principles listed in the award are: 1. pacta sunt servanda; 2. good faith; 3. duty to negotiate in good faith; 4. resolution of contract in case of substantial breach by one of the parties; 5. prohibition to prevent the performance of one’s own obligation through a wilful act; 6. venire contra factum proprium; 7. interpretation of contracts according to the principle of ‘ut res magis valeat quam pereat’ and 8. principle of implied consent by conduct. 54 See Arnaldez, J.-J., Comment to ICC Award No. 8365, 124 Clunet (1997) 1080, at p. 1081. 55 Cf. Schmitthoff, supra note 42, p. 47 (five); ‘General Principles of Law in International Commercial Arbitration’, supra note 47, p. 1826 et seq. (seven); Molineaux, supra note 48, id. (nine). 56 Mustill, supra note 44, p. 110 et seq.; Molineaux, supra note 48, p. 56 et seq.; cf. also Magnus, supra note 49, p. 480 (for UN Sales Law). 57 Goldman, B., ‘Nouvelles réflexions sur la Lex Mercatoria’, Festschrift Pierre Lalive, Helbing und Lichtenhahn (1993) 241, at p. 243. 58 Mustill, supra note 44, p. 110, fn. 82; cf. also Weise, P.-F., Lex mercatoria, Lang (1990), p. 124. 59 Esser, supra note 33, p. 335.

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commercial law,60 they provide a realistic picture of the contents of the NLM, thereby filling the theoretical discussion with practical life and verifying the thesis of the existence of an autonomous transnational commercial legal system.61 This theoretical aspect has important repercussions on transnational legal practice. The list provides a clearly defined, flexible legal framework for the controlled application of the NLM.62 It has been characterized as the ‘coup de grâce’ for the NLM doctrine that the tremendous amount of academic attention devoted to it has only given rise to a very limited number of principles.63 The consolidation and autonomization of transnational commercial law that go along with the drafting of these lists can therefore be viewed as a basic prerequisite in regarding the parties’ reference to the NLM as a genuine choice of law.64 The resulting inclusion of the NLM doctrine in traditional conflicts of law concepts ensures that arbitral awards based on autonomous world trade law will not be set aside by domestic courts. The same applies to a refusal of recognition and enforcement of international arbitral awards abroad unless the award suffers from a general grave mistake in the application of the law that has been described above.65 This is in line with the ‘Resolution on Transnational Legal Principles’, adopted by the International Law Association on its 65th conference on 26 April 1992, in Cairo.66 This Resolution established a direct link between the validity of international arbitral awards based on the NLM and the consolidation and stabilization of transnational commercial law.

60 General principles of law, international conventions, standard-form contracts, domestic laws, general conditions of trade, trade usages, customs, international arbitral case law and scientific sources, see for the sources of the lex mercatoria Goldman, supra note 57, p. 242; Mustill, supra note 44, p. 109; Goldstajn, A., ‘Usages of Trade and other Autonomous Rules of International Trade According to the UN (1980) Sales Convention’, in: Volken, P., Šarčević, P., [Eds.], International Sale of Goods, Dubrovnik Lectures, Oceana Publ. (1986) 55, at p. 99. 61 See Schwab, K.H., book review of: ‘Berger, Internationale Wirtschaftsschiedsgerichtsbarkeit (1992)’, 107 ZZP (1994) 118; cf. for a more careful view Magnus, supra note 49, p. 491: ‘. . . they seem to reflect generalized notions of the basic structure of mutual contractual relationships as a whole’ (translation by the author). 62 Cf. generally Horn, ‘Zur Bedeutung der Topiklehre Theodor Viehwegs für eine einheitliche Theorie des juristischen Denkens’, 21 NJW (1967) 601, at p. 608. 63 Gaillard, E., ‘Thirty Years of Lex Mercatoria: Towards the Discriminating Application of Transnational Rules’, in: van den Berg (ed.), Planning Efficient Arbitration Proceedings—The Law Applicable in International Arbitration, ICC (1996) 570, at p. 571 (reprinted in ICSID Rev.-FILJ 1995, at 208 et seq.; French version in 122 Clunet [1995], at 5 et seq.). 64 Böckstiegel, K.-H., Der Staat als Vertragspartner ausländischer Privatunternehmen, Athenäum Verlag (1971), at 144; cf. also Kappus, A., ‘ “Conflict avoidance” durch “lex mercatoria” und UN-Kaufrecht 1980’, 36 RIW (1990) 788, at p. 791. 65 Cf. Berger, supra note 3, p. 102 et seq. 66 ‘Resolution on Transnational Rules Adopted at the 65th International Law Association Conference in Cairo on April 26, 1992’, reprinted in: Gaillard, E., [Ed.], Transnational Rules in International Commercial Arbitration, ICC (1993), p. 247.


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Finally and most importantly, the idea of drafting an open-ended list of principles and rules of the NLM does away with one of the major objections raised against the NLM doctrine: the criticism67 that this allegedly unstructured and heterogeneous legal mass poses considerable problems for everyday legal practice because its contents are so difficult to determine. These lists therefore prove that the NLM doctrine is still alive and in a process of constant evolution. D. The Role of General Principles of Law Transnational commercial law which is focused solely on general principles of law or on technically detailed legal rules is not viable. This is reflected in the experience with the project of the American Cornell Law School, which focused solely on the technical issue of the formation of international contracts,68 and the judgment of the Vienna Supreme Court, which set aside an arbitral award that was based solely on the principle of good faith.69 General principles such as ‘good faith’ and ‘pacta sunt servanda’, although prominent in every list, do not constitute vague formulae that are intended to invite decisions in equity that are totally detached from any legal considerations.70 While vagueness and flexibility do not necessarily constitute attractive elements of transnational commercial law,71 it is impossible to regard transnational commercial law as a set of clearly defined, detailed legal rules. Rather, every attempt to codify the NLM involves a sound mixture of detailed legal rules and general principles as well as standards of conduct (‘obligations de comportement’).72 In spite of their necessary vagueness and generality these general principles provide a vital function within the system of transnational commercial law.73 These general principles of law play an important, dual role in the drafting of lists of the NLM.

67

See e.g. Spickhoff, A., ‘Internationales Handelsrecht vor Schiedsgerichten und staatlichen Gerichten’, 56 RabelsZ (1992) 116, at p. 126 et seq.; cf. also Berger, supra note 3, p. 177 et seq. 68 Cf. Berger, supra note 3, p. 162 et seq. 69 Cf. Berger, supra note 3, p. 78 et seq.; cf. also Riese, O., ‘Die Haager Konferenz über die internationale Vereinheitlichung des Kaufrechts vom 2. bis 25. April 1964’, 29 RabelsZ (1965) 1, at p. 66; but see ICC Award No. 5065, Clunet (1987) 1039; Ad Hoc Award of 3 November 1977, YCA (1082) 77. 70 Cf. Berger, supra note 3, p. 118 et seq. 71 Zamora, S., ‘Is there Customary International Economic Law?’, 32 GYIL (1989) 9, at p. 39: ‘Vagueness and flexibility may be desirable characteristics for political and cultural relations; they are not particularly attractive in the competitive world of economic relations, however’. 72 Cf. Berger, supra note 3, p. 73 et seq. 73 Carreau, D., Flory, T., Juillard, P., Droit international économique, 1st ed., Librairie générale de droit et de jurisprudence (1978), p. 20.

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1. Genetic function of general principles of law The origin of many of the rules and principles contained in the various lists may be traced back to the basic notion of good faith. For example, the right to set-off mutual claims is based on the idea that good faith would be violated if a creditor were to require performance of an obligation from his debtor if that creditor would have to return immediately what he has received from the debtor (‘dolo agit, qui petit, quod statim redditurus est’).74 A particularly important aspect of good faith is the prohibition of contradictory conduct (‘venire contra factum proprium nemini licet’). Even though the latter principle is ‘still far away from a sufficient normative solidification’,75 it lies at the roots of many of the more detailed rules and principles contained in the list. The principle thereby serves as a perfect example for the inductive development of special rules within the system of transnational commercial law. Thus, the principle of ‘volenti non fit iniuria’ as well as the general prohibition of a State or State-controlled entity to deny its contractual obligations with the reference to its internal law, is based on the idea of ‘venire contra factum proprium’. That principle forms part of public international law and is reflected in Article 46 of the Vienna Convention on the Law of Treaties.76 As one of the first principles of the NLM, it has been codified in domestic law in Article 177(2) of the Swiss Statute on Private International Law.77 The idea of liability for breaking off negotiations in bad faith can be traced back to the prohibition of ‘venire contra factum proprium’ and its Anglo-American counterpart, the idea of ‘promissory estoppel’.78 The general principle, as well as the detailed rules derived from it, all hint at a subordinate idea pertaining to the codification of transnational law. They provide strong indications for the development of a general principle of transnational liability for disappointing the confidence of the other party in the performance of one’s own obligations.79 From the perspective of German law, this development finds further support in the strong interaction between the idea of confidence and 74 Cf. already Dig. 50, 17, 173 = 44, 4, 8 pr. (Paulus); Reichsgericht, Judgment, 19 October 1898, RGZ 42, 138, at p. 141; Dernburg, H., Geschichte und Theorie der Kompensation nach römischem und neuerem Rechte, 2nd ed., Bangel & Schmitt (1868), at 361; MünchKommSchlüter, BGB, 5th ed., Beck (2007), §387, No. 1; see for the lex mercatoria (even though reluctantly) Mayer, P., ‘Le principe de bonne foi devant les arbitres du commerce international’, Festschrift Pierre Lalive, Helbing und Lichtenhahn (1993) 543, at p. 554. 75 Canaris, Die Vertrauenshaftung im deutschen Privatrecht, Beck (1971), p. 287. 76 See www.trans-lex.org/500600. 77 Cf. Paulsson, supra note 45, p. 82. 78 Cf. Hoffmann v. Red Owl Stores, Inc., 133 N.W. 2nd. 267 (Wis. 1965); Kühne, G., ‘Der Vertrauenstatbestand im Schuldvertragsrecht. Vergleichende Betrachtungen zum deutschen und anglo-amerikanischen Recht’, 36 RabelsZ (1972) 261, at p. 274. 79 Cf. Harries, H., ‘Die Rechtsscheinhaftung für fehlerhafte Rechtsgutachten bei internationalen Verträgen’ Festschrift Konrad Zweigert, Mohr (1981) 451, at p. 463; Kühne, supra note 78, p. 283; Weise, supra note 58, p. 125.


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faith of one party in the performance of the other party’s obligation and the general prohibition of ‘venire contra factum proprium’.80 The development towards a transnational principle of liability related to this aspect of confidence is reinforced by the special role which confidence and faith play in the doctrine of international contract law.81 2. General principles of law as reference points for valuation processes within the system of the New Lex Mercatoria Within the complex process of developing an autonomous system of transnational commercial law, general principles of law such as ‘good faith’ and ‘pacta sunt servanda’82 perform an important ‘classification and evaluation function’83 with respect to the legal character and application of rules and standards contained in that system. This phenomenon is exemplified by the duty to renegotiate. The origin, contents and character of this duty are influenced by the principle of good faith and are also linked to other general principles such as ‘clausula rebus sic stantibus’. A new rule that is being discovered as an element of the NLM always has to be harmonized with the general principles that form the basic pillars of transnational commercial law.84 Indeed, the constant interplay between legal rules and principles described above in the context of the UNIDROIT Principles85 is also decisive for the evolution of the NLM in general86 and for the structure of the lists in particular. As has been stated by an international arbitral tribunal: The application of international principles of law offers many advantages. They apply in a unique manner and they are independent of the particularities of any domestic legal system. They take into account the particular needs of international relations and allow a fruitful exchange between the systems which are often linked to conceptual distinctions in an exaggerated manner on the one hand and those who seek just and pragmatic solutions of individual cases on

80 Cf. Wieacker, F., Zur rechtstheoretischen Präzisierung des §242 BGB, Mohr (1956), p. 28; Canaris, supra note 75, p. 287 et seq.; Singer, R., Das Verbot widersprüchlichen Verhaltens, Beck (1993), p. 35 et seq. 81 Cf. Berger, supra note 3, p. 138 et seq. 82 Cf. Kahn, supra note 43, p. 241: ‘Pacta sunt servanda constitue sans aucun doute la règle majeure du droit transnational avec son corollaire qu’est le principe de bonne foi’. 83 Cf. Dasser, F., Internationale Schiedsgerichte und lex mercatoria, Schuldhess (1989), p. 116; cf. also Osman, F., Les principes généraux de la lex mercatoria, LGDJ (1992), p. 322 et seq. 84 Cf. Schlesinger, R.B., Bonassies, P., ‘Le fonds commun des systèmes juridiques’, 15 Rev. int.dr.comp. (1963) 501, at p. 517 et seq.; Wahl, E., in: Dölle, H., Kommentar zum Einheitlichen Kaufrecht, Beck (1976), Art. 17, No. 32. 85 See Berger, supra note 3, p. 201 et seq. 86 Cf. Mayer, supra note 74, p. 550 et seq.

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klaus peter berger the other. It is thus an ideal opportunity to apply [in this arbitration] what is more and more called lex mercatoria.87 [insertion added]

In the context of the NLM, general principles of law perform a function that is similar to that of domestic legal systems in that they provide the substratum for the development of new legal rules.88 Because of their genetic function as the drivers of the NLM, the argument that general principles of law should not be included as sources of the NLM because general principles of commercial law do not exist, must be rejected.89 Every legal system, whether commercial or not, requires some basic standards and principles out of which new rules can be developed. It is their fundamental legal character and not their commercial nature which qualifies general principles of law as constituent elements of the NLM. Frequently, the lists reproduce legal principles in their original Latin terminology. This ‘Latin approach’ is evidence that the dogmatic basis of these principles can be traced back to classical Roman law.90 The reference to the Roman origins of many of the rules and principles contained in the list provides another important aspect of the research on which the list is based.91 It is interesting to note in this context that the voluminous list of 1000 principles, rules and aphorisms of ‘Global Law’ published by the Garrigues Chair of Global Law at the University of Navarra92 contains only Latin principles and rules. They are reprinted therein together with reference to international legal materials and the reprint of the original Latin text of the Roman Digest in which some of these principles and rules have their roots. This historic approach reflected in the Latin maxims finds support in the drafting process of the Dutch Civil Code. Even though this code is based on substantial comparative research,93 the drafters have emphasized the Roman origins of many of the rules and principles contained therein.94 Also, references to the Roman 87

ICC Award No. 8385, Clunet 1995, 1061, at p. 1066 (translation from French). Cf. for the principle of good faith as a source of the ‘estoppel doctrine’ in common law Berger, supra note 3, p. 201 et seq. 89 See for this argument Goode, R., Kronke, H., McKendrick, E., Transnational Commercial Law, Oxford Univ. Press (2007), No. 1.67. 90 See for the force of Latin legal maxims Hyland, R., ‘Pacta Sunt Servanda: A Meditation’, 34 Va. J. Int’l L. (1993/94) 405, at p. 408. 91 Cf. Yntema, H.E., ‘Roman Law as the Basis of Comparative Law’, in: Zweigert, K., Puttfarken, H.-J., [Eds.], Rechtsvergleichung, Wiss. Buchgesellschaft (1978), at 162 et seq.; Schipani, S., ‘The General Principles of Law and the Foreign Debt’, 3 University of Rome II, Department of Public Law Yearbook (1990–1991) 583, at p. 606 et seq.; Zimmermann, R., ‘Roman Law and the Harmonisation of Private Law in Europe’, in: Hartkamp, A.S., et al. [Eds.], Towards a European Civil Code, 3rd ed., Kluwer Law International (2004) 21, at p. 27 et seq. 92 Domingo, Ortega, Rodriguez-Antolin, Zambrana, supra note 50, p. 31 et seq. 93 Cf. Berger, supra note 3, p. 66 et seq. 94 Cf. Feenstra, R., Romeinsrechtelijke grondslagen van het Nederlands privaatrecht, 6th ed., Brill (1994), No. 27. 88


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origins of the rules and principles that are part of the NLM provide an ideal complement to the various sources of contemporary law such as the case law of international arbitral tribunals, international contract forms, general conditions of trade and the scientific discussion of the NLM doctrine. The historic references thereby add to the legitimacy of the NLM as an autonomous transnational legal system.95 Apart from general principles of law and rules, the lists also contain generally recognized legal institutions such as the notion of prescription. To be workable in practice, these institutions need to be filled with concrete legal contents.96 Thus, the idea of prescription can only be applied in international legal disputes if it relates to clearly defined periods of time. However, even without such concrete workable legal contents, the inclusion of such a legal institution in the list performs an important function within the system of the NLM in that it avoids from the outset any discussion on the existence of such an institution on the transnational plane. Also, the inclusion of the institution on the lists may ultimately lead to a consensus on the details of its contents. E. The Open-ended Character of the List Even though the list performs an important function as a ‘focal point’97 for the Creeping Codification of the NLM, this should not be confused with a definite manifestation and petrifaction of transnational commercial law. Gaillard maintained that the idea of drafting lists of principles and rules of the NLM is based on a misconception of the true nature of transnational commercial law. In his opinion, the contents of the NLM cannot be derived from a simple list, but instead result from the application of a certain comparative methodology.98 The legal rules and principles that constitute the contents of the NLM may not be determined in advance, but only on an

95 Cf. for the ‘Latin solution’ of the Chamber for Complaints of the European Patent Office Knütel, R., ‘Rechtssicherheit in Europa und römisches Recht’, 2 ZEuP (1994) 244, at p. 245 et seq.; see for the Roman legal tradition of many rules and principles of the lex mercatoria Knütel, id., p. 274; cf. for the legitimacy of rules and principles of Roman law Liebs, D., Lateinische Rechtsregeln und Rechtssprichwörter, 7th ed., Beck (2007), p. 12; cf. also Fouchard, supra note 41, p. 441 et seq. 96 Cf. Ripert, G., ‘Les règles du droit civil applicables aux rapports internationaux’, 44 Rec. Cours 1933-II, 569, at p. 642; Sandrock, O., ‘How Much Freedom Should an International Arbitrator Enjoy?’, 3 Am. Rev. Int’l Arb. (1992) 30, at p. 53. 97 Cf. Schmidt, K., Die Zukunft der Kodifikationsidee, C.F. Müller (1985), p. 60 for the judiciary of the state. 98 Gaillard, supra note 63, p. 583; Gaillard, E., ‘Transnational Law: A Legal System or a Method of Decision-Making?’, in: Berger, K.P., [Ed.], The Practice of Transnational Law, Kluwer Law International (2001) 53, at p. 56 et seq.; Ortscheidt, J., La réparation du dommage dans l’arbitrage commercial international, Dalloz (2001), p. 6.

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ad hoc basis, i.e. once a dispute has risen on the basis of the directives given by the parties or, in the absence of such agreement, by applying the functional comparative method.99 Gaillard asserted that this approach does not require any further efforts by international arbitrators and counsel than the classical doctrines of private international law.100 Likewise, Goode argued that the ex ante determination of the contents of the NLM is not in the interest of parties to international transactions and that this determination should be left to the arbitrator who has to decide a concrete case: No doubt it is possible after the event for an arbitrator, armed with all the relevant facts, to identify a rule of the lex mercatoria applicable to the case in hand. It is quite another to extrapolate from this ex post identifiability the ex ante ability to determine that the lex mercatoria would be suitable as a governing law for a dispute that has not yet arisen and the nature of which may be difficult, if not impossible, to foresee.101

This view must be rejected for two reasons. First, it underestimates the considerable problems that are related to the determination of the contents of the NLM.102 These problems were exemplified in the Eurotunnel arbitration.103 Gaillard maintained that it was the methodical task of the arbitrators in this case to ascertain the relevant jurisdictions from which the general principles, referred to in the complex choice of law clause of the construction contract, should be derived.104 In actual practice, however, the arbitrators decided to have recourse to the UNIDROIT Principles as a pre-fabricated set of rules of authoritative persuasiveness.105 Thus, the pragmatism of international arbitral practice lends itself much more to a collection of highly sophisticated rules and principles of transnational law than to the application of a transnational method of decision-making which requires ‘access to a huge volume of comparative law studies’.106 Secondly, the idea of codifying the NLM through either the drafting of lists or the functional comparative methodology does not constitute two antagonistic approaches to the same problem. It is true that the functional comparative method is a topical method that begins with the analysis of an individual legal problem.107 The lists characteristically also allow a topical

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Gaillard, id.; cf. also Stein, supra note 20, p. 175. Gaillard, supra note 98, id. 101 Goode, R., ‘Rule, Practice, and Pragmatism in Transnational Commercial Law’, 54 ICLQ (2005) 539, at p. 552. 102 Cf. Berger, supra note 3, p. 78 et seq. 103 See Berger, supra note 3, p. 55 et seq. 104 Gaillard, supra note 98, p. 583. 105 See Berger, supra note 3, p. 215 et seq. 106 Gaillard, supra note 98, p. 585. 107 Cf. Berger, supra note 3, p. 66 et seq. 100


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approach to the finding of the law. It has already been emphasized in this chapter that it is one of the main tasks of scientific and practical research in the field of the NLM to avoid the creation of an inflexible, rigid or predetermined legal system that leaves little or no room for the further development of the NLM. This leads to a constant process of cross-fertilization between the decision-making of international arbitral tribunals and the list. The list derives a substantial input from the case load of international arbitration, while international arbitrators may use the list and the comparative references contained therein to develop or ‘discover’ new rules or principles of this transnational commercial legal system. This means that the lists are never ‘completed’ or ‘closed’. Although in its initial form a list may not contain the solution to a certain legal issue of transnational law, a later version may include a principle or rule that has been acknowledged in international arbitral or contract drafting practice.108 Here lies the decisive advantage of this non-formalized codification procedure as compared to the formalized approaches taken by the UNIDROIT Working Group and the Lando Commission. The work of these groups had to be ‘finished’ at some point in time. Even though the 2004 version of the Principles shows that there is a possibility for both the amendment and the updating of the UNIDROIT Principles,109 such process always requires the initiation of a new formalized procedure within the Working Group and within UNIDROIT. Updating the list through Creeping Codification, however, does not require a formalized procedure of that kind and can therefore be effected through a constant dialogue between arbitral practice, legal science and the academic institution that is responsible for the list. It is for this reason that the list contains a ‘more or less complete collection of principles’ which reflect ‘the lex mercatoria in its present form’.110 The progressing quality of comparative science necessarily leads to an increase in the sophistication of existing lists. As a consequence of this dialectical process between comparative science and (arbitral) practice,111 new principles will be added to the list and existing ones

108 Cf. Goldman, supra note 57, p. 249 for the principles of defective contract formation, representation and form, which he initially did not consider to form part of the lex mercatoria. 109 Bonell, supra note 18, p. 24, 361 et seq. 110 Mustill, supra note 44, p. 110; cf. also Stein, supra note 20, p. 161, speaking of a ‘necessarily limited snap shot’. 111 Cf. for domestic law Schmidt, supra note 97, p. 75 et seq.; classical dialectic methods can therefore be used in the context of topical legal processes; in this context, they serve to apply legal principles, on which a general agreement has been reached, in order to use the combination of these principles and the weighing of interests as a means to arrive at a resolution of legal problems, see Horn, supra note 62, p. 607.

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will be refined or even substituted by others.112 In spite of the uncertainty that is necessarily connected with the drafting of the list as a process of constant evolution and change, the list still provides the necessary prerequisite for the practical acceptance of the NLM: the list creates ‘a certain degree of predictability’113 for the resolution of legal conflicts, thereby guaranteeing more legal certainty in transnational dispute resolution. This provides parties to international contracts with a certain basis for ‘conflict avoidance’ through planning and drafting techniques thereby depriving the NLM of the aura of a ‘laissez-faire doctrine’. At the same time, the goal of achieving legal certainty is not seen as an end in itself. Rather, the list technique leaves enough room for a teleological evolution of the NLM. The application of the NLM in practice therefore always oscillates between two extreme positions without ever reaching either: a decision in equity or a decision according to codified written law.114 Both aspects influence the doctrine of a transnational autonomous law, but taken alone they would mean the failure of the NLM doctrine. III. Creeping Codification Online: The TransLex Principles The TransLex Principles available at www.trans-lex.org provide a unique online tool for the Creeping Codification of the NLM through the Internet. They contain legal principles, standards and rules as constitutive elements of a transnational commercial legal system. This online approach to the Creeping Codification of the NLM serves three specific purposes: • Formulating the rules and principles in black-letter text so as to allow the user to apply the NLM in legal practice; • Reproducing the comparative law references for each principle or rule to help to save the time and money that practitioners and academics must invest in comparative research required to determine the contents of transnational law; and

112 Cf. for this ‘norm-creation-potential’ as ‘the real focal point of the discussion on the lex mercatoria’, Mertens, H.-J., ‘Das lex mercatoria-Problem’, Festschrift Walter Odersky, de Gruyter (1996) 857 et seq. 113 Langen, supra note 47, Nos. 11 et seq.; Samuel, A., Jurisdictional Problems in International Commercial Arbitration, Schuldhess (1989), p. 248 mentions as one of the basic arguments against the lex mercatoria doctrine the lack of predictability of decision-making. 114 Cf. Esser, supra note 33, p. 343: ‘Instead of the primitive “either-or” of domestic law and equity, a universal practice of general principles of law in the sense of Art. 38 No. 3 of the ICJ-Statute is required more and more’ (translation by the author).


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• Displaying the relevant materials in full-text versions immediately below the black-letter text of each principle and rule to enable the user to make his own judgment about the ‘comparative persuasiveness’ of these sources. A. History of the List The first version of the lists which form the basis of the TransLex Principles was published in 1992.115 The list contained 39 principles and rules of the NLM together with numerous comparative law references. The list was unstructured and not organized in any way. Its sole purpose was to prove the contents of the NLM at that specific point in time. The English version of the list, published in 1993, contained 44 principles and rules.116 It was Norbert Horn, one of the most important proponents of the NLM doctrine in Germany,117 who brought up the idea that the list could be more than just an unsystematic compilation of principles and rules of the NLM: One is puzzled by the list . . . because of its form: A concise listing of individual legal notions and legal principles. Almost each of them would deserve a scientific treatment of its own . . . The reader acknowledges with great interest the—according to my knowledge up to now most comprehensive—listing of such basic notions and legal principles. In my opinion, the list, in and of itself, constitutes an advancement of legal knowledge.118

The original German version of the list, published in 1996, contained the third version of the list, now with 69 principles and rules of the NLM.119 Again, the list had no structure and was not organized in chapters or subdivisions. It was in that treatise that the idea of the ‘Creeping Codification’ of the NLM was developed and presented.120 The English version of the German treatise was published in 1999. It contained a new version of the list with 78 principles and rules of the NLM.

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Berger, supra note 19, p. 374 et seq. Berger, supra note 8, p. 544 et seq. 117 See De Ly, F., International Business Law and Lex Mercatoria, North-Holland (1992), at 234; Marrella, F., La Nuova Lex Mercatoria, CEDAM (2003), p. 690. 118 Translation by the author, the German original is published in Berger, K.P., ‘Transnational Law Digest & Bibliography: The Inside Story’, in: CENTRAL [Ed.], Jahresbericht 2007/2008 (2008), p. 38. See also Winiger, B., book review of: ‘Berger, Internationale Wirtschaftsschiedsgerichtsbarkeit, 1992’, ASA Bull. 1992, p. 565: ‘The compilation of substantive legal principles which are being used increasingly by international arbitrators in lieu of domestic laws, coupled with comprehensive references, is of particular value especially for the legal practitioner’ (translation from the German original by the author). 119 Berger, K.P., Formalisierte oder ‘schleichende’ Kodifizierung des transnationalen Wirtschaftsrechts, de Gruyter (1996), p. 217 et seq. 120 See Berger, id. 116

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B. History of the Online Codification Platform ‘TransLex’ (www.trans-lex.org) There was an intrinsic problem with all lists published between 1992 and 1999. Their growth and character as a mere unorganized compilation of principles and rules reduced their utility. That problem ran counter to the very purpose of the lists, namely the codification of the NLM in a way that makes them easily accessible for practitioners and academics around the globe. 1. The predecessor: The Transnational law database (Tldb) In 1999, CENTRAL began to consider the use of modern communication technology for the implementation of the concept of the ‘Creeping Codification’ of the NLM. The idea of publishing a CD-ROM with the text of the list and the numerous full-text materials supporting each principle121 was quickly abandoned. It was obvious that this technology would not be able to keep pace with the dynamic development of the NLM. Instead, the idea was born to set up a ‘codification platform’ on the Internet. To prepare for this project, a list was published by the Research Team in a CENTRAL publication on transnational law in late 1999 which was, for the first time, subdivided into fifteen chapters and which contained—also for the first time—the black-letter text of each principle and rule contained in the list.122 In May 2000, the CENTRAL Team, having conducted a global survey on the use of transnational commercial law in international practice, announced that it would ‘publish a comprehensive Online Database on Transnational Commercial Law in early 2001’.123 While the Internet has been regarded as a typical area of business life for which transnational legal structures have developed into a kind of ‘lex informatica’ or ‘lex electronica’,124 the CENTRAL Research Team regarded the Web as the only technical environment through which the Creeping Codification of the NLM could be implemented. The CENTRAL Research Team quickly realized that the unique character of the World Wide Web avoids the

121 See Berger, K.P., CENTRAL-Datenbank zum transnationalen Wirtschaftsrecht, in: CENTRAL [Ed.], Center for Transnational Law (1997), p. 18 et seq. 122 See Central List of Principles, Rules and Standards of the Lex Mercatoria, in: CENTRAL [Ed.], Transnational Law in Commercial Legal Practice, quadis (1999), p. 146 et seq. 123 Berger, K.P., Dubberstein, H., Lehmann, S., Petzold, V., ‘The CENTRAL Enquiry on the Use of Transnational Law in International Contract Law and Arbitration’, in: Berger, K.P., [Ed.], The Practice of Transnational Law, Kluwer Law International (2001) 91, at p. 113 with reference to previous reports on the progress of this project in CENTRAL’s Annual Reports of 1998/1999 and 1999/2000; see also Berger, K.P., ‘CENTRAL-List of Principles, Rules and Standards of the Lex Mercatoria’, in: CENTRAL [Ed.], Transnational Law in Commercial Legal Practice, quadis (1999) 121, at p. 144. 124 Ipsen, N.C., Private Normenordnungen als Transnationales Recht?, Duncker & Humblot (2009), p. 104 et seq.; Kahn, supra note 2, p. 26 et seq.

codification of the new lex mercatoria through the internet 101 defects inherent in traditional means of codification. The absence of a territorial localization of the Web conforms with the transnational character of the NLM, whose primary goal is to detach commercial law from the territorial constraints of domestic legal systems. The ‘Open Access’ environment and global scope of the Web complies with the nature of the NLM as a ‘public domain law’. Also, the Web permits easy and free access to the NLM on a global scale. Unlike printed texts, the technical options available on the Web, coupled with modern IT and database-technology, allow for easy everyday access, use, as well as the quick and continuous updating and dynamic evolution of the TransLex Principles. Through the Internet, CENTRAL can take account of the special character of the Creeping Codification concept which is as flexible, spontaneous, and highly volatile as the NLM itself.125 The use of the highly flexible technical environment of the Web assuages concerns that any attempt to ‘catch’ the NLM, which is floating in the transnational sphere, and to force it back into the straightjacket of a code-like list might ultimately result in compromising not only the autonomy, but also the inherent flexibility and highly dynamic character of the NLM.126 A senior member of the CENTRAL Research Team, Holger Dubberstein, a lawyer and expert in IT and database programming, programmed the database as an Internet-based codification platform. The result of his excellent work, the ‘Transnational Law Database’ (Tldb, www.tldb.de)127 was launched at an international conference on ‘Transnational Law in the Age of Globalization’ held at the University of Münster on 26 October 2001. At the conference, one of the speakers, Gralf-Peter Calliess, stated:

125 See Frischkorn, M., ‘Definitions of the Lex Mercatoria and the Effects of Codifications on the Lex Mercatoria’s Flexibility’, 7 Eur. J. L. Reform (2005) 331, at p. 343: ‘By the time the list is prepared, the Lex Mercatoria may have changed.’ 126 See e.g. Fortier, supra note 11, p. 126: ‘I cannot help but wonder whether Berger’s proposal does not end up impaled on the horns of the very “codification dilemma” that he himself invokes. One may legitimately ask whether any institutional framework is able to maintain the degree of openness and flexibility required to keep pace with the world of international commerce—particularly the world of e-commerce’ (emphasis in the original); Wasserstein Fassberg, C., ‘The Empirical and Theoretical Underpinnings of the Law Merchant’, 5 Chi. J. Int’l L. (2004) 67, p. 82: ‘This push towards formalised codification . . . requires lex mercatoria theorists to relax the qualifications for membership and compromise its autonomy in a way which ultimately belies the standard justification offered for its existence—the more formal and explicit the rules, the less organic, the less spontaneous, the less authentic they are’. 127 See Berger, K.P., ‘Lex Mercatoria online: the CENTRAL Transnational Law Database at www.tldb.de’, 18 Arb. Int’l (2002) 83 et seq.; Berger, K.P., ‘Lex Mercatoria Online’, 48 RIW (2002) 256 et seq.; Redfern, A., Hunter, M., International Arbitration, 5th ed., Oxford Univ. Press (2009), No. 3.174.

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klaus peter berger [. . .] in terms of providing free and easy access to systematic knowledge of Lex Mercatoria and thereby enabling self-reference, the CENTRAL Transnational Law Database launched today could be a milestone on the road to the New Law Merchant.128

After CENTRAL moved from the University of Münster to the University of Cologne in April 2002, the Tldb was renamed into ‘Transnational Law Digest & Bibliography’ in order to emphasize the ‘Digest-like’129 quality of the platform, while maintaining the acronym ‘Tldb’. The platform was also transferred from a ‘.de’- to a ‘.net’-domain (www.tldb.net) to underline the transnational character of the codification platform. 2. From the Tldb to the TransLex Principles Over the next seven years, various problems in the handling of the Tldb manifested themselves. The Tldb became too complex, sacrificing the userfriendliness of the platform. At the same time, the back-end programme which the members of the CENTRAL Team used to prepare and upload new documents became outdated and its use proved to be very time consuming. Also, the feedback from the users indicated that the message behind the acronym ‘Tldb’ was not readily understood by those academics and practitioners who were not familiar with CENTRAL and its research activities. For these reasons, the decision was made at CENTRAL in early 2008 to set up a completely new online codification platform—TransLex—to which the list and the materials contained in the Tldb would then be transferred. The programming of TransLex was done by two members of the team with considerable experience in database programming, Ulf Krause and Oliver Froitzheim. The new TransLex logo has four colours. These four colours represent the four areas of the TransLex platform at www.trans-lex.org: TransLex Principles: a list of almost 130 principles of transnational law, the ‘New Lex Mercatoria’. TransLex Bibliography: a comprehensive bibliography on transnational law. TransLex Materials: a collection of texts of international conventions, model laws, restatements, domestic statutes, soft law instruments and many other materials. TransLex Links: a collection of selected links which are relevant for research in transnational law and international business law.

128 Calliess, G.-P., ‘Lex Mercatoria: A Reflexive Law Guide To An Autonomous Legal System’, 2 German L. J. (2001), No. 17, www.germanlawjournal.com/article.php?id=109 (last checked 3 May 2011). 129 See supra note 17.

codification of the new lex mercatoria through the internet 103 TransLex was launched at the final rounds of the Willem C. Vis Arbitration Moot Competition in Vienna in early April 2009. In fact, many student teams who have participated in that competition in the past have made extensive use of the Tldb, and the teams who participated in the final rounds of 2009 showed great interest in the new TransLex platform which can be accessed free-of-charge. Like the UNIDROIT and Lando Principles,130 the TransLex Principles are of a multi-functional nature. They may be used: 1. to determine the applicable rules in a dispute if the parties have chosen ‘transnational commercial law’, ‘general principles of law’, ‘the lex mercatoria’ or the like; 2. to determine the applicable law, if, absent a choice of law by the parties, the arbitrators decide to apply this concept to the dispute before them; 3. to allow for an autonomous interpretation of and for the filling of internal gaps in international conventions and other uniform law instruments; 4. to allow for the ‘internationally useful’ construction of domestic law in international disputes; 5. to ascertain the disputed meaning of key legal terms of transnational commerce, e.g. ‘force majeure’, ‘hardship’, ‘best efforts’, ‘time is of the essence’, ‘FOB’, ‘CIF’ etc.; 6. to supplement or correct a future European Civil Code in international commercial disputes; 7. to provide legal know how about modern commercial law to developing and transition countries; and 8. to provide information about transnational law to other sciences (politics, economics, sociology) which are exploring the clash between the territorial limitations of the law and the transnationalization of international commerce and trade in an era of globalization.131 C. Content and Structure of the List As of October 2009, the TransLex Principles contained 128 principles and rules of the NLM. The list begins with very general principles of good faith and the standard of reasonableness. It also contains very detailed and specific rules on such issues as agency, contract interpretation, the consequences of non-performance, force majeure and hardship, interest claims, unjust enrichment, expropriation, international commercial arbitration, and conflict of laws. The scope of the list thus goes far beyond international contract law. The principles and rules contained in the list, either on their own or in their 130 131

See Berger, supra note 3, p. 213 et seq. and p. 245 et seq. Purpose and Concept at www.Trans-Lex.org/000010.

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combination, allow for the resolution of the vast majority of international business disputes. TransLex therefore does away with the longstanding criticism that the tremendous amount of academic attention devoted to it has only given rise to a very limited number of workable principles. Unlike their predecessors which were published between 1992 and 1999, the TransLex Principles are not an unorganized compilation of principles and rules of the NLM. Instead, they are structured in 14 chapters which are accessible through a drop-down menu. This is an example of the increasing systematization of the NLM described above.132 Such systematization is by no means a new phenomenon. Even the ancient predecessors of the list, like the ‘Rôles d’Oléron’,133 were not an unsystematic compilation of rules and principles. Rather, they contained a coherent set of rules corresponding in broad terms to the chronology of a sea voyage.134 By clicking on a principle of his choice, the user of the TransLex Principles gets instant access not only to its black-letter text, but also to hundreds of comparative law references (doctrine, arbitral awards, court decisions, national legislation, international restatements, model laws, model terms), most of them in full-text versions. It is one of the main tasks for the members of the CENTRAL Research Team to collect on a continuous basis new materials and upload them onto the platform. Reproduction of these sources has always been a key feature of the four lists published before the Tldb was launched and is also a key feature of TransLex. Apart from its online character and scope, which is not limited to contract law, it is that feature which distinguishes the TransLex Principles from the UNIDROIT and Lando Principles.135 The experience with the American Restatement of the Law of Contracts136 reveals the tremendous significance which these references have. It was for this reason that the Lando Commission decided to include notes with comparative law references (without, however, reproducing their full texts) in its Principles of European Contract Law and not to follow the example of the UNIDROIT Working Group.137 The references guarantee the

132

See Berger, supra note 3, p. 117 et seq. See Berger, supra note 3, p. 258 et seq. 134 Shephard, supra note 27, p. 217. 135 But see Brunner, supra note 23, p. 20 who argues that the drawback of the UNIDROIT Principles—the absence of comparative law materials—is considerably mitigated by the fact that the UNIDROIT Principles correspond to a large degree with the Lando Principles which contain such comparative law references. That, however, would require the burdensome process of constant comparisons between UNIDROIT and Lando Principles. The TransLex Principles combine the black-letter text and comparative law references at a glance, i.e. within a single instrument. 136 Cf. Berger, supra note 3, p. 154 et seq. 137 Cf. Berger, supra note 3, p. 242 et seq. 133

codification of the new lex mercatoria through the internet 105 transparency which is necessary for a worldwide acceptance of the TransLex Principles and the rules and principles contained therein.138 The documents which constitute the comparative law references are reproduced on the platform in PHP-format but can be downloaded as formatted and unlocked pdf-files. A sophisticated search engine developed specifically for the TransLex Principles by the CENTRAL technicians and equipped with a large variety of search filters allows the user to search for specific principles, rules or documents. When searching for a principle or rule, the search engine always produces the black-letter text of the relevant principle as the first search result. While working with TransLex, users can suggest further references through the ‘suggest a reference’-feature that was programmed into the platform for every principle or rule. This feature, together with a blog-like discussion forum on transnational law, realizes the idea of a ‘worldwide data-communication network’.139 TransLex also contains a ‘genesis’ function which is intended to create transparency of the ‘codification’ process by explaining the history of a given principle or rule throughout the codification process within TransLex. Embedded in the programming of the platform but not yet activated is an ‘annotation’ feature which allows the CENTRAL Team to issue annotations and comments for individual principles or rules contained in the list. IV. Conclusion The process of online codification described in this contribution must not be confused with the traditional notion of codification by domestic legislatures. There is not and cannot be a single ‘legislator’ of the NLM which is created ‘bottom-up’ by the community of merchants. Rather, by putting the principles and rules of the NLM in the form of black-letter rules with a synopsis of the relevant comparative law references, the TransLex Principles establish a presumption, i.e. prima facie evidence, that the principles and rules reproduced in the list do in fact form part of the NLM. With this approach, the TransLex Principles aim at alleviating the burden of arbitrators and contract lawyers who need to be concerned, in their daily work and in every single case, with the ‘validity’ and ‘application-worthiness’ of

138 Cf. Langen, supra note 47, No. 30: ‘The judge may not be allowed to assume, without any further considerations, the equality of principles of different legal systems. This is indeed no longer reconcilable with legal certainty’ (translation by the author); cf. also Zimmermann, R., ‘Konturen eines Europäischen Vertragsrechts’, 100 JZ (1995) 477 at pp. 478, 480, who rightly characterizes the omission of any comparative references through the UNIDROIT Working Group as ‘not very convincing’. 139 Cf. Berger, supra note 119, p. 213 note 11.

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a particular principle or rule of the NLM. In a way, the global accessibility of the TransLex Principles through the Internet reflects the fact that their significance and that of the NLM doctrine in general must be seen in the context of the globalization of international business law. Thomas Wälde understood that the NLM stands for a much more dramatic phenomenon. He rightly argued that the NLM must be positioned in the economic globalization paradigm and the changing role of the traditional concepts of law.140 Again, Thomas saw the broader picture: These ideas [on the New Lex Mercatoria] are in a way precursors to the current preoccupation with the role of law in the global economy, a relatively new term that describes a much older phenomenon—the acceleration of national markets into a global economy during prolonged periods of peace and prosperity.141

140 141

Wälde, supra note 4. Wälde, id.

THINKING ABOUT BITS AND BIT ARBITRATION: THE LEGITIMACY CRISIS THAT NEVER WAS Devashish Krishan* I. Introduction Louis Halle, an American diplomat and strategist of the 1950s, observed that policy is made not in reaction to the world but rather in reaction to an image of the world in the people making decisions. “In the degree that the image” warned Halle, “is false, actually and philosophically false, no technicians, however proficient, can make the policy that is based on it sound.”1 Before 1990, the image of private foreign investment was a simple one, composed of a few multinational entities, fewer states, some “economic development agreements,” still less national investment codes and international policy statements, perhaps a score of arbitral awards, and a few hundred (barely used) bilateral investment treaties (BITs).2

* Practicing lawyer, Freshfields Bruckhaus Deringer US LLP, New York. The views expressed in this paper are personal, of the author alone, and do not engage the personal or professional opinions of anybody else. I am grateful to Andrew Newcombe, Anthony Sinclair, Brooks Daly, Jan Paulsson, Jeffery Commission and Maximiliaan Rijkenberg for discussions and to Jan Paulsson, Jose Alvarez, Joshua Cooper Ramo and Stephen Schwebel for their inspired and illuminating writings. 1 L. Halle, American Foreign Policy 318 (G. Allen, 1960) (Hereafter: “Halle, Foreign Policy”). See also, J. Ramo, The Age of the Unthinkable 13 (Little, Brown & Co, 2009). For insightful analyses of imagery in policy making in rule of law and arbitration matters, see, J. Paulsson, Enclaves of Justice, 4(5) TDM 2 (2007) (“Our model for global development of the rule of law may be flawed and counterproductive. It may be harmful to consider that the rule of law is the norm . . . It may be more realistic to think and act on the assumption that justice is a surprising anomaly . . . What we need is not legal analysis leading to ever more perfectly fraudulent texts, but an understanding of reality.”) (Hereafter: “Paulsson, Enclaves of Justice”); J. Paulsson, International Arbitration is not Arbitration, 6(1) TDM 1 (2009) (“You don’t think that international arbitration is arbitration because it has ‘arbitration’ in its name, do you? Do you think a sea elephant is an elephant?”); J. Paulsson, Arbitration in Three Dimensions, LSE Law, Society and Economy Working Papers 2/2010; E. Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff, 2010). 2 See, P. Kohona, Some Major Provisions in Modern Investment Protection Agreements, 1987 Third World Legal Stud 151, 152 (1987) (180 BITs concluded between OECD and developing countries as of 1984; further, south-south and socialist BITs were “a recent feature” and China signed numerous BITs because “the importance of ensuring a secure investment climate for foreign investors is recognised by China’s planners.”); P. Peters, Investment Risk and Trust: The Role of International Law, in, P. de Waart, et al., eds., International Law and Development

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Then, the cold war ended and the world changed. Since 1990, a globalized space, full of multinationals, has emerged.3 Our collective socio-economic condition bettered.4 Foreign investment became globalization’s seeping, and then sweeping, force.5 For the past two decades, the world has been moving every day closer towards ordering the global free flow of capital—during the 1990s, the world’s states signed three BITs a week and domestic laws changed as many times (93% favor foreign investment). This intensified in the 2000s. Today, the world’s BITs number more than three thousand, and BIT arbitration is a permanent fixture of the international investment regime.6 So reality became perplexing: just how did it come to be that the entirety of the world’s states uniformly now embrace foreign investment into and out of their shores? This is an amazing development, and established scholars and practitioners marvel at the astonishing ascendancy of BITs and BIT arbitration. The pudding needed no proof. Yet, in recent times, a torrent of academic publications on the subject has ensued. Roughly, in the past five years, western hemispheric English language legal scholarship has seen one new academic publication containing the term “bilateral investment treaties” published every second day.7 In this 131, 132 (Martinus Nijhoff, 1988) (300 BITs concluded as of 1987, of which 190 signed since 1973, the eve of the NIEO movement.) 3 UNCTAD, World Investment Reports (UN, 2005, 2008, 2010) (number of multinational corporations rose from 7,250 in the late 1970s, to 60,000 with 500,000 foreign subsidiaries in 1999, to 82,000 along with 800,000 foreign affiliates employing more than 80 million workers in 2010); The Economist, The Non-Governmental Order: Will NGOs Democratize, or Merely Disrupt, Global Governance? (Dec. 11–17, 1999) (number of international non-governmental organizations (NGOs) rose from 6,000 in 1990 to 26,000 in 1996.) 4 World Bank, Poverty—Statistics and Indicators, available at http://go.worldbank.org/ JIO7WY61V0 (globally, living standards—poverty, infant mortality, life expectancy and adult literacy rates, social indicators, and average incomes—have improved dramatically since 1980; gender disparities remain.) 5 IMF Statistics Department, Foreign Direct Investment Trends and Statistics, Board of Directors Paper, (Oct. 28, 2003), at, http://www.imf.org/external/np/sta/fdi/eng/2003/102803 .htm (“Recorded world inflows of FDI, which increased by an average of 13 percent a year during 1990–97, surged by an average of nearly 50 percent a year during 1998–2000 . . . World FDI inflows reached a record US$1.5 trillion in 2000 before falling to US$0.7 trillion in 2001 . . . Inflows of FDI into developing countries grew by an average of 23 percent a year during 1990–2000, but declined by 13 percent to US$215 billion in 2001.”) World FDI inflows reached $1.5 trillion again 2007 before contracting as a result of the global financial crisis. In 2009, inflows were $1.114 trillion and are expected to rise in the near future. For the first time in 2009, developing country FDI inflows peaked at 50% of the world’s total, see, UNCTAD, World Investment Report (UN, 2010). 6 This paper looks mainly at BITs and BIT arbitration, recognizing that the international investment regime consists more generally of actions of states (enactment of national and international laws and entering treaties), international arbitrators (deciding investor-state disputes), international organizations (the IMF, World Bank and the WTO), and private actors (foreign investors and NGOs). 7 I searched Heinonline, containing 58 million pages of legal history at http://heinonline .org, on October 1, 2010, for all content containing the phrase “bilateral investment treaties.”

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burgeoning literature, there emerges a genre of political/legal writing which attempts to impose an image of the international investment regime. With increasing frequency, every year, a group of academician critics and political activists warn of a “legitimacy crisis” in BIT arbitration.8 Does this image accurately reflect the changed reality of the regime governing world private foreign investment? Can the legitimacy crisis be observed and verified? Is

It resulted in around 2,350 results: 301 publications (1940 to 1990); 668 publications (1991 to 2000); 1,408 publications (2001 to 2010). Two-thirds of the last, 964 publications, were published since 2005. This means, roughly, that while five academic publications containing this phrase were published every month in the 1990s, the frequency rose to eleven per month in the 2000s (fifteen every month since 2005). A search for the phrase “bilateral investment treaty” throws up around 1,400 results (similar production characteristics). 8 See, e.g., M. Sornarajah, The Clash of Globalizations and the International Law on Foreign Investment: The Simon Reisman Lecture in International Trade Policy, 10 Can Foreign Pol’y 1 (2003); V. Been, J. Beauvais, The Global Fifth Amendment? NAFTA’s Investment Protections and the Misguided Quest for an International “Regulatory Takings” Doctrine, 78 NYU L Rev 30 (2003); A. Afilalo, Towards a Common Law of International Investment: How NAFTA Chapter 11 Panels Should Solve Their Legitimacy Crisis, 17 Georgetown Int’l Envir L Rev 51 (2004); S. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions, 73 Fordham L Rev 1521 (2005) (Hereafter: “Franck, Legitimacy Crisis”); N. Gurudevan, An Evaluation of Current Legitimacy-Based Objections to NAFTA’s Chapter 11 Investment Dispute Resolution Process, 6 San Diego Int’l L J 399 (2005); L. Zarsky, ed., Balancing Rights and Rewards: International Investment for Sustainable Development (Nautilius Institute for Security and Sustainability, 2005); M. Sornarajah, A Law for Need or a Law for Greed?: Restoring the Lost Law in the International Law of Foreign Investment, 6 Int’l Envir Agmts 329 (2006); K. Tienhaara, What You Don’t Know Can Hurt You: InvestorState Disputes and the Protection of the Environment in Developing Countries, 6 Global Envir Pol 73 (2006); G. Van Harten, Investment Treaty Arbitration and Public Law (Oxford, 2007) (Hereafter: “Van Harten, Arbitration & Public Law”); O. Chung, The Lopsided International Investment Law Regime and its Effect on the Future of Investor-State Arbitration, 47 Va J Int’l L 953 (2007); G. Van Harten, The Public-Private Distinction in the International Arbitration of Individual Claims against the State, 56 Int’l & Comp L Q 371 (2007); M. Sornarajah, A Coming Crisis: Expansionary Trends in Investment Treaty Arbitration, in K. Sauvant, ed., Appeals Mechanism in International Investment Disputes 39–45 (Oxford, 2008); B. Choudhury, Recapturing Public Power: Is Investment Arbitration’s Engagement of the Public Interest Contributing to the Democratic Deficit?, 41 Vand J Transnat’l L 775 (2008); G. Van Harten, A Case for an International Investment Court SIEL Working Paper (2008); Open Letter to Robert B. Zoellick, President, World Bank, from Sarah Anderson, Institute for Policy Studies (Oct. 3, 2008); D. Collins, A New Role for the WTO in International Investment Law: Public Interest in the Neo-Liberal Period, 25 Conn J Int’l L 1 (2009); G. Kahale III, A Problem in Investor/State Arbitration, 6(1) TDM 1 (2009); M. Waibel, et al., eds., The Backlash Against Investment Arbitration (Kluwer, 2010); K. Miles, International Investment Law: Origins, Imperialism and Conceptualizing the Environment, 21 Colo J. Int’l Envir L & Pol’y, 1 (2010); Various, Public Statement on the International Investment Regime, August 31, 2010, available at, http://www.osgoode.yorku.ca/public_statement/ (Hereafter: “2010 Public Statement”); D. Schneiderman, Judicial Politics and International Investment Arbitration: Seeking an Explanation for Conflicting Outcomes, undated, http://works.bepress.com/david_schneiderman/1/. For early critics, see surveys and responses in: C. Brower II, Investor State Disputes Under NAFTA: The Empire Strikes Back, 40 Colum J Transnat’l L 43 (2001); C. Brower, A Crisis of Legitimacy, Natl LJ B9 (Oct. 7, 2002); C. Brower II, C. Brower, J. Sharpe, The Coming Crisis in the Global Adjudication System, 19 Arb Int’l 415 (2003); C. Brower II, Structure, Legitimacy, and NAFTA’s Investment Chapter, 36 Vand J Transnat’l L 37 (2003).

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this image suitable for the exacting task of policy-making? And is anything in it, to quote Halle, false—actually and philosophically false? I explore these questions in this contribution dedicated to an exceptional man, Thomas Wälde. He was a fearless (and fearsome) academic, practitioner, and internationalist; and an enterprising mentor and warm friend. He did more than most to establish, nurture, and sustain the international investment law community. His name was, and remains, a leading light in this field. In the spirit of civilized debate, which Thomas so relished and cherished, this paper journeys through the last twenty years of scholarship about the international investment regime with a view to assessing what in it is fair-minded, complete, and accurate, and therefore adequate to the exacting task of policy making. During this journey, we will look at the language used by various scholars and policy activists when they speak of BITs and BIT arbitration (part I), so as to see more clearly the underlying critical ideas (part II). Four images of BITs and BIT arbitration emerge: the economic, the normative, the political, and the universal. Our vision thus enhanced, we tentatively attempt to imagine BITs and BIT arbitration more vividly (part IV). II. On the Language Used by the Critics or the Battle for Language Words are highly revealing. They articulate a mental vision. By articulation, we are able to communicate mental pictures to one another. In turn, this ability to communicate enables a group of people to form a shared view. Depending on their influence, this enunciated shared view—whether true or a delusion—may become policy.9 Words make that happen. How one articulates is therefore critical to defining the policy agenda and entrenching an image of the world—which may or may not be false. Although we are told that there is a “legitimacy crisis” in BITs and BIT arbitration, nobody seems to agree on what that entails. Diverse and conflict-

9 Halle, Foreign Policy 315–316 (“Foreign policy—anywhere, any time—has its birth and its essential being in the recesses of the human mind . . . It is commonplace to say that the foreign policy of any particular nation addresses itself to the world which is external to that nation. But this is not so. What the foreign policy of any nation addresses itself to is the image of the external world in the minds of the people who determine the policy of that nation. That image may approximate the reality more or less closely, but at best it can never be quite the same thing. And it is generally different in fundamental respects.”) See also, T. Endicott, Law and Language, in, J. Coleman, S. Shapiro, eds., The Oxford Handbook of Jurisprudence and Philosophy of Law 935–968, 935 (Oxford, 2002) (quoting Demosthenes, 350 BCE: “our polity consists of words” and “the power of words can damage the city.”)


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ing realities have been lumped together under this rubric. Does the phrase accurately reflect the world? Is there a BIT and BIT arbitration crisis? A crisis is the decisive moment, the crucial time in an unstable state of affairs. The BIT crisis is, depending on who one reads, either already here or is imminent. The problem with those critics who say the crisis is already here is that none of them have identified the signs of doom that portend its arrival. The image of a world in crisis also contradicts the record maintained by august bodies. According to the United Nations,10 the world’s states continue to sign BITs at a rapid pace—around 750 BITs were signed in the eight and a half year period stretching from early 2001 to June 2009.11 This means, for the past decade or so the world’s states signed more than three BITs every second week. Over the past five years, developing countries maintained a steady 27% share of the world’s BITs even as that total stock grew at an astonishing rate.12 BIT arbitration too tremendously grew in the past decade.13 And this worldwide web of BITs and BIT arbitration has been knitted together by every state in the world, comprising every shade of political complexion.14 Nor has the global credit crisis

10 I am aware of the limitations of UN figures and of speaking of BITs as a disaggregated whole. However, the UN figures have the virtue of (a) being the most complete; and (b) being in accord with the observed reality that the number of BITs the world’s states entered into has increased dramatically over the past twenty years and the overwhelming trend has been in favor of including robust substantive protections and failsafe investor-State arbitration mechanisms. See, B. Koremenos, If Only Half of International Agreements Have Dispute Resolution Provisions, Which Half Needs Explaining?, 36 J Legal Stud 189 (2007) (general analysis of treaties and statistics from the United Nations Treaty Series); J. Yackee, Conceptual Difficulties in the Empirical Study of Bilateral Investment Treaties, 33 Brook. J Int’l L 405, 428–434 (2007–2008) (Hereafter: “Yackee, Conceptual Difficulties”) (even on alternative statistics, the phenomenon of “strong” BITs, i.e., those with robust investor-State arbitration mechanisms, have dominated in the very strong increase in the numbers of BITs signed since 1990.) 11 UNCTAD, The Entry into Force of Bilateral Investment Treaties, IIA Monitor No. 3 3 (2006) (the world’s BITs were: 385 at the end of 1990; 1,308 at the end of 1996; 1,939 at the end of 2000; 2,495 at the end of 2005); UNCTAD, Recent Developments in International Investment Agreements (2008—June 2009), IIA Monitor No. 3 2–5 (2009) (by June 2009, 2,701 BITs had been signed worldwide.) 12 UNCTAD, South-South Investment Agreements Proliferating, IIA Monitor No. 1 1 (2005) (By July 2004, 653 BITs had been signed between developing countries representing a 28% total share of the world’s 2,300 or so BITs); UNCTAD, Recent Developments in International Investment Agreements (2008—June 2009), IIA Monitor No. 3 2–5 (2009) (by June 2009, BITs between developing countries represented 26% of the worldwide total of 2,701 BITs.) 13 UNCTAD, Occasional Note: International Investment Disputes on the Rise, UNCTAD/ WEB/ITE/IIT/2004/2 (Nov. 29, 2004) 6 (under 15 BIT arbitrations by end 2000); UNCTAD, Latest Developments in Investor State Dispute Settlement, IIA Monitor No. 4 1 (2005) (219 BIT arbitrations as of November 2005); UNCTAD, Latest Developments in Investor State Dispute Settlement, IIA Monitor No. 1 1 (2009) (317 BIT arbitrations by end 2008); UNCTAD, Latest Developments in Investor State Dispute Settlement, IIA Monitor No. 1 1 (2010) (357 BIT arbitrations at the end of 2009, 57% of which initiated during the last five years.) 14 UNCTAD, The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries, 2 (2009) (Save Monaco, all the world’s states are party

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diminished the world’s appetite for BITs.15 In the face of all this evidence, the theory that we are in the midst of a crisis simply expires. Is the crisis coming? That an expected crisis failed to materialize for ten years permits the rational and fair-minded question whether the use of the word “crisis” is an accurate description of the reality sought to be described or predicted. We may also be wary of the word “legitimacy” for it too denotes an evershifting landscape. The image portrayed is that the international investment regime is a house of cards ready to collapse because it lacks the foundation of legitimacy. But there are as many yardsticks of legitimacy proffered as there are critics. This is unsurprising because critical scholarship “is a divided house.”16 How the notion of legitimacy fragmented is beyond our survey;17 for present purposes, we may only note that some critics apply their yardstick of legitimacy and find structural, fatal and irreversible flaws in the regime. Other yardsticks of legitimacy suggest that the problems are not structural and irreversible, but point only to ad hoc problems that are easily fixed or fixable. So, we see that the reality of illegitimacy depends upon the author of the moment. The inescapable conclusion is that there are numerous realities captured by these two words “legitimacy crisis”. It follows that the phrase is inherently

to at least one IIA); UNCTAD, Recent Developments in International Investment Agreements (2007—June 2008), IIA Monitor No. 2 4 (2008) (“About 60 per cent of the Chinese BITs concluded from 2002 to 2007 were with other developing countries.”); UNCTAD, Occasional Note: International Investment Disputes on the Rise, UNCTAD/WEB/ITE/IIT/2004/2 (Nov. 29, 2004) 3 (as of 2004, 50 countries received notices of arbitration under BITs); UNCTAD, Latest Developments in Investor State Dispute Settlement, IIA Monitor No. 1 2 (2010) (by 2009, 81 countries received notices of arbitration under BITs.) 15 Taking the global picture of the investment regime, according to most recent estimates, as of 2010, there were 5,939 investment agreements (BITs, tax treaties and other investment agreements). UNCTAD, World Investment Report xxv (UN, 2010) (“In 2009, 211 new IIAs were concluded (82 BITs, 109 DTTs and 20 other IIAs)—on average about four new agreements per week . . . The trend towards rapid treaty making continued in 2010, wit the first five months seeing the conclusion of 46 more IIAs (6 BITs, 33 DTTs and 7 other IIAs) . . . As for investor-state dispute settlement, at least 32 new cases were initiated in 2009.”) 16 B. Chimni, An outline of a Marxist course on public international law, in S. Marks, ed., International Law on the Left 53, 90 (Cambridge, 2008) (Hereafter: “Chimni, Marxist Course”) (further, “the Third-Worlders, the Marxists, the feminists, the new approaches are unable to come together to contest Mainstream International Law Scholarship. The reasons are more fundamental than the simple lack of co-ordination. There are profound differences in their vision of the future and about what can be done to get from here to there.” For the difficulties in delineating between “mainstream” and “marginal” approaches to international law, see, R. Müllerson, Ordering Anarchy: International Law in International Society 49 (Martinus Nijhoff, 2000). 17 See generally, B. Maragia, Almost There: Another Way of Conceptualizing and Explaining NGOs’ Quest for Legitimacy in Global Politics, 2 Non-St Actors & Int’l L 301–332, 301–317 (2002) (theory of Multiple Sites of Authority and Multiple Sources of Legitimacy.)


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distorting. It denotes one reality—a crisis of legitimacy—whereas it actually represents the multiple realities perceived by the many critics. In this way, it can misrepresent the image of the world. But more distortion is at work here. The phrase also has the potential to pervert discourse. The phrase “legitimacy crisis” comprises fighting words and carries heavy political baggage. It is a call to arms, laden with value judgments, which, as noted above, are all subjective and numerous. It is emotive language. This makes the phrase inherently unsuitable for the basis of rational discourse on the subject of the international investment regime. Moreover, it only encourages those disposed to employing an inflammatory vocabulary when speaking to the subject.18 When and where did this phrase originate? In the waning years of the last millennium, scholarly attention was focused on the proliferation of international courts and tribunals.19 For some scholars, this growth in international adjudication heralded a “problem.”20 In the early years of the first decade of this third millennium, this paradigm was co-opted by another set of authors who began identifying both the global adjudicatory system and BIT arbitration with the word “crisis.”21 In parallel, others found what they believed

18 Most recent scholarship in political science—the Overton Window of Political Possibility, which is a model developed to explain public policy change—suggests that the vocabulary of political discourse sets the limits of the range of public policy choices that are considered “acceptable” and not too “extreme.” The research informs us that the more emotive the language, the more mainstream otherwise extreme ideas become—the window of mainstream (the area between “acceptable” and “extreme”) opens wider. This often leads to the fallacy that any compromise position between the two extremes of the window must be correct—a concept termed by political scientists as the “Argument to Moderation.” We know this is a fallacy because sometimes there is no middle ground—sometimes only X or Y is acceptable. See generally, D. Sears, et al., eds., Oxford Handbook of Political Psychology (Oxford, 2003); R. Wintrobe, Rational Extremism: The Political Economy of Radicalism (Cambridge, 2006); D. Johnson, D. Tierney, Failing to Win: Perceptions of Victory and Defeat in International Politics (Harvard, 2006); L. Thiele, The Heart of Judgment: Practical Wisdom, Neuroscience and Narrative (Cambridge, 2006); J. Lehman, Collected Essays (Mackinac, 2010) available at, http://www.mackinac.org. 19 See, L. Helfer, A. Slaughter, Toward a Theory of Effective Supranational Adjudication, 107 Yale LJ 273 (1997); J. Charney, the Impact on the International Legal System of the Growth of International Courts and Tribunals, NYU J Int’l L & Pol 697 (1999); C. Romano, The Proliferation of International Judicial Bodies: The Piece of the Puzzle, 31 NYU J Int’l L & Pol 709 (1999); R. Alford, The Proliferation of International Courts and Tribunals: International Adjudication in Ascendance, 94 Am Soc’y Int’l L Proc 160 (2000); L. Reed, Great Expectations: Where Does the Proliferation of International Dispute Resolution Tribunals Leave International Law?, 96 Am Soc’y Int’l L Proc 219 (2002). 20 B. Kingsbury, Is the Proliferation of International Courts and Tribunals a Systemic Problem?, 31 NYU J Int’l L & Pol 679 (1999) (introducing special symposium issue); S. Spelliscy, Note: The Proliferation of International Tribunals: A Chink in the Armor, 40 Colum J Transnat’l L 143 (2001). 21 For surveys and responses, see, C. Brower II, Investor State Disputes Under NAFTA: The Empire Strikes Back, 40 Colum J Transnat’l L 43 (2001); C. Brower, A Crisis of Legitimacy,

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were inconsistencies and contradictions between some BIT awards, a most disagreeable development according to them, and began calling into question the entire system’s “legitimacy.”22 By 2005, the vocabulary had congealed, and a different set of authors began speaking of a “legitimacy crisis” in BITs and BIT arbitration.23 This unfortunate vocabulary spread. Pushing the alarmist language were voices, particularly from select NGOs, that viewed BIT arbitration as an ecumenical battle between good and evil. A clearing-house to channel opposition to BITs was born in September 2004, describing itself as a “collective effort to share information and stimulate cooperation against bilateral trade and investment agreements that are opening countries to the deepest forms of penetration by transnational corporations.”24 In 2005, other NGOs got involved and solidified.25 Exemplifying the shift to emotive language, an activist attached to the UK-based Rights and Accountability in Development opined to a forum comprising over 500 people in the summer of 2006: It is perfectly understandable why international investment lawyers are content with the complexity and costliness of international arbitration dispute mechanisms, but we should at least be honest enough to admit that this deeply flawed system currently operates to the benefit of corrupt companies and individuals providing them with almost complete security for their ill gotten assets. So the dispossessed citizens of countries like the Democratic Republic of the Congo, whose interests are not served by their political leaders, should be ‘realistic’ and not expect assistance from the World Bank and the OECD governments that have supported the ‘transition to peace’ to revoke or revise mining contracts that have been improperly obtained and which are profoundly unbalanced. The

Natl LJ B9 (Oct. 7, 2002); C. Brower II, C. Brower, J. Sharpe, The Coming Crisis in the Global Adjudication System, 19 Arb Int’l 415 (2003). 22 See, e.g., C. Brower II, Structure, Legitimacy, and NAFTA’s Investment Chapter, 36 Vand J Transnat’l L 37, 93 (2003) (“[NAFTA investor-state arbitration] finds itself in the midst of a legitimacy crisis.”); Franck, Legitimacy Crisis, 1521, 1523 (2005) (BIT arbitration faces “the looming legitimacy crisis.”) 23 See, e.g., A. Afilalo, Towards a Common Law of International Investment: How NAFTA Chapter 11 Panels Should Solve Their Legitimacy Crisis, 17 Georgetown Int’l Envir L Rev 51 (2004); N. Gurudevan, An Evaluation of Current Legitimacy-Based Objections to NAFTA’s Chapter 11 Investment Dispute Resolution Process, 6 San Diego Int’l L J 399 (2005). 24 http://www.bilaterals.org/spip.php?rubrique51. 25 The internet webpage for the Investment section of the Center for International Economic Law has been frozen since February 2005, suggesting this is when their message crystallized (http://ciel.org/Tae/Trade_Investment.html, visited, October 2, 2010); the Bretton Woods Project, which “focuses on the World Bank and the IMF to challenge their power, open policy space, and promote alternative approaches,” for the first time in 2005 annually reports its work with respect to investment disputes (Annual Report 2005, at http://www .brettonwoodsproject.org/project/about.shtml, visited October 2, 2010.) The first publication dealing with BITs on the Institute for Policy Studies website, titled Challenging Corporate Investor Rule, dates to April 2007 (http://www.ips-dc.org/globaleconomy/reports?start=25, visited October 2, 2010.)


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companies should be free to pocket the proceeds of these corrupt deals while home governments can salve their consciences by putting money into aid projects to promote good governance.26

This language is lamentable, not least because it is a poor substitute for analysis. The language neither (a) articulated a valid or rational criticism, nor (b) offered any alternative mechanisms or solutions to what was perceived to be the flaws of the system. Thomas Wälde responded to the above statement, highlighting that such language was not part of serious policy debate, but instead was suited to engage in the: exploitation of a particular situation for short-term political gain, for an adolescent-like immediate satisfaction of emotional needs, without the adoption of a long-term, serious interest based strategy focusing on rights, risks, benefits and accountability. These NGO campaigns appear to me often like a thunderstorm: they move into an area, and then depart; they don’t develop the long-term commitment best expressed in long-term self-interest embodied in well protected rights that leads to accountability, constant responsibility and thus sustainable development. Such campaigning is public relations; it has nothing to do with developing responsible stewardship that comes with ownership under an effective rule of law.27

Thomas worried that degrading the language of debate would distort the view of the foreign investment world and therefore any policy prescriptions that may be proposed would be false—philosophically and actually false. Such language, according to Thomas, embodied “a quasi-religious approach valuing sentiment more than outcome.”28 The language of crisis and legitimacy is unsuitable for scholarship and policymaking absent a much greater and sincere effort at definition (because it fails to represent the world) and is rather better suited to political activism (because it slants discourse). Is there a better approach to policy reform and scholarship on BITs and BIT arbitration? Again, one can look to Thomas for guidance. Thomas suggested that NGO-generated rhetoric that neither describes nor helps us react to reality—in the stead of hard-headed solid analysis—can lead to disastrous results: in order to achieve greater sustainable development in various areas— investment disputes, rule of law and good governance in developing and transition countries—and ultimately a more prudent and efficient use of the natural resources of the Earth, it is essential not to indulge in ‘feeling good’, and

26 C.f., T. Wälde, Investment Arbitration and Sustainable Development: Good Intentions—or Effective Results?, 3(5) TDM note 3 (2006) (Hereafter: “Wälde, Good Intentions”). See also, for other examples of language used at this time, Civil Association for Equality and Justice. 27 Wälde, Good Intentions, 2 (2006). 28 Wälde, Good Intentions, 7 (2006).

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devashish krishan projecting such essential “goodness” to others, but rather to understand the workings of the world; an altogether much more difficult, complex, subtle and uncertain undertaking . . . moral concerns, however, are not enough; excessive focus only on moral sentiments—a kind of autistic moralism—may even be counterproductive. We need to understand how things work before we can try to change the world to make it somewhat better. The great risk is that the emotive animosity against investment arbitration leads to the opposite of what is probably—hopefully—intended: to push businesses into the substitute for “rule of law” approaches, that is corruption and reliance on ever volatile politics to secure investment and thus produce the widespread poverty coupled with extreme wealth of politically well-connected oligarchs on the other end.29

In sum, the language used by the critics of BITs and BIT arbitration is unhelpful. Instead of providing a clear explanation of the world as it is, the language is more akin to a fata morgana. One can take whatever one wants from it—just not an accurate image of the world. This indicates that whether or not there is a “legitimacy crisis” in arbitration, we are certainly in a crisis of language amongst the critics of BITs and BIT arbitration. Let us now turn to the ideas behind this language. Do they reflect reality? III. On the Ideas Espoused by the Critics or the War of the Issues Andreas Lowenfeld of NYU has pointed to a failure of imagination when thinking about BITs. His very recent “impression is that BITs have rarely been subject to serious debate in the developed countries.”30 So too—in a wider sense and with very different conviction—has Henry Kissinger: “an unprecedented concept has emerged to submit international politics to judicial procedures [that] has spread with extraordinary speed and has not been subjected to systematic debate.”31 Although the past decade has been a passionate one as far as criticisms against BITs and BIT arbitration are concerned, more recently, cogent critiques of the critics have emerged.32 Without resorting to the language of 29 Wälde, Good Intentions, 1 (2006) (Further, “It is not sufficient to criticize investment arbitration for not measuring up to a high level of perfection it does neither pretend to nor can achieve; the NGO activists critics would do well to focus on providing a well-thought out and realistically designed alternative that can be tested and the high moral claims of which can be corroborated in practice. Well-meaning NGO prescriptions thus can easily end up as de-facto recipes for poverty and barbarism.”) 30 A. Lowenfeld, Foreword, in, L. Sachs, et al., eds., The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows xxi-xxiii, xxii (Oxford, 2009) (Hereafter: “Sachs, Treaties & FDI Flows”). 31 H. Kissinger, Does America Need A Foreign Policy? Toward A Diplomacy For The 21st Century 273 (Simon & Schuster, 2001). 32 See, S. Schwebel, Reflections on International Adjudication, 2001–2002 Proceedings of the American Branch of the International Law Association 43 (2001–2002); S. Schwebel, The


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apocalypse, these authors—some of whom rank amongst the world’s best known international lawyers—have examined the criticisms against BITs and BIT arbitration in a mature and dispassionate way. They have found that the critiques put forward by the critics of BITs and BIT arbitration generally do not match up with reality. Further, extensive empirical research clearly establishes that the imagery of BIT arbitration constructed by its critics does not conform to the observable and verifiable reality of these arbitrations.33

Influence of Bilateral Investment Treaties on Customary International Law, 98 Am Soc’y Int’l L Proc 27 (2004); T. Wälde, Investment Arbitration as a Discipline of Good Governance, in T. Weiler, ed., NAFTA, Investment Law and Arbitration, 475–493 (Transnational Publishers, 2004); S. Schwebel, The United States 2004 Model Bilateral Investment Treaty: An Exercise in the Regressive Development of International Law, in, G. Aksen, et al., eds., Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honour of Robert Briner (ICC, 2005); Wälde, Good Intentions, 1 (2006); J. Paulsson, Indirect Expropriation—Is the Right to Regulate at Risk?, 3(2) TDM 1 (2006); J. Paulsson, Enclaves of Justice, 2 (2007); A. Newcombe, Sustainable Development and Investment Treaty Law, 8 JWIT 357 (2007); D. Zaring, Rulemaking and Adjudication in International Law, 46 Colum J Transnat’l L 563 (2007–2008); S. Schwebel, A BIT about ICSID, 23 ICSID Rev—FILJ 1 (2008); J. Alvarez, Book Review—Investment Treaty Arbitration and Public Law, 102 AJIL 909–915 (2008) (Hereafter: “Alvarez, Review—Arbitration & Public Law”); J. Alvarez, Implications for the Future of International Investment Law, in K. Sauvant, Coherence and Consistency in International Investment Law 29 (Oxford, 2008); A. Newcombe, Book Review—Investment Treaty Arbitration and Public Law, 71 MLR 145–158 (2008); Y. Fortier, Arbitrating in the Age of Investment Treaty Disputes, 31 U.N.S.W. L J 282 (2008); J. Alvarez, Contemporary Foreign Investment Law: An “Empire of Law” or the “Law of Empire”?, 60 Ala L Rev 943 (2008–2009) (Hereafter: “Alvarez, Contemporary Foreign Investment Law”); D. Meyers, In Defense of the International Treaty Arbitration System, 31 Hous J Int’l L 47 (2008–2009); C. Brower, S. Schill, Is Arbitration a Threat or Boon to the Legitimacy of International Investment Law?, 9 Chi J Int’l L 471 (2008–2009) (Hereafter: “Brower & Schill, Arbitration & Legitimacy”); J. Paulsson, International Arbitration is not Arbitration, 6(1) TDM 1 (2009); S. Schwebel, The Overwhelming Merits of BITs, 32 Suffolk Transnat’l L Rev 263 (2009); P.I. Blyschak, State Consent, Investor Interests and the Future of Investment Arbitration: Reanalyzing the Jurisdiction of Investor-State Tribunals in Hard Cases, 9 Asper Rev. Int’l Bus & Trade L 99 (2009); J. Alvarez, A BIT on Custom, 42 NYU J Int’l L & Pol 17 (2009); J. Alvarez, K. Khamsi, The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime, in K. Sauvant, ed, 2009 Yearbook of International Investment Law and Policy (Oxford, 2009); J. Alvarez, The Evolving BIT, 7 TDM 1 (2010); J. Paulsson, Moral Hazard in International Dispute Resolution, TDM 1 (2010); A. Newcombe, A Brief Comment on the “Public Statement on the International Investment Regime”, Sept. 3, 2010, http://kluwerarbitrationblog .com/blog/2010/09/03/public-statement-on-the-international-investment-regime/ (Hereafter: “Newcombe, 2010 Public Statement”). 33 Empirical studies by which to verify theory are provided by Susan Franck. See, S. Franck, The Nature and Enforcement of Investor Rights under Investment Treaties: Do Investment Treaties have a Bright Future?, 12 UC Davis J Int’l L & Pol’y (2005); S. Franck, Foreign Direct Investment, Investment Treaty Arbitration and the Rule of Law, 19 McGeorge Global Bus & Dev L J 337 (2007); S. Franck, Empirically Evaluating Claims About Investment Treaty Arbitration, 86 NCLR 1 (2007); S. Franck, Empiricism and International Law: Insights for Investment Treaty Dispute Resolution, 48 Va J Int’l L (2008); S. Franck, Challenges Facing Investment Disputes: Reconsidering Dispute Resolution in International Investment Agreements, in, K. Sauvant, ed., Appeals Mechanisms in International Investment Disputes (Oxford, 2008); S. Franck, Development and Outcomes of Investment Treaty Arbitration, 50 Harv Int’l L J (2009). See also,

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So which picture is to be believed? Is it the one of all doom and gloom as the critics of BITs and BIT arbitration would have us believe? At the outset, we ought to be aware that there is no “one” image of the phenomenon of BITs and BIT arbitration. It can never be a static image. History is not data, the future is not output. It is impossible to approximate reality by an image that does not take into account the ever-changing nature of reality. This is because reality is constantly poised on the edge of unpredictable change. The contemporary BIT system is a system of incredible—and unmappable—dynamism. But a static image—by failing to capture dynamic energy—is always a dead one. A static image cannot do justice to a reality that is in constant movement. How does one capture an image of ever-deepening networks of treaties; of increasingly intricate webs of legal principles; of hundreds of thousands of daily interactions occurring between the million or so foreign investors and about two hundred governments that populate the globe; of trillions of dollars flowing every year across the planet and attaching to all forms of productive endeavor, from extracting the gifts of the earth and nature to entirely intellectual constructions of property; of unpredictable impacts that capitalized new ideas and production have on the Earth’s six billion people who are now within the singular umbrella we call the global economy? There is simply too much going on all of the time. Thus attuned to a complex image, we ask: what are the pictures being constructed by the scholars and critics? Do those pictures withstand close observation? At least four visions of the phenomenon of BITs and BIT arbitration can be discerned from the critical literature—the economic, the normative, the political, and the universal. Are these adequate media for the complex process of perception? Let us take a look. A. The Economic View One picture views BITs as nothing more than mere economic arrangements that, when signed, must cause increased investment flows.34 The critique

K. Tallent, State Responsibility by the Numbers: Towards an Understanding of the Prevalence of the Latin America Countries in Investment Arbitration, TDM 1 (2010). 34 An early proponent of this paradigm is Andrew Guzman. See, A. Guzman, Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va J Int’l L 639 (1998); A. Guzman, Explaining the Popularity of Bilateral Investment Treaties, in, Sachs, Treaties & FDI Flows 73 (Hereafter: “Guzman, Explaining Popularity”) (updating prior work, that lesser developed states entered into BITs solely to attract enhanced foreign investment flows from the particular BIT partner and not to depart from the common position of the Global South in relation to the New International Economic Order). The conception thus excludes a dynamic normative agenda.


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here is that BITs do not increase foreign investment flows as between the BIT countries and are therefore illegitimate. It is an attempt to explain the phenomenon of BITs as a mathematical problem: the conclusion of BITs is data, increased capital flows is the output. It is a linear, mechanistic view of the world. It is also a static image. BITs are pieces of paper. They are signed, scanned to the internet, and lodged in appropriate archives. Foreign investment is measured year on year. Controlling for a limited amount of factors, the measure of foreign investment should rise once the piece of paper that is the BIT has been archived. This is the model. In this view, BITs do not take on a life of their own because the model erases that possibility. We state that BITs do not establish a normative or political agenda and build elaborate models by ignoring that insight.35 There are several deficiencies in this image. First, it requires omniscience. A truth is postulated: BITs cause increased investment. Data is then examined to assess whether or not the world conforms to this truth. In this manner, the view prioritizes an image of the world over the data: if the researchers are unable to see the causal link between BITs and increased flows, it must be that there is no link. But there is no reason to assume this. It is equally possible that a given researcher’s inability to see a link derives from her or his methodological limitations as much as it could possibly derive from the actual absence of a linkage between BITs and foreign investment activity. But the possibility of a blind-spot is ignored. Instead, because the researchers are unable to see the link, they assume none exists. It is an assumption, not an observation. There is also no agreement on what is being visualized. Some authors study whether BITs cause foreign investment flows.36 Others study exactly the opposite: whether foreign investment causes BITs.37 Even amongst those who

35 Guzman, Explaining Popularity, 73, 85–86, 95–96. For persuasive critiques of Guzman’s views, see, A. Lowenfeld, Investment Agreements and International Law, 42 Colum J Transnat’l L 123, 126 (2003); J. Alvarez, A BIT on Custom, 42 NYU J Int’l L & Pol 17 (2009). 36 See, e.g., contributions by J. Salacuse & N. Sullivan, T. Büthe & H. Milner, E. Neumayer & L. Spess, P. Egger & M. Pfaffernayr, R. Grosse & L. Tevino, K. Gallagher & M. Birch, S. Rose-Ackerman, UNCTAD, M. Hallward-Driemeier, and J. Yackee, in, Sachs, Treaties & FDI Flows 109–394; J. Tobin, S. Rose-Ackerman, Foreign Direct Investment and the Business Environment in Developing Countries: The Role of Bilateral Investment Treaties, Center for Law, Economics and Policy Research Paper No. 293, Yale Law School (2004); J. Tobin, S. Rose-Ackerman, Bilateral Investment Treaties: Do They Stimulate Foreign Direct Investment? (2006), available at http://www.ssrn.com. 37 See, e.g., E. Aisbett, Bilateral Investment Treaties and Foreign Direct Investment: Correlation Versus Causation, in, Sachs, Treaties & FDI Flows 3395 (a higher growth rate of FDI leads to an increased probability of a BIT being negotiated); D. Swenson, Why Do Developing Countries Sign BITs?, in, Sachs, Treaties & FDI Flows 437 (countries more likely to sign BITs if they already had high levels of FDI); K. Vandevelde, Investment Liberalization and Economic

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study what impact BITs have on increased foreign investment flows there is widespread disagreement—between those that find no evidence that BITs increase foreign investment flows (and therefore no link), others that find that BITs do positively impact foreign investment flows but unilaterally label such impact as “insignificant” or “minor,” and yet others that find a positive relationship between BITs and increased investment without qualifying the quantity.38 The image of reality wholly lies in the eye of the beholder. More disconcerting is the transmission of the imagery. Different readers of the same study interpret it in inconsistent ways.39 This scholarly confusion allows for the findings of the research to be mischaracterized, perhaps molded to an agenda, distorting the scholarship. Consider, for example, the way Lisa Sachs and Karl Sauvant of the Vale Centre at Columbia University consider a study with the way Gus Van Harten, a young academic from Osgoode Hall, considers it. For Sachs and Sauvant, a study by Hallward-Dreimeier notes that “BITs had an insignificant effect on FDI flows. However, she also found that, rather than encouraging more FDI flows in riskier environments, BITs only have a positive effect on FDI flows in countries with an already stable business environment and reasonably strong domestic institutions. If a country signs a BIT while undertaking domestic regulatory reforms that facilitate FDI, it would be the institutional reforms and liberalization that may affect investors’ locational decisions rather than simply the BIT itself.”40 Van Harten, however, interprets the Hallward-Dreimeier Study in absolute terms: “In a comprehensive study, Hallward-Dreimeier analyzed FDI flows from OECD [sic.] to developing countries during 1980–2000 and found

Development: The Role of Bilateral Investment Treaties, 36 Colum. J. Transnat’l L. 501, 525 (1998) (BITs are caused by investment flows and not the other way around: “the point is not that BITs are uncorrelated with increased investment, but only that probably would be impossible to demonstrate the existence of a correlation.”). 38 L. Sachs, K. Sauvant, BITs, DTTs and FDI Flows: An Overview, in, Sachs, Treaties & FDI Flows xxvii, lii–lviii, lx–lxi (Hereafter: “Sachs, Overview”) (summarizing the conflicting conclusions of the research and explaining that diversity of findings reflect poor data sets, variations amongst BITs, the difficulties of extricating the impact of BITs from other state policies and economic factors.); Yackee, Conceptual Difficulties 405 (2007–2008) (highlighting conceptual problems embedded in the research.) 39 Compare, Sachs, Overview, lii (Study by Salacuse/Sullivan supports the view “that concluding BITs does have a positive effect on FDI flows and that the effect is larger when developing countries conclude these agreements with economically more important countries”) with Yackee, Conceptual Difficulties, 405, 407 note 10 (2007–2008) (Cites same study to assert that “several other studies do not support Neumayer and Spess’s conclusion that there is a strong positive link between BITs and foreign investment flows.”) 40 Sachs, Overview, liv.


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a ‘significant negative finding on the impact of ratifying a BIT.”41 Such scholastic inaccuracies, innocent though they may be, distort reality.42 But the fundamental reason to reject the view of the international investment regime as a simple economic arrangement is because it is out of date and wrong. For one, the BIT phenomenon has, as shown above, expanded and deepened over the past ten years that the research was being done. This shows that reality is indifferent to the research—reality continues even if theory cannot explain it. When reality outstrips theory, it is safer to discard the theory than to discard reality. Jose Alvarez of NYU points out that states sign BITs for a multitude of reasons: it is “in all probability wrong to suggest that LDCs (or any BIT party) enter into such a treaty only for ‘economic’ reasons . . . [the] mono-causal view of the reasons states conclude BITs is not supported by the evidence we have.”43 Alvarez’s critique is that a “mono-causal” view—a static view of BITs as simple economic arrangements devoid of normative life—neither describes nor explains the dynamic, ever-deepening global web of BITs. This accords with the emerging consensus in the literature: that the normative agenda a BIT brings to life more accurately describes what is going on.44 41 G. Van Harten, Five Justifications for Investment Treaties: A Critical Discussion, 2(1) Trade L & Dev 1, 10 (forthcoming), available at, http://www.ssrn.com (Hereafter: “Van Harten, Five Justifications”). The Hallward-Dreimeier Study is at, M. Hallward-Driemeier, Do Bilateral Investment Treaties Attract FDI? Only a Bit . . . and they could bite, in, Sachs, Treaties & FDI Flows 349–375. The Hallward-Dreimeier phrase reproduced in Five Justifications is found in the middle of the piece, at page 364. Sachs and Sauvant read from page 374, its end. Five Justifications also quotes an UNCTAD study but omits important reservations contained in the original text. Compare quote at Five Justifications page 10 with Sachs, Treaties & FDI Flows page 347. 42 See, further on this theme, Alvarez, Review—Arbitration & Public Law, 909–915 (2008); A. Newcombe, Book Review—Investment Treaty Arbitration and Public Law, 71 MLR 145–158 (2008). Further illustrating the point, the same author inconsistently cites the same article in his own work, compare Five Justifications footnote 78 with Arbitration & Public Law chapter 7 footnote 118. The original is at, N. Majeed, Investor-State Disputes and International Law: From the Far Side, 98 Am Soc’y Int’l L Proc 30, 31 (2004). 43 J. Alvarez, A BIT on Custom, 42 NYU J Int’l L & Pol 17, 41 (2009). 44 UNCTAD, The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries xiii (UN, 2009) (“As far as BITs are concerned, their indirect impact on FDI has been measured in a series of econometric studies published between 1998 and 2008 . . . The findings of early empirical studies on the impact of BITs on FDI flows were ambiguous, with some showing weak or considerable impact, and one or two showing no impact at all. However, more recent studies published between 2005 and 2008—based on much larger data samples, improved econometric models and more tests—have shifted the balance towards concurring that BITs do have some influence on FDI inflows from developed countries into developing countries. Although most BITs do not change the key economic determinants of FDI, they improve several policy and institutional determinants, and thereby increase the likelihood that developing countries engaged in BIT programmes will receive more FDI . . . There is consensus in the literature that host-country market-size variables remain the dominant factor for inward FDI, including in developing countries and—as noted later in this

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This brings us to a second standpoint by which to view BITs and BIT arbitration—the normative image. B. The Normative View The normative value of a BIT compels a dramatic shift of perspective. Unlike the economic view discussed above, the normative approach to BITs has the virtue of recognizing that that which it is attempting to capture is a dynamic world. In this vision, BITs take on a life of their own—triggering changes in the behavior of host States and investors, and indeed the wider community— and BIT arbitration accelerates this generative and regenerative process. It embraces the insight that BITs and BIT arbitration are in a continuous state of change because the physical and intellectual world that envelops it is in a continuous state of change. It accepts uncertainty and indeterminacy as integral to making sense of the world we had never understood before. It rejects the static view. It is not as though there is no stability in this view. Rather, stability exists as a passing phase, a pause in an ever-dynamic system. The reverberations of the BIT-animated normative agenda disrupt the idea that one can expect a given action to generate the same reactions every time. The view recognizes that there is a dynamic, sometimes mysterious, relationship between input and output. The challenges of modeling such a reality cause consternation for some— those who call BITs and BIT arbitration as illegitimate on account of “vagueness,” “uncertainty,” and “inconsistency.” The critique here is that BIT provisions are comprised of open-ended terms, such as indirect expropriation and fair and equitable treatment, and this indeterminacy is the problem. Some authors say that even without bias, indeterminacy leads to inconsistent or incoherent decisions and a lack of predictability in the law.45 Others go a step further and superimpose the idea that there is “system bias” inborn in this indeterminacy, an innate tendency to generate pro-investor interpretations and prioritize private property over public welfare, resulting in large

paper—there is no and can never be a mono-causal link between the conclusion of an IIA and FDI flows.”) See also, Sachs, Overview, lx (“One uncontroversial truth is that all countries value FDI as a means to advance their economic development . . . BITs and DTTs are a central part of this process” of creating a favorable investment climate because “they are seen to enhance locational advantages of countries by enshrining certain approaches to the treatment of foreign investors in international treaties, thereby improving the regulatory environment for investment.”) In other words, BITs enshrine a normative agenda and it is the future State behavior pursuant to this agenda that is key. 45 Notably, Charles Brower, II (2003) and Susan Franck (2005).


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cash awards that undermine democratic choice and impede innovative public policy.46 Is the indeterminacy of the system (which is intrinsic to a future-oriented normative vision of BITs and BIT arbitration) verifiably so terrifying? Charles Brower and Stephan Schill do not think so.47 Neither does Jan Paulsson.48 Jose Alvarez also says no.49 On the contrary, a view from a position of indeterminacy can be stimulating.50 Even if indeterminacy of itself is not a pressing problem, does it carry within a system bias? Or are the critics crying wolf? Let us consider the 2010 Public Statement, concocted by a colorful group of academic scholars now circulating on NGO websites.51 The 2010 Public Statement’s position accuses BIT arbitrators of incorporating “overly expansive interpretations of language in investment treaties” with the result that “investment treaty arbitration as currently 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.” It invites states to violate their legal obligations by refusing to honor international arbitral awards and abolish the BIT regime on moral grounds. 46 Notably, Gus Van Harten and signatories and followers of the self-styled 2010 Public Statement. 47 Brower & Schill, Arbitration & Legitimacy, 471, 473–474 (2008–2009) (“A solution will come with the passage of time. Increasing dispute-settlement procedures and doctrinal efforts promise to prove that concepts relating to investors’ rights, such as fair and equitable treatment and indirect expropriation, are not as vague and indeterminate as some argue.”) 48 J. Paulsson, Indirect Expropriation: is the right to regulate at risk?, 3 TDM 1, 2–3 (2006) (“In a phrase, perfect predictability is an illusion. There is nothing alarming about this . . . those who fulminate against international awards should understand what they are really saying, and should be understood in this way: they want investment disputes to be resolved—if at all—by negotiation and politics, and not binding adjudication . . . This explains why we should be unfazed by strident cries for dismantling a valuable system on the alleged ground that a particular decision is wrong—even if we might agree with the criticism as to that particular decision.”) 49 J. Alvarez, A BIT on Custom, 42 NYU J Int’l L & Pol 17, 78 (2009). 50 See, D. Evseev, Living with Indeterminacy: A Practical approach to ICSID Annulment Reasoning, in T. Weiler, I. Laird, eds., Investment Treaty Arbitration and International Law: Vol. 2 177 ( JurisPublishing, 2009). 51 2010 Public Statement. For critiques, see, Newcombe, 2010 Public Statement; T. Toulson, Investment treaty arbitration is ‘unfair’, say academics, Global Arb Rev (Sept. 10, 2010); T. Toulson, BIICL appoints new head of investment treaty forum, Global Arb Rev (Sept. 24, 2010). The 2010 Public Statement employs remarkable language. Investors are segregated from the general public as a targeted class. Investors only have “interests” but the public has “rights” and states “fundamental rights.” Further, the Statement opposes the conclusion of a multilateral treaty on investment as that would “legitimize and entrench” a regime. This is a play on words—it is difficult to see what further “legitimization and entrenchment” a multilateral treaty offers over and above the legitimization and entrenchment by the 3,000 or so BITs signed by every state in the world. However, by no more than the use of rhetorical devices, the 2010 Public Statement attempts to divest legitimacy from thousands of treaties concluded by hundreds of states over tens of years.

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It sets out in Point 4 what the authors believe to be the “true” legal position: “States have a fundamental right to regulate on behalf of the public welfare and this right must not be subordinated to the interests of investors where the right to regulate is exercised in good faith and for a legitimate purpose.” Lest anyone forget the true legal position, in Point 11 this group advocates that this position must also be once again included in foreign investment contracts: “Investment contracts should . . . preserve the state’s right to regulate in good faith and for a legitimate purpose.” Now let us compare this to reality. Already in 2004, the U.S. Model BIT made clear that: “Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”52 This position was adopted by India and Singapore in their 2005 Comprehensive Economic Cooperation Agreement. In 2006, Jan Paulsson set out the defence to a claim of indirect expropriation established from the jurisprudence and doctrine already prevalent at the time: “To escape liability under international law, the relevant regulation must be legitimate and bona fide.”53 What is the difference between the critics today and Paulsson/Alvarez writing five years prior? In substance, nothing. Both accept that the right to regulate is fettered by the need for it to be legitimate and in good faith. The difference is one of tone and agenda. The 2010 Public Statement is political grandstanding of poor standing. For if there really is no difference between the law being developed by BIT arbitration and the law advocated by the critics, their entire theory of system bias collapses: otherwise, the critics are forced to admit that the system born of BIT arbitration is biased in their favor as it is identical with their view of the rights of states in international investment law. If this were not enough, Brower and Schill have, based on extensive sources, found no evidence of the system bias idea.54 The most recent general survey

52 For the history of this provision, see, Alvarez, Contemporary Foreign Investment Law, 943, 965–969 (2008–2009). 53 J. Paulsson, Indirect Expropriation: is the right to regulate at risk?, 3 TDM 1, 6 (2006). (The exception to liability is “non-discriminatory measures of general application which governments normally take for the purpose of regulating economic activity in their territories. This hardly sounds like the paralysis of regulation. But there is much in the word normally. I would suggest that it is not normal to regulate in contradiction of justifiably perceived commitments. Nor is it normal to regulate while ignoring due process. Nor obviously is it normal to use regulatory enactments or conduct as a pretence of form serving as a cloak for the pursuit of hidden objectives. Nor finally is it normal for a state to be the judge of the international licitness of its own refusal to compensate.”) 54 Brower & Schill, Arbitration & Legitimacy, 471, 475–498 (2008–2009). See also, Alvarez, Review—Arbitration & Public Law, 909, 913 (2008) (“Missing from Van Harten’s book is any


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of ICSID claims also does not reveal any system bias against the ability to regulate. Of the 61 final ICSID decisions on liability rendered in BIT arbitrations as of January 2010, expropriation (direct and indirect) claims were successful in less than 25% of them.55 Similarly, fair and equitable treatment claims were successful in less than 43% of the final decisions.56 Rough as it is, such disparities in outcome do not reflect the sort of behavior one labels as a biased system. In a highly interesting, recent article titled “The Repeat Appointment Factor: Exploring Decision Patterns of Elite Investment Arbitrators,” Daphna Kapeliuk of the Interdisciplinary Center Herzliya makes a remarkable finding—remarkable not perhaps for its conclusions. It is remarkable for the fact that the author finds her conclusions counter-intuitive to what she perceives to be the “conventional wisdom.” From her abstract: “This Article analyzes the judicial behavior of repeatedly appointed arbitrators. Focusing on repeat investment arbitrators, the research empirically controverts the conventional wisdom that arbitrators tend to render compromise awards and the perception that investment arbitrators are biased in favor of investors.”57 Reality, it appears, shows up the system bias theory as seriously wanting, but that theory holds itself up as the “conventional wisdom.” Can we seriously rely on those who espouse the system bias theory to formulate policy based on this portrayal of the world?58

serious attempt to examine particular arbitral decisions that evince the bias that he claims exists. Also missing is any more general empirical effort to demonstrate such bias in the many public arbitral decisions issued to date.” See further, Van Harten, Five Justifications 1, 14–19, 15 (2010) (betraying that the system bias theory rests on the proposition that perceptions matter more than reality. This proposition—which relies on people who want to agree more than they want to be right—permits one to discard any responsibility to prove the shared view of the world as an approximation of reality: “Where one can credibly show that the judges may be financially or economically beholden to public or private interests that have a stake in the case or in the interpretation of the law, then the appearance of independence—and appearances are key in this respect given the difficulties or proving or disproving actual bias—is seriously undermined.”) (Emphasis supplied.) 55 L. Reed, J. Paulsson, N. Blackaby, Guide to ICSID Arbitration, 2nd edn, (Kluwer, 2010) forthcoming (As of January 2010, of a total of 225 disputes brought to ICSID arbitration, decisions on liability had been rendered in 61 with the remainder either pending or having ended without proceeding to the merits. Expropriation claims (both direct and indirect expropriation) were advanced in 53 cases. Tribunals upheld 15 of these 53 expropriation claims. Thus, we take 15 of 61 cases to arrive at a 25% success rate.) 56 L. Reed, J. Paulsson, N. Blackaby, Guide to ICSID Arbitration, 2nd edn, (Kluwer, 2010) forthcoming (Fair and equitable treatment claims were advanced in 50 ICSID cases and upheld in 26. Thus, we take 26 of 61 cases to arrive at the approximately 43% success rate.) 57 D. Kapeliuk, The Repeat Appointment Factor: Exploring Decision Patterns of Elite Investment Arbitrators, 96 Cornell L Rev (2010), at http://www.ssrn.com. 58 See, e.g., Background Note to the 2010 Public Statement (“The statement was motivated by a concern that we are at an important juncture for the international investment regime in light of upcoming meetings and ongoing processes on investment law and arbitration”); Profile:

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It emerges that the inveighing language of system-biased indeterminacy portrays an image that does not approximate with a terrifying reality, unless what is terrifying is that the critics, perhaps unwittingly, have become the “new dirigisme.”59 But not all this work is junk. While its value may not lie in an accurate description of the world,60 the work does offer something of value. These critics introduce an element of power analysis within the normative agenda brought alive by BITs. This introduction could serve to correct our vision of the normative vision of BITs and BIT arbitration. However, the critics have not embraced the corrective powers of this lens. Their power analysis resides largely in the realm of system bias and thus fails to correspond with observable data. In this way, the critics wholly fail to appreciate the essential insights of the normative vision of BITs and BIT arbitration— that indeterminacy is a constant and there is no one body or power group pulling the strings. C. The Political View We may now move our chin ever so slightly from the normative perspective to discover the third perspective by which BITs and BIT arbitration are viewed—the political perspective. This perspective takes the view that BITs and BIT arbitration do not merely animate a normative agenda, but also that this normative agenda in turn, and by necessity, impacts upon the political

Sarah Anderson, Institute for Policy Studies, http://www.ips-dc.org/staff/sarah (describing her only experience in investment law as belonging to “an advisory committee to the Obama administration on bilateral investment treaties.”) On the role of NGOs in law-making, see, M. Fitzmaurice, Actors and Factors in the Evolution of Treaty Norms (An Empirical Study), 4 Austrian Rev Int’l & Eur L 1–84, 82–83 (1999); M. Schurtman, The Challenges of Evaluating NGO “Success” in Cross-Border Rights Initiatives, in, R. Miller, et al., eds., Progress in International Law 357–379 (Martinus Nijhoff, 2008). 59 See, D. Lal, The Threat to Economic Liberty from International Organizations, 25 Cato Journal 503, 517 (Fall 2005) (“The whole web of multilateral organizations created at the end of the Second World War to promote a new Liberal International Economic Order has served its initial purpose, and in many cases become counterproductive. They are increasingly becoming the purveyors of a ‘new dirigisme.’ ”) In Lal’s view, entities like the group behind the Public Statement have hijacked the international economic regime, becoming the decision-makers for economic planning. 60 This construct could also be philosophically false: that states and investors have irreconcilable interests (hence, a possibility of bias). Can this be true? It can be credibly argued that far from it being the case that the private sector is out to destroy sovereignty, the private sector cannot exist without sovereignty. For example, many private firms point to the fact that a lack of sovereignty in outer space jeopardizes their ability to make profits from private investment. See, L. Viikari, From Manganese Modules to Lunar Regolith: A Comparative Legal Study of the Utilization of Natural Resources in the Deep Sea Bed and Outer Space 1–16 (Lapland University, 2002); R. Sattler, Transporting a Legal System for Property Rights: From the Earth to the Stars, 6 Chi J Int’l L 23–30 (2005); S. Shackleford, The Tragedy of the Common Heritage of Mankind, 27 Stanford Envir L J 101–157 (2008).


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agenda. This is essentially an additional dimension to the normative perspective—a correction to the way we perceive the normative world of BITs and BIT arbitration. It adds to a solely normative view the analytical frame of power analysis. Thus, to the dynamic and extremely powerful sandpile image61 of the international investment regime which the normative vision conjures up, we may add a political lens. What is the image constructed by the critics from the political perspective? There are two related critiques of the international investment regime stemming from the normative plus political image of a dynamic and complex system. First, some critics argue that the “public” nature (by this they mean the governance impact) of the normative agenda advanced by BITs makes it unsuitable for norm generation to occur through the interaction of governments and foreign investors whether within or without the auspices of an international arbitration. To them, norm generation can only validly arise through the interaction of foreign investors, governments, and the electorate and then too only through the channels of national politics and domestic courts.62 In the other camp is a group of scholars who do not view norm generation illegitimate because it is born of internationalism. Rather, they are engrossed in the challenging work of systematizing the law being created through the BIT arbitration norm-generation.

61 Great minds devote substantial amounts of their time observing sandpiles: they pile sand, grain by grain, until it made a cone about the size of a human fist. They seek to answer the question how one would know when that tiny pyramid of sand would have a little avalanche. In other words, when would the relatively stable system of the pyramid turn unstable into an avalanche? Can this be predicted? What these people are studying is not simply stacks of sand, but rather the underlying physics of the world. This is where the sandpile gets interesting. Every sandpile is history-making—not one is like another. The most interesting thing about the sandpile is its fundamental unpredictability. You can not take your eyes off it for an instant. There is no magic number, or position, of rest. What happens within the pile, the shifting and sliding of the grains, is as important as what happens to the pile. There is no explicit link between how you hit the pile and how it responds, no proportionality between cause and effect. It can break down not only under the force of a mighty blow, but also at the drop of a pin. See, P. Bak, K. Chen, Self-Organized Criticality, Scientific American 264, no. 1 46–53 (1991); G.A. Held, et al., Experimental Study of Critical-Mass Fluctuations in an Evolving Sandpile, 65 Physical Review of Letters 1120–1123 (1990). This research has been elegantly captured in J. Ramo, The Age of the Unthinkable 41–81 (Little, Brown & Co, 2009). 62 These critics blot out of their analysis the fact that national politics have already spoken! Of over 2,000 changes in national FDI laws from 1991 through 2004, 93% were in the direction of making the investment climate more favorable to FDI. See, UNCTAD, World Investment Report 26 (UN, 2005); K. Sauvant, A Backlash Against Foreign Direct Investment?, in Economist Intelligence Unit, ed., World Investment Prospects to 2010: Boom or Backlash 71, 72 (Economist, 2006); Alvarez, Contemporary Foreign Investment Law, 943, 957 (2008–2009).

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A prolific activist from the first school of thought is said63 to be Gus Van Harten.64 Of his discussion of the “public” nature of the normative agenda— governance impacting norm-generation—Jose Alvarez’s review is that Van Harten’s work “suffers from numerous flaws,” that it “sidesteps what he rightly identifies elsewhere as the real issue,” that it “does little to explain in theoretical terms just why the resort to international arbitration to resolve investment disputes, which the UN General Assembly proclaimed to be desirable in 1962, is the unique affront to ‘democratic’ values that Van Harten claims,” and that his “book whose central thesis turns on the central distinction between ‘private’ and ‘public’ arbitration does not actually tell us much about what the distinction is about or why it matters.”65 Overall, Alvarez’s assessment is that the book Arbitration & Public Law has entirely missed the point by focusing solely on a narrow aspect of institutional design: “he may be barking up the wrong tree, ignoring a huge forest behind.”66 In other words, Alvarez’s review is that if there were a critique of the governance impact of norm generation by BIT arbitration to be had, Van Harten does not make it. This is unfortunate given his early promising beginning into BITs and BIT arbitration as a species of what has begun to be called a “global administrative law.”67 More thoughtful analysis of the public nature of the norms generated through BITs and BIT arbitration comes from other quarters. None of these suggest that the political agenda-making function (which is inextricably attached to the normative view of BITs) constitutes a “legitimacy crisis.”68 Brower and Schill have shown that it is demonstrably false that the norms

63 The literature along the system-bias/anti-internationalism line unfailingly draws back to Arbitration & Public Law. Many agree to this book’s portrayal of BIT arbitration without question or independent critical analysis. See, e.g., J. Stiglitz, 2007 Grotius Lecture: Regulating Multinational Corporations: Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights with Responsibilities, 23 Am U Int’l L Rev 451–558, authors footnote, 540–547 (2008) (verbatim adoption.) 64 Van Harten, Arbitration & Public Law; G. Van Harten, The Public Private Distinction in the International Arbitration of Individual Claims Against the State, 56 ICLQ 371 (2007); G. Van Harten, A Case for an International Investment Court, SIEL Working Paper No. 22/08 ( June 2008); Van Harten, Five Justifications, 1 (2010). 65 Alvarez, Review—Arbitration & Public Law, 909, 911–912 (2008). Van Harten does not appear to have addressed the criticisms. See, G. Van Harten, Five Justifications, 1, 29–31 (2010) (joining with the Marxist school to attack so-called domestic elites that support BITs by segregating these elites from the domestic electorate.) 66 Alvarez, Review—Arbitration & Public Law, 909, 915 (2008). 67 G. Van Harten, M. Loughlin, Investment Treaty Arbitration as a Species of Global Administrative Law, 17 EJIL 121–150 (2006). 68 R. Dolzer, The Impact of International Investment Treaties on Domestic Administrative Law, 37 NYU J Int’l L & Pol 953, 972 (2005) (“The treaty-based rules for foreign investment can be seen from a variety of different perspectives. Considering the host State’s rights . . . Essentially, the obligations and disciplines laid down for host countries in investment treaties amount to major ingredients of good governance.”) See also, Wälde, Good Intentions, 2 (2006).


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generated by BIT arbitration either constrain public welfare powers or lead to a regulatory chill.69 No author (bar one)70 takes the position that international arbitration for investment disputes is always and forever unsuitable because of the public nature of norm generation.71 The work on elucidating an accurate image of how BITs and BIT arbitration impact upon the political agenda is in its infancy. Careful and deliberate work on the global administrative law perspective has only just begun.72 In this emerging image, BITs entrench a “‘global administrative space’: a space in which the strict dichotomy

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Brower & Schill, Arbitration & Legitimacy, 471, 483–489 (2008–2009). Van Harten, Arbitration and Public Law. The idea of providing domestic courts with control over disputes that may arise between foreign investors and states is unpersuasive. See, Paulsson, Enclaves of Justice; Alvarez, Review—Arbitration & Public Law, 909, 912–915 (2008). The answer to Paulsson does not like in making common cause with the Marxist school. See, Van Harten, Five Justifications, 1, 12–14 (2010). Paulsson’s point is that there are “enclaves” where national courts do justice to both domestic and foreign nationals and argues that because these enclaves are too few and far between for the needs of the present day’s vast foreign investment intercourse, international arbitration is “the only game in town.” Rational choice supports Paulsson’s view. Domestic courts wash their hands of a dispute when they want to have nothing to do with it. See, e.g., litigation against Zimbabwe’s Constitutional Amendment 17 on land acquisition: Campbell (Pty) Ltd. v Minister of National Security Responsible for Land, Land Reform and Resettlement [2008] ZWSC 1 (Jan. 22, 2008) (Supreme Court of Zimbabwe declining jurisdiction on grounds that the dispute was of a political, nonjusticiable, character); Campbell (Pty) Ltd. v Zimbabwe SADC (T) Case No. 2/2007 (Tribunal of the South African Development Community ruling that Amendment 17 deprived the claimants of their rights to access judicial courts and was applied in a racially discriminatory manner; Zimbabwean High Court refusing enforcement of the Tribunal’s ruling on grounds it contravened Zimbabwe’s Constitution and public policy); Bernardus H Funnekotter and others v Zimbabwe, ICSID Case No. ARB/05/6, Award (Aug. 22, 2009) (ICSID arbitral tribunal ruling Amendment 17 effected an expropriation and ordering compensation; judgment on the award entered in New York on February 1, 2010.) See further, Y. Vyas, The Independence of the Judiciary: A Third World Perspective, 1992 Third World Legal Stud. 127, 177 (1992) (in the global south, “it can be seen that judicial independence is a concept fraught with ambiguities and is difficult to achieve in practice.”); T. Hartley, Multinational Corporations and the Third World: A Conflict-of-Laws Analysis, 62 RHDI 567–580, 580 (2009) (“Common-law countries—especially the US, but also England—give significant advantages to claimants [i.e., system bias].”); G. Van Harten, Weaknesses of Adjudication in the Face of Secret Evidence, 13 Int’l J Evidence & Proof 1 (2009) (evidence in western courts.) So neither first nor third world courts suit. 71 Z. Douglas, The Hybrid Foundations of Investment Treaty Arbitration, 74 Brit Y.B. Int’l L 151 (2003); C. Brower II, The Functions and Limits of Arbitration and Judicial Settlement under Private and Public International Law, 18 Duke J Comp & Int’l L 259 (2007–2008); S. Schill, Private Enforcement of International Investment Law—Why We Need Investor Standing in BIT Dispute Settlement, in, M. Waibel, et al., eds., The Backlash Against Investment Arbitration—Perceptions and Reality, 29–50 (Kluwer, 2010); Brower & Schill, Arbitration & Legitimacy, 471, 477–483, 489–495 (2008–2009). 72 B. Kingsbury, S. Schill, Investor-State Arbitration, Fair and Equitable Treatment, Proportionality, and the Emerging Administrative Law of Global Governance, in A. van den Berg, ed., 50 Years of the New York Convention: ICCA Congress Series 14, (Kluwer, 2010); S. Schill, The Multilateralization of International Investment Law (Cambridge, 2009); R. Leal-Arcas, The Multilateralization of International Investment Law, 35 NC J Int’l L & Comm Reg 33–135 (2009). 70

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between domestic and international has largely broken down, in which administrative functions are performed in often complex interplays between officials and institutions on different levels, and in which regulation may be highly effective despite its predominantly non-binding forms.”73 A group of authors is already examining whether a “standard of review” in international investment law may be developed along “margin of appreciation, proportionality analysis” lines.74 In summary, the critical literature to date has identified correctly the unique, public nature of investment disputes. Some appear to consider this a threat, leading them to criticize the norm generation institutions, such as BIT arbitration, that are an important part of this edifice. Their hope is that by demolishing the institution, the norm generation will go away, or at least be less susceptible to being influenced by solely foreign investors and states. Thus, they charge that the BIT arbitration system of norm generation is illegitimate and hope that by calling it as such, they can erase the reality of the norm generation in their endeavor to construct all-encompassing theories and meta-visions of the international investment regime. But to do this is to adopt a fiction as reality. The fact of the matter is BIT frequency is increasing—and more and more states are accepting this reality and internalizing the norms so generated.75 The crisis of illegitimacy—if we can call it that—appears to exist more in the individual mind than in any observed or verified reality. Other, reflective scholars accept the reality that BITs and BIT arbitration generate norms of behavior, and that these sometimes have significant effects on governance. They do not engage in willful blindness through labels such as illegitimacy. They do not view BIT arbitration as intrinsically dangerous or illegitimate. It is a mere fact of contemporary international life that has to be taken for what it is and incorporated into one’s thinking. This type of think-

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N. Kirsch, B. Kingsbury, Introduction: Global Governance and Global Administrative Law in the International Legal Order, 17 EJIL 1, 1 (2006). See also, B. Kingsbury, The Administrative Law Frontier in Global Governance, 99 Am Soc’y Int’l L Proc 1 (2005). 74 See, Y. Shany, Toward a General Margin of Appreciation Doctrine in International Law? 16 EJIL 907–940 (2006); A. van Aaken, Defragmentation of Public International Law Through Interpretation: A Methodological Proposal, 16 Ind J Global Legal Stud 483, 502–512 (2009); W. Burke-White, A. von Staden, Private Litigation in a Public Law Sphere: The Standard of Review in Investor-State Arbitrations, 35 Yale J Int’l L 283–346 (2010). 75 E.g., between 2004 and 2010, 7 states (Cambodia, Canada, Kosovo, Qatar, Serbia, Syria, and Yemen) signed or ratified the ICSID Convention whilst only 2 (Bolivia and Ecuador) withdrew from it. As of September 2010, 144 states had ratified the Convention (this is around the same number of states that are parties to the New York Convention) and 156 had signed it. Given that there are around 200 states in the world, the popularity of the ICSID and New York Conventions make them amongst the more successful international treaties ever to be established in the history of the world. Note, at the time of writing (October 2010), Kosovo’s status as a state is contested.


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ing is more complex and nuanced—necessary for analyzing the dynamic, complex and nuanced system that is the international investment regime. Despite these vast differences, a common thread running through the scholarship is found. It is that their work revolves around institutional design as a product of the unique, public nature of investment disputes. Is the arbitration system the right mechanism? What checks and balances exist or need to exist to address the unique nature of investment disputes? To the extent there are valid problems identified, they are fixed. The system is constantly reviving and redeveloping. Thus, we have seen the introduction of a host of procedural innovations in the practice of international arbitration, usually clustered around ideas such as “transparency” and “third party participation.”76 Governments reform their model BITs and BIT negotiating practice with regularity, learning from the arbitral law and each other.77 They have begun entering into collective arrangements for individual defence.78 Even within the rough and tumble world of the practitioners of international arbitration, there is constant reflection.79 All this suggests a healthy, invigorated and energized system that is flexible enough to remain fit for purpose as the contexts change. From where we stand, the politico-normative perspective, is this where the view ends? 76 See, generally for an overview, A. Bjorklund, The Emerging Civilization of Investment Arbitration, 113 Penn S LR 1269 (2009). About five years ago, appeals facilities were in vogue. See, T. Wälde, Some Implications of an Investment Arbitration Appeals Facility, 2 TDM (2005); A. Fijalkowski, ed., International Institutional Reform: Proceedings of the Seventh Hague Joint Conference (2005) 274–315 (TMC Asser, 2007). 77 See, e.g., M. Ewing-Chow, Investor Protection in Free Trade Agreements: Lessons from North America, 5 Sing J Int’l & Comp L 748, 768, 772 (2001). 78 See, A. Thompson, Briefing Note: Latin American Advisory Facility on Investor-State Disputes, e-mail message from K. Sauvant (Aug. 30, 2010), archived (modeled on the Advisory Centre on WTO Law.) 79 A sample representative of the regions of the world except Africa include: M. Hunter, International Commercial Dispute Resolution: The Challenge of the Twenty-first Century, 16 Arb Int’l 379 (2000); S. Schwebel, Reflections on International Adjudication, 2001–2002 Proceedings of the American Branch of the International Law Association 43 (2001–2002); K. Böckstiegel, The Role of Arbitration within Today’s Challenges to the World Community and to International Law, 22 Arb Int’l 165 (2006); M. Hwang, Why is there still Resistance to Arbitration in Asia?, Lunchtime Address: The International Arbitration Club (Autumn 2007) available at http://www.arbitration-icca.org/articles.html; T. Carbonneau, Commercial Peace and Political Competition in the Crosshairs of International Arbitration, 18 Duke J Comp & Int’l L 311 (2007–2008); Y. Fortier, Arbitrating in the Age of Investment Treaty Disputes, 31 U.N.S.W. L J 282 (2008); F. Vicuna, New Issues in the Settlement of Disputes of International Investments, unpublished available at http://www.arbitration-icca.org/articles.html; K. Böckstiegel, Perspectives of Future Development in International Arbitration, in, L. Newman, R. Hill, eds., The Leading Arbitrators’ Guide to International Arbitration, 2nd edn., 821 (JurisPublishing, 2008); J. Paulsson, Arbitration in Three Dimensions, LSE Law, Society and Economy Working Papers 2/2010; E. Gaillard, Legal Theory of International Arbitration (Martinus Nijhoff, 2010); J. Paulsson, Moral Hazard in International Dispute Resolution, TDM (2010).

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devashish krishan D. Interlude: A Deeper Look at the Political View

If we look deeper into the political image of BITs and BIT arbitration, we see some intriguing interconnections between governance impact and the norm generation. Although as a theoretical framework it has not yet been discussed in the literature, its manifestations are apparent. This insight would focus not on the institutional design per se, but on the interactive internal dynamics of norm generation by BIT arbitration. The essential insight here is that the norms that have governance effects are being generated through a binary, dialectical process—that of arbitration—which pits one state against one particular investor before one particular tribunal. This is a very peculiar—and perhaps unrepresentative—way of making law.80 A narrow group of actors generates a norm that, due to the visibility of such arbitrations, has wider applicability and becomes “international law.”81 However, this power to transfigure the norms into law, thereby freezing the norms, has fallen by necessity on BIT arbitrators—it has not been conferred upon them by treaty or statute. There may be sound reasons to critique the structure within which the law is made.82 Is the structure of dispute resolution the most appropriate mechanism by which norms that affect governance interests freeze into law or are otherwise internalized?83

80 Exacerbating the problem is the phenomenon of “systemic” disputes, such as those involving the Iran-US Claims Tribunal or the various arbitrations brought against Argentina. By these cases, only a very small selection of states and nationals from other states make the law which purports to have global applicability. Thus, the series of Argentina cases are seminal for their rulings on aspects of jurisdiction of ICSID tribunals. No research has yet been done on the making of a global law by only a small group of states engaged in the law making. For example, is it not worthy of analysis that although Brazil, India and China together represent some 2.5 billion people and a significant share of the global economy, none of these states has had any significant input into the law making going on in the BIT arbitration world and at ICSID (Brazil and India have not even signed the ICSID Convention)? 81 See, e.g., Saipem SpA v Bangladesh, ICSID Case No. ARB/05/7, Decision on Jurisdiction, ¶ 67 (Mar. 21, 2007) (The Tribunal “believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.”) 82 See, e.g., D. Zaring, Rulemaking and Adjudication in International Law, 46 Colum J Transnat’l L 563 (2007–2008); D. Krishan, A Notion of ICSID Investment, in, T. Weiler, ed., Investment Treaty Arbitration and International Law 97 (JurisPublishing, 2008); A. Kaushal, Revisiting History: How the Past Matters for the Present Backlash Against the Foreign Investment Regime, 50 Harv J Int’l L 491, 514–522 (2009); A. Grammaticaki-Alexiou, Multiculturalism: Does it Affect International Transactions?, 62 RHDI 553– 565, 564 (2009). 83 This insight has the additional virtue of making irrelevant the distinction between domestic litigation, international arbitration, and international litigations as mechanisms for resolving investment disputes.


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Jose Alvarez has made a start in describing the dialectic of investment law making.84 He visualizes the interaction between foreign investors and states in the framework of a dispute submitted to arbitration to describe how norms are being converted into law. He first covers familiar ground—that what is innovative about the law-generation is that it is the foreign investor and not the investor’s home state that sets the agenda (along, of course, with the host state receiving the investment). His fresh and original insight comes next— that the process of law-making through arbitration is very distinct from the process of law-making by consensus and consent: “Defendant states being sued are put in the defensive posture of trying to defend their behavior; their reactive interpretive posture may, of course, influence the subsequent interpretation of the law, but states cannot simply declare certain topics to be off limits or not subject to arbitral interpretation.”85 Alvarez’s insight is that placing the claimant in an aggressive posture and the defendant in a defensive posture will influence the content of the norm/law that emerges. This appears to be supported by the logic of rational choice. The claimant will attempt to maximize the protective content of the law and argue every ground available to it. The defendant will attempt to minimize the protective content of the law and argue every defence and jurisdictional objection available to it. Either needs only one ground or defence/objection to succeed (in the short run).86 84

Alvarez, Contemporary Foreign Investment Law, 943, 958–959, 963 (2008–2009). Alvarez, Contemporary Foreign Investment Law, 943, 958–959 (2008–2009). For a succinct analysis of the various ways of international law-making—from consent to consensus to adjudication to law-breaking—see, J. Merrills, The Anatomy of International Law, 2nd edn. (Sweet & Maxwell, 1981). For a wider analysis, see, A. Boyle, C. Chinkin, The Making of International Law (Oxford, 2007). See generally, S. Schwebel, Confrontation, Consensus and Codification in International Law, Address to the American Branch of the International Law Association (Nov. 3, 1978) (impact of UN General Assembly Resolutions on the customary law); S. Goswami, Politics in Law Making: A Study of the International Law Commission of the UN (APH Pub, 1986) (southern perspective on the International Law Commission); O. Elias, C. Lim, The Paradox of Consensualism in International Law (Kluwer, 1998) (evolution of consensual basis of international law); R.P. Anand, The Universality of International Law: An Asian Perspective, in AALCO, eds., Essays in International Law (AALCO, 2007) (international law making in historical, Asian perspective); A. Nollkaemper, Constitutionalization and the Unity of the Law of International Responsibility, 16 Ind J Global Legal Stud 535, 535, 563 (2009) (conceptual tension in law of state responsibility nearing “breaking point” between “liability principles for the determination of compensation for injury” and “entirely different accountability requirements to which the law of international responsibility” contributes.) 86 Alvarez concludes that the current thinking is that international tribunals are better suited—they are more impartial—than national courts to resolve the conundrum between disputing investors and states. See, Alvarez, Contemporary Foreign Investment Law, 943, 963 (2008–2009) (“It is widely assumed that such forums are far more likely to be impartial than national courts and judged, who historically have favored local interests.”) However, one must be careful that international arbitral tribunals do not fall into the “argument to moderation” trap, described above, given the structure of modern day adversarial dispute resolution. The same holds true for national and international courts, which are organized according to the same logic. 85

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The posturing forced upon parties to an adversarial situation loses the distinction between norms and law. The parties to an arbitration may assert a position to be the “law” even if they do not consider it a norm or having much normative value. For example, a respondent state may view the content of the fair and equitable treatment obligation as nothing more than customary law (and interpreting that to require egregious bad-faith) even if, as a matter of day-to-day practice, it considers that unfairness and inequity can be visited upon a private entity in the absence of egregious bad-faith. This insight adds value to our perspective. It accurately describes the process of arbitration as one that is binary and adversarial, with a small group of repeat actors (claimants, respondents and tribunal members), who transform particularized norms applicable to an individual situation of friction in a foreign investment transaction into a global law that has spillover effects upon political governance. Whether or not this is an appropriate method of lawmaking is not for me to comment—that is the job for theoreticians. However, once we appreciate the image, we can see the insight manifested in the emerging scholarship, which does not fit neatly into either the normative or political paradigms described above. These authors are working around the edges of the insight that BIT arbitration merges the particular normative behavioral impact of BITs in a given foreign investment transaction with global lawmaking agendas: they are on the nexus of the normative and political views. One author has begun mapping ICSID arbitration by organizing the jurisprudence according to maxims and counter-maxims to see on which side of a proposition of law the weight of authority falls.87 He is translating the binary view into practical terms. Another author calls for a “balance of interpretive power between treaty parties and tribunals.”88 Although she focuses on the role of states as bilateral interpreters, her approach reflects the (far) limits of particularized adjudication as the primary instrument of global lawmaking. A third accepts that the binary method “is presumably here to stay with us for quite a while” and suggests the binary process incorporate a “systemic integration [theory of interpretation]” as part of “a metaprinciple of . . . an international constitutional order.”89 She too is attempting to shoehorn the wider normative system into the organizing logic of binary lawmaking.

87 D. Evseev, Living with Indeterminacy: A Practical approach to ICSID Annulment Reasoning, in T. Weiler, I. Laird, eds., Investment Treaty Arbitration and International Law: Vol. 2 177, 183–194 ( JurisPublishing, 2009). 88 A. Roberts, Power and Persuasion in Investment Treaty Interpretations: The Dual Role of States, 104 AJIL 179 (2010). 89 A. van Aaken, Defragmentation of Public International Law Through Interpretation: A Methodological Proposal, 16 Ind J Global Legal Stud 483, 512 (2009).


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A fourth set of writers fret that the binary system’s norm generation has gone on un-systematized far too long and for this very reason is unsustainable “in the absence of a supportable institutional fabric. This fabric ultimately rests in the hands of states.”90 These writers perhaps overstate the physical dynamic in the binary system: while multilateralism at the global level is totalitarian (all in or out), the logic of bilateralism permits states to order their treaty commitments and affairs with some semblance of political autonomy. If the global law develops through the interactions of arbitral tribunals, that project is an indefinite one in time—time that states can utilize to internalize norms of an ultimately liberal order. It provides the gap, the time, that permits dissent and assent to play out, to fine tune the system, to leave it an unfinished and ever-evolving project. Multilateralism, on the other hand, would destroy the open-ended nature of the system. It would be a now or never approach. It would impose a closed door onto the system—set down in tablet a statement of the “law of foreign investment.” But such a project— when the reality of foreign investment (as a global phenomenon) is only twenty years old—would shut the door on reality. And we have seen that reality walks right past any theoretical closed door we may fortify. The multilateralists need to demonstrate the effects their project would have on patterns of international cooperation before displacing the binary system. They need to answer the point that a system of bilateral cooperation entrenched by BITs has the potential of greater self-conscious restructuring than any multilateral system possibly ever could. If a coherent and persuasive case can be made that an adversarial posture is inappropriate as the sole channel for the law making in “public” disputes, and that we are better off supplementing this channel with more consensual approaches, that would give rise to significant policy prescriptions. For one, it would advocate a far wider referencing of BITs in the non-litigious interactions between foreign investors and states—at each stage of making, conducting and exiting the investment. Another would be to encourage more informal methods of dispute resolution so as to ease the pressure of posturing and divorce norm internalization from law making.91 A third policy prescription would be that foreign investors, states and BIT arbitrators must

90 C. Congyan, International Investment Treaties and the Formation, Application and Transformation of Customary International Law Rules, 7 Ch. J Int’l L 659–679 (2008); L. Trakman, Foreign Direct Investment: Hazard or Opportunity, 41 Geo Wash Int’l L Rev 1 (2009) (calling for a multilateral treaty); D. Collins, A New Role for the WTO in International Investment Law: Public Interest in the Post Neoliberal Period, 25 Conn J Int’l L 1–35 (2010) (calling for a multilateral treaty and a WTO-esque dispute resolution body for investment disputes.) 91 See, for a beginning, UNCTAD, Investor–State Disputes: Prevention and Alternatives to Arbitration (UN, 2010). However, UNCTAD’s reasons for promoting informal dispute resolution are different. For another set of reasons to promote informal dispute resolution,

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take more seriously the waiting periods and opportunities for negotiation that a number of BITs provide before arbitration is to be commenced.92 However, before making any policy prescriptions, much work needs to be done first to visualize and describe accurately the process of law-making in BIT arbitration and norm-internalization by states, foreign investors, domestic investors and the general body politic.93 What we need from the scholars is for them to discard old, static—dead—ideas and embrace the challenges of the global investment regime as it stands today—as a pulsating, living form. Only once we grasp the reality of the world can we begin to make sense of it. That is highly empowering, for it brings wisdom with which to navigate the complex future lying ahead. E. The Universal View A more purist—almost Marxist—vision comes from the scholars who critique BITs as instrument of hegemony, particularly capitalist hegemony. To them, the entire liberal order is a grand political project irreversibly headed towards a conflict from which will emerge a more perfectly just society. In this vision, the politico-normative image is given, but instead on focusing on one part of the picture or another, here the image is taken in whole. It is Universalist. What can we see in the image of BITs and BIT arbitration when we attempt to verify the claims of the Marxists? We don’t see as true what the Marxists claim is true, but we must linger at the gaze. For that allows us to appreciate the perspective, to take in a holistic view of BITs from outside itself. It upturns reality in a way and in that way reinforces it. The object stares back. We see BITs as all encompassing, a universal phenomenon, which makes one wonder whether one is even seeing the right picture.94 It is a view of a transformed world—an irreversible, liberal march to modernity. see, J. Coe Jr., Toward a Complementary Use of Conciliation in Investor-State Disputes—A Preliminary Sketch, 12 UC Davis J Int’l L & Pol’y 7 (2005). 92 See, Western NIS Enterprise Fund v Ukraine, ICSID Case No. ARB/04/2, Order, ¶ 5 (Mar. 16, 2006) (Staying proceedings pending the waiting period mandated by the relevant BIT on the ground that proper notice to the respondent State was not given and that “proper notice is an important element of the State’s consent to arbitration, as it allows the State, acting through its competent organs, to examine and possibly resolve the dispute by negotiations.”) For a review of the various approaches in the case-law and literature of the mandatory or discretionary nature of waiting periods and other time-delays between the arising of a dispute and its submission to BIT arbitration, see, Wintershall Aktiengesellschaft v Argentina, ICSID Case No. ARB/04/14, Award (Dec. 8, 2008) (finding that non-compliance with a requirement to exhaust local remedies for 18 months in the Germany/Argentina BIT renders the dispute outside the tribunal’s competence and ICSID jurisdiction.) 93 Towne v Eisner 245 US 372, 376 (1918) per Holmes, J (“A word is not a crystal transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time which it is used.”) 94 We also see that sovereignty in the form of the state has now become universal.


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But before we transform our vision, we must first see what the Marxists see and examine its basis in reality. The Marxists see these BITs and BIT arbitration as malleable instruments and institutions, i.e., the normative-political view. But these can never (i.e., universalism) be more than tools of power for elites to be used against those on the periphery, made possible by “the imperial states.”95 After so describing the network, the authors criticize that this hegemony adversely affects those on the periphery. The Marxists evoke various images to suit their agenda. Some of the times, Marxists speak of developed countries imposing their power on weaker, developing countries—state-centric imagery.96 At other times, they paint a picture of a global (or transnational ) capitalist class, allimposing and all-pervasive—universality human imagery.97 The Marxists describe the international investment regime as an imposition by the capitalist states upon the weaker states so as to enhance the former’s economic domination of the latter. Jose Alvarez has shown both that this “would be descriptively inaccurate. More importantly, such an account would miss a principal source of that regime’s legitimacy and power.”98 Further, Brower & Schill have analyzed the charge that BITs and related BIT arbitration are instruments of oppression (to be) used by privileged elites against those at the periphery (although they did so as part of their analysis of whether there is system bias or governance harming elements in BIT arbitration, a narrower form of the Marxist critique). They found that the BIT regime is not an asymmetric legal regime detrimental to state sovereignty and biased in favor of the privileged.99 Ultimately, in the absence of demonstrable evidence pointing to oppression, the issue boils down to finger pointing, that: there is abuse of the system, there is misuse of the system, and there is use of the system. It goes in circles. Unable to match description to reality, the Marxists take refuge in history and allege that the modern investment regime is nothing but the earlier, despicable, capitulations system in disguise.100 The story of how the world

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B. Chimni, Marxist Course, 53, 78. M. Sornarajah, Power and Justice in International Law, 1 Sing J Int’l & Comp L 28–68, 67 (1997); B. Chimni, Marxist Course, 53, 57–60, 74–81; B. Chimni, Marxism and International Law: A Contemporary Analysis, Econ & Pol Wkly 337 (Feb. 6, 1999); K. Miles, International Investment Law: Origins, Imperialism and Conceptualizing the Environment, 21Colo J Int’l Envir L & Pol’y 1–47 (2010). 97 M. Sornarajah, The Asian Perspective to International Law in the Age of Globalization, 5 Sing J Int’l & Comp L 284–313 (2001); B. Chimni, International Institutions Today: An Imperial Global State in the Making, 15 EJIL 1 (2004). 98 Alvarez, Contemporary International Law, 943, 955 et seq. (2008–2009). 99 Brower & Schill, Arbitration & Legitimacy, 471, 474–475 (2008–2009). 100 See, e.g., K. Miles, International Investment Law: Origins, Imperialism and Conceptualizing the Environment, 21Colo J Int’l Envir L & Pol’y 1, 1 (2010) (“Indeed, the political context 96

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came to be so thickly populated with foreign investors and states has hardly begun to be told.101 Nonetheless, Alvarez has refuted the historical reference of the Marxist view in the concrete case of capitulations.102 It should come as no surprise then that the Marxist/hegemony based vision does not pretend to describe the world as it is—although it seeks to explain and predict it by envisioning anything short of a state of socialism as an inevitable process towards the attainment of full and complete socialism.103 It is idealistic to an unparalleled degree. In this way, it is not engineered for description but rather for prescription. The Marxist critique is not an attack on BITs and BIT arbitration per se. Rather, it attacks the entire social system engendered by the capitalist modes of production. Thus, even if one were to abolish BITs and BIT arbitration, the Marxists would not be satisfied. In their view, inequities pervade the entire structure of international law, which is fashioned to serve the interests of the capital holding classes. In order to satisfy the Marxist critique in its purest form, not only would we have to abolish BITs, but also the entirety of modern international law, starting with the law of state responsibility. Yet, the international investment regime and the Marxist project share one feature: they both aspire to universality and hence will always fundamentally be at odds with one another. The difference is that while the international investment regime is universal today, the Marxist project continues to await its world revolution. Debate will continue.

from which [international investment law] emerged determined its core character . . . It emerged from an international legal system established amongst European nations and evolved through the ‘colonial encounter’ as a tool to protect the interests of capital-exporting states.”); A. Ostby, Will Foreign Investors Regulate Indigenous Peoples’ Right to Self-Determination?, 21 Wis. Int’l L J 223 (2003) (“The advent of multilateral investment treaties raises concerns that globalization will reinforce, rather than dismantle, traditional patterns of subjugation.”) 101 This is in part because much of the world was not populated by states until sixty years ago, i.e., sovereignty was not universal, and multinational enterprises are entities divorced from their home states with a long and distinct history; the imperialist capitalist states are only one piece of the puzzle. For reliable beginnings of a historical survey, see, A. Newcombe, L. Paradell, Law and Practice of Investment Treaties (Kluwer, 2009); K. Vandevelde, A Brief History of International Investment Agreements, in Sachs, Treaties & FDI 3; J. Thornton, Efforts to Codify the Law of State Responsibility for Damage to the Person or Property of Foreigners at the First Conference for the Codification of International Law, (Aug. 6, 2010) at http:// kluwerarbitrationblog.com/blog/2010/08/06/efforts-to-codify-the-law-of-state-responsibilityfor-damage-to-the-person-or-property-of-foreigners-at-the-first-conference-for-the-codification-of-international-law/. 102 Alvarez, Contemporary International Law, 943, 959–973 (2008–2009). 103 M. Koskenniemi, What should international lawyers learn from Karl Marx?, in, S. Marks, ed., International Law on the Left 30 (Cambridge, 2008).


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In the meanwhile, the world’s work of governance and commerce goes on: “In today’s global market, not participating in the free trade and investment regimes is tantamount to fiscal (and possibly political) suicide . . . To be allowed entry into the regime—to permit the inward flow of external capital and to permit one’s entrepreneurs to be protected elsewhere—is perceived by most states, East and West, North and South, as a positive good. For the world’s capitalists (which now include most of us), the investment regime is no longer a imposition by the West but a requirement of contemporary civilization, morally and politically justified.”104 Are we performing great service by describing, by explaining, by predicting the world unconcerned that our ideas bear no semblance to practical reality? How can we do so if we elect not to see the world afresh but with the same tired eyes of ideas tried and discarded? The view from our present perspective—that the norms generated by BITs and BIT arbitration impact upon the political agenda—requires us to have a little more imagination. For BITs, by their innate ability to influence the political agenda stemming from their normative nature, have the potential to be transformational. They may play a part in our quest to uplift the human condition. In that direction lies an exhilarating challenge for scholarship. How to articulate such a political vision for BITs? IV. A View from the Sandpile or outside the Playbox We have traversed the imagery of the reality of the BIT and BIT arbitration regime found in the literature. What have we learned? From the economists, we have learned that the real world walks through the face of theory when theory does not reflect it accurately. That we require a more complex, nuanced vision. The normative perspective provides this. Here, we see a complex system imbued with indeterminacy, influencing the behavior of a variety of actors—governments, corporations, the scholars, the practitioners, the body politic. From that dawns upon us the political dimension of this normative form as we envision that norms are translating into a system of law. The emergence of a law of general application is all the more prominent because it draws governance issues into the fray, forming an almost invisible pole of reference in the system. When we look a little deeper at this image, we begin to glimpse some of the physics at work. We appreciate that lawmaking is taking place in a binary paradigm and see the usefulness of a

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See, Alvarez, Contemporary International Law, 943, 972–973 (2008–2009).

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bilateral framework, providing a pressure valve to a growing, now twentyyear old phenomenon that shows no sign of abating. This insight allows us to be skeptical about the total envelopment of a multilateral treaty on investment—because it is totalitarian. But one can avoid totalitarianism and still be universal. That is the education our vision receives from the Marxists. We see that the law of general application that emerged from the political view may also well be a global law, of universal application.105 We embrace the BIT system’s holism—a transformed world—but with its own ontology and methodology—the aesthetics of how we get there. Taken together, what image do these insights allow us to capture, enabling us to imagine the future? A brief start may be had. In 1986 (well before the BIT explosion), the International Court of Justice indicated that Friendship, Commerce and Navigation treaties (FCN Treaties) are more than simple economic arrangements.106 In the Court’s view, they also function to constrain the political use of economic power by states in their international relations. In this case, Nicaragua had brought suit against the United States complaining that the United States was unlawfully interfering in Nicaragua’s domestic affairs. In the economic realm, Nicaragua complained that three specific acts of the United States Government constituted unlawful inter-

105 We must also recognize objections to the very idea that BITs and BIT arbitration have global pretensions. Alvarez recognizes it as a reality that we are in the midst of, see, Alvarez, Contemporary International Law, 943 (2008–2009). Yackee on the other hand suggests a global view is illegitimate, see, J. Yackee, Pacta Sunt Servanda and State Promises to Foreign Investors Before Bilateral Investment Treaties: Myth and Reality, 32 Fordham Int’l L J 1550, 1610–1611 (2008–2009) (“If the modern BIT-based system of international investment has a fundamental problem, the problem principally lies in the system’s universalistic claims and pretensions, rather than in the occasional set of inconsistent arbitral decisions that other scholars have identified as the primary source of a crisis of legitimacy. These universalistic claims and pretensions manifest themselves in two ways. The first manifestation is the increasing tendency of analysts to view BIT promises as not simply lex specialis, binding only between treaty partners, but as both indicative of and constituting a universal, one-size-fits-all, customary international law of foreign investment that binds all states, whether they wish to be bound or not . . . The second and interrelated manifestation is the fact that development of this new “common law of investment” has been placed primarily in the hands of an exceedingly small pool of super-elite, like-minded international lawyers who operate largely divorced from any municipal political process, who have shown a tendency to interpret the vague language of BITs expansively in favour of customary international legal rights for investors, and who tend to view the current system as but an intermediate stage in a process intended to lead, at their direction, to an eventual and complete global harmonization of international economic law.”). See also, B. Chimni, Third World Approaches to International Law: A Manifesto, 8 Int’l Comm L Rev 3–27, 14–15 (2006) (Marxist Universality opposition.) But what if no one were directing the system? 106 Military and Paramilitary Activities in and against Nicaragua (Nicaragua v United States), Merits, ICJ Rep 14 (1986). (Hereafter: “Nicaragua Judgment.”) On the approximation of FCN Treaties to BITs, see, K. Vandevelde, U.S. International Investment Agreements 19–25 (Oxford, 2009).


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ference: (a) the cessation of foreign aid and official economic assistance to Nicaragua in 1981; (b) reducing the amount of Nicaraguan sugar imported into the US by 90% through modification of the US domestic quota system; and (c) proclaiming a total trade embargo on Nicaragua which prohibited all imports and exports to that country, barred Nicaraguan vessels from US ports and excluded Nicaraguan aircraft to and from the United States.107 Nicaragua advanced two arguments against these three actions. First, it argued that these three acts violated the United States obligations under the customary law not to interfere in Nicaragua’s domestic affairs. Second and independently of the first argument, Nicaragua argued that these three acts violated the United States obligation not to defeat the object and purpose of the US/Nicaragua FCN Treaty of 1956. The World Court concluded that—on the facts of the case—the imposition by the United States of a trade embargo against Nicaragua defeated the object and purpose of the US/Nicaragua FCN Treaty.108 Notably, the Court explicitly made the point that absent the FCN Treaty, Nicaragua’s argument would not succeed as there is no customary law duty prohibiting a state from imposing a trade embargo on another state: A State is not bound to continue particular trade relations longer than it sees fit to do so, in the absence of a treaty commitment or other specific legal obligation; but where there exists such a commitment, of the kind implied in a treaty of friendship and commerce, such an abrupt act of termination of commercial intercourse as the general trade embargo of 1 May 1985 will normally constitute a violation of the obligation not to defeat the object and purpose of the treaty.109

This is a valuable ruling for the political value of BITs. A state party to a BIT cannot rely on its domestic national security doctrine and terminate commercial intercourse with its BIT partner. The result is that the economic aspect of the inter-state relationship is disentangled from the political channel. States that are unequal in political and economic power are placed on

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Nicaragua Judgment, ¶¶ 123–125. Nicaragua Judgment, dispositif (10). 109 Nicaragua Judgment, ¶ 276 (Further, “The 90 per cent cut in the sugar import quota of 23 September 1983 does not on the other hand seem to the Court to go so far as to constitute an act calculated to defeat the object and purpose of the Treaty. The cessation of economic aid, the giving of which is more of a unilateral and voluntary nature, could be regarded as such a violation only in exceptional circumstances. The Court has also to note that, by the very terms of the legislation authorizing such aid (the Special Central American Assistance Act, 1979), of which the Government of Nicaragua must have been aware, the continuance of aid was made subject to the appreciation of Nicaragua’s conduct by the President of the United States. As to the opposition to the grant of loans from international institutions, the Court cannot regard this as sufficiently linked with the 1956 FCN Treaty to constitute an act directed to defeating its object and purpose.”) 108

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equal footing so far as the bilateral economic relationship is concerned. The United States and China, for example, in order to achieve their international political agenda, cannot deploy against their BIT co-contractors the entire gamut of economic methods of compulsion available to them absent the BIT.110 Investment is insulated from politics through the means of a BIT. This constrains powerful states and thereby empowers relatively weaker ones. But this is only part of the story of the potential impact of BITs on a state’s international political position. It is not just politically and economically weaker states that are empowered by the signature of a BIT. Powerful states have much to gain from BITs as well. This is because BITs upgrade the bilateral relationship and enable the creation of a “zone of peace” which brings about not only a state of non-war between the BIT parties, but also helps bring about a zero prospect of war—surely the goal of all inter-state relations. Kishore Mahbubani, one of Asia’s foremost intellectuals, has written about the transformational effect of economic treaties. By creating economic security in the smaller state, the political security of the larger state is strengthened: In theory, an FTA is a trade agreement. In practice, it represents a strategic calculation that both parties have a long-term interest in forging a closer society, that is, if one party is interested in strengthening the other party. The US decision to offer Mexico trade access through the NAFTA was driven by a cold calculation that if America did not help to strengthen the Mexican economy (even at the cost of exporting jobs to Mexico), Mexico would end up sending more illegal immigrants to America. Hence, when Mexico joined NAFTA, it appeared to be the big short-term beneficiary in economic terms. In reality, the US became the bigger beneficiary because it did not have to worry about political and economic instability at its own doorstep. ... China’s decision to open its markets and establish close partnerships with all its neighbors was undoubtedly driven by sound geopolitical considerations, including the prevention of any possible containment strategy by America . . . This decision by China to create new partnerships with its neighbors has in turn triggered a virtuous spiral of competition among other countries to match China’s offer. After China offered an FTA to ASEAN countries, Japan, South Korea and India have made the same offer . . . These developments have created new patterns of trade and economic interdependence, and the trade and economic relationships have been complemented by a new pattern of political cooperation.111 110 See generally, N. Alford Jr., Modern Economic Warfare (Law and the Naval Participant), 56 Int’l L Stud Ser US Naval War Col (1963). 111 K. Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East 231, 268–270 (PublicAffairs, 2008). See also, J. Wang, China’s Regional Trade Agreements: The Law, Geopolitics and Impact on the Multilateral Trading System, 8 Sing Y B Int’l L


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For Mahbubani, BITs are grand gestures that help the signatory states move closer to non-war and eventually to a zero prospect of war. That surely is a higher form of civilization. BITs and BIT arbitration therefore form patterns of international cooperation, constantly renewing, with the objective of “locking in” the march to modernity, a march to attain a liberating international order, animated by a social rule of law. In other words, we seize the virtues of legalized cooperation.112 We move from the idea of treaties as part of an “anarchy-ordering international law” to a “global law of legalized cooperation” in which separate state entities acting in international anarchy morph into a network of overlapping jurisdictions.113 If this is the “grand project” of BITs and other international investment agreements, it also reveals the virtues of bilateralism. A multilateral approach to investment law would impose a singular march to modernity—a static image. But the march is dynamic, and we have seen already that a static image is a dead one and dead images leave us perplexed about a marching, future-oriented reality. A bilateral arrangement is evolving, networking.114 It permits flexibility for states to define their own culturally specific path

119–147 (2004); C. Chak Mung, The Comprehensive Economic Cooperation Agreement—The Strategic Imperatives, 10 Sing Y B Int’l L 233–242 (2006) (India’s “Look East” Policy.) 112 R. Keohane, et al., Legalized Dispute Resolution: Interstate and Transnational, in, J. Goldstein, et al., eds., Legalization and World Politics 73, 84–85 (MIT, 2001). See also, D. Held, Democracy: From City-States to Cosmopolitan Order, in, D. Held, ed., Prospects for Democracy: North, South, East West 14–15 (Stanford, 1993) (“If the case for rethinking democracy in relation to the interconnectedness of states and societies is established successfully, a new agenda will have been created for democratic theory and practice . . . The agenda will be new to the extent that the case is made that a theory of democracy (whether focusing on philosophic or empirical-analytic concerns) requires a theory of the interlocking processes and structures of the global system . . . Democratic institutions and practices have to be articulated with the complex arena of national and international politics, and the mutual interpenetration of the national and international must be mapped.”) 113 See, e.g., D. Held, Editor’s Preface, in, D. Held, ed., Prospects for Democracy: North, South, East, West 1–10, 3 (Stanford, 1993). See also, B. Ghali, An Agenda For Peace, Preventive Diplomacy, Peacemaking and Peacekeeping, UNSG Report, UN Doc. A/47/277—S/24111, ¶ 17 (June 17, 1992) (“The time of absolute and exclusive sovereignty . . . has passed; its theory was never matched by reality.”); K. Annan, ‘We the Peoples’: The Role of the United Nations in the 21st Century, UNSG Report, ¶ 30 (UN, 2000) (“Simply put, our postwar institutions were built for an inter-national world, but we now live in a global world. Responding effectively to this shift is the core institutional challenge for world leaders today.”); S. Strange, The Declining Authority of States, in, D. Held, A. McGrew, eds., The Global Transformations Reader: An Introduction to the Globalization Debate, 2nd edn., 128–134, 129 (Polity, 2003) (“territoriality [has been] swept away by a change more rapid than human society has ever experienced before.”) Jeremy Bentham coined the word international in a book he wrote in 1780 but did not publish until 1789. Interestingly, he aligned it with jurisprudence. 114 See generally, Z. Pearson, Non-Governmental Organisations and International Law: Mapping New Mechanisms for Governance, 23 Aust YB Int’l L 73, 80, 95–101 (2004) (network structures operate both within and outside of formal international law, facilitating the relations between diverse actors—dialogue—transmitting knowledge and disseminating information; they engage international reality.)

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to modernity and march to their own (bilateral ) tune. Thus, it allows for modernity to remain distinct from westernization—for one can be safe that the west will take the lead in drafting a multilateral treaty, leading to modernity fusing with westernization.115 In a bilateral network, modernity competes; the world is universal but not totalitarian.116 Our picture comes together. Bilateralism permits greater specificity and greater self-conscious restructuring. The “single multilateral treaty” agenda imposes a view that has caused some to protest against globalization as a “straightjacket.” Would not a bilateral network be more accommodating to those who critique globalization as lacking multiculturalism?117 115 On the difference between westernization and modernity, see, K. Mahbubani, Can Asians Think? (Times, 2000); K. Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (PublicAffairs, 2008); A. Latif, Between Rising Powers: China, Singapore and India 127–167 (Institute of Southeast Asian Studies, 2007); D. Fidler, The Asian Century: Implications for International Law, 9 Sing Y B Int’l L 19–35 (2005). 116 See, generally, T. Wälde, Non-Conventional Views on “Effectiveness”: The Holy Grail of Modern International Lawyers: The New Paradigm? A Chimera? Or a Brave New World in the Global Economy?, 4 Austrian Rev Int’l & Eur L 164, 199–200 (1999) (“It is also far from clear that the world needs a global authority, directly or by ways of making global treaties universally effective. This is nothing but a projection of the model of the unitary, Hobbesian and sovereign state onto the world scale. This model seems to be waning with respect to nation states; its credibility to explain or propose structures of global governance is now doubly dubious. Can one not imagine a situation where there are many competing legal systems, domestic laws, regional laws, treaty-based laws, regulatory mechanisms in large international institutions and companies and transnational professional and interest groups, which may have a certain internal force, but otherwise compete?”); M. Srur, The International Investment Regime: Towards Evolutionary Bilateral & Regional Investment Treaties?, 1 Manchester J Int’l L 54–75 (2004) (bilateralism likely to continue); C. Kessedjian, Uniformity v Diversity in Law in a Global World: The Example of Commercial and Procedural Law, in 61 RHDI 319–33 (2008) (“Uniformity is not a universal value and should not be considered as the overall goal in international norm creation. On the contrary, diversity is a much better value, as it allows for tolerance between people, societies and cultures.”); H. Kronke, From International to Transnational Commercial Law: The Impact of Diversity of Cultures, 62 RHDI 705–713 (2009). 117 See, F. Dallmayr, Alternative Visions: Paths in the Global Village 1–6 (Rowman & Littlefield, 1998) (‘Today, all the countries and peoples in the world stand under a universal mandate or directive: to “develop” or “modernize” and hence catch up with the civilizational standards established and exemplified by the West (and some of its non-Western proxies) . . . In light of the radical asymmetry of status and influence between North and South, “developed” and “undeveloped” countries, development sometimes operates as a massive steam roller granting rights to some while the rights of others . . . By and large [the] turn to “otherness” has remained speculative and ineffectual with regard to cross-cultural encounters in our time . . . A learning experience can only occur through mutual interrogation and interpellation, through a mode of interaction stopping short of both instant hybridization and pliant surrender. Such interaction, in turn, presupposes the encounter of situated, but not absolutized, differences.’); P. Davidson, The ASEAN Way and the Rule of Law in ASEAN Economic Cooperation, 8 Sing YB Int’l L 165–176 (2004) (‘There has been a movement internationally towards a rules-based framework to regulate international economic relations . . . In contrast, within ASEAN, much economic cooperation has been achieved by the “ASEAN way”, not through rules and regulations, but through discussion, consultation and consensus. The “ASEAN Way” relies to a large extent on the personal approach in contrast to the Western way of dependence on structures and functions.’); R. Mushkat, Culture and International Law: Universalism v Relativism, 6 Sing


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Vaclav Havel observed that the dissent is not against globalization itself, but rather against a top-down format. His vision merits substantial quotation: I sat there thinking about this and again—for the umpteenth time—I realized an almost banal truth: that we now live in a single global civilization . . . our planet has, for the first time in the long history of the human race, been covered in the space of a very few decades by a single civilization—one that is essentially technological . . . The world is now enmeshed in webs of telecommunications networks consisting of millions tiny threads or capillaries that not only transmit information of all kinds at lightning speed, but also convey integrated models of social, political and economic behavior. They are conduits for legal norms, as well as for billions and billions of dollars crisscrossing the world while remaining invisible even to those who deal directly with them . . . The life of the human race is completely interconnected not only in the informational sense but in the causal sense as well . . . In theory, at least, [this global civilization] gives people not only the capacity for worldwide communication, but also a coordinated means of defending themselves against common dangers. It can also, in an unprecedented way, make our life on this earth easier and open up to us hitherto unexplored horizons in our knowledge of ourselves and the world we live in . . . This civilization is immensely fresh, young, new, and fragile, and the human spirit has accepted it with dizzying alacrity, without itself changing in any essential way . . . And thus, while the world as a whole increasingly accepts the new habit of global civilization, another contradictory process is taking place: ancient traditions are reviving, different religions and cultures are awakening to new ways of being, seeking new room to exist, and struggling with growing fervor to realize what is unique to them and what makes them different from others. Ultimately they seek to give their individuality a political expression . . . What follows from all of this? It is my belief that this state of affairs contains a clear challenge not only to the Euro-American world but to our present-day civilization as a whole. It is a challenge to this civilization to start understanding itself as a multicultural and multipolar civilization, whose meaning lies not in undermining the individuality of different spheres of culture and civilization but in allowing them to be more completely themselves. This will only be possible, even conceivable, if we all accept a basic code of mutual co-existence, a kind of continuum we can all share, one that will enable us to go on living side by side. Yet such a code

J Int’l & Comp L 1028–1042 (2002) (‘In fact, the more heterogeneous the world becomes, the more importance appears to be attached to the formulation of common goals and criteria for the balancing of interests . . . It is precisely in such a context that international law is held to be “indispensable” as a “conduit through which States can express differences and similarities of interests plainly in fairly exact universal language,” as well as “a bridge that both transcends and nurtures cultural differences.” ’). For the particularity of Asian states in ICJ litigation, see, C. Weeramantry, Some Practical Problems in International Adjudication, 17 Aust Y B Int’l L 1, 11–15 (1996) (commenting on multiculturalism in the World Court); H. Owada, The Experience of Asia With International Adjudication, 9 Sing Y B Int’l L 9–18, 18 (2005) (commenting on movement for “more active participation by the Asian states in the norm-creating process and norm-applying process.”)

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devashish krishan won’t stand a chance if it is merely the product of the few who then proceed to force it on the rest. It must be an expression of the authentic will of everyone, growing out of the genuine spiritual roots hidden beneath the skin of our common, global civilization. If it is merely disseminated through the capillaries of this skin, the way Coca-cola ads are—as a commodity offered by some to others—such a code can hardly be expected to take hold in any profound or universal way.118

The lock-in approach in a bilateral, diffused setting, would commit states to the march to modernity, but leave the indeterminacy, the constructive ambiguity, necessary for the fluid situation that is the future to develop. This approach does not spend time on yesterday’s issue of how to achieve cooperation by states of varying degrees of power operating in an anarchic international environment.119 Instead, it takes cognizance of the world’s BITs—and other international economic arrangements—and starts from the assumption that international cooperation is not only feasible, but that the mechanisms that create and sustain such cooperation are already entrenched and legitimized in the international community. It merges normative insights with a causal explanation underlying patterns of political behavior. In this way, there is no clash between first and second-generation rights.120 Instead, the model to test would be whether economic and social advancement—more secure personal liberty—gives rise to a stable civic polity.121 An image of a world transformed is made possible by the universal and politico-normative visions of BITs—a global pattern of legalized co-operation operating in tandem but not multilaterally orchestrated. Anchoring it is the economic perspective: BITs as “commitment” devices, which lock-in and boost the co-operative channels.122 Through this emerge governance norms—

118 V. Havel, A Challenge to Nourish Spiritual Roots Buried Under Our Global Skin, Commencement Address at Harvard University (May 1995), at http://www.humanity.org/voices/ commencements/speeches/index.php?page=havel_at_harvard. 119 See, J. Starke, Elements of the Sociology of International Law, 1965 Aust YB Int’l L 119, 136 (1965); S. Scott, Building Bridges with Political Science?: A Response from the Other Shore, 16 Aust YB Int’l L 271–284 (1995). 120 See generally, C. Brower II, NAFTA’s Investment Chapter: Initial Thoughts About SecondGeneration Rights, 36 Vand. J. Transnat’l L. 1533 (2003). 121 See, e.g., B. Eichengreen, D. Leblang, Globalization and Democracy, BIS Annual Research Conference Paper ( June 2006), at http://www.econ.berkeley.edu/~eichengr/research .html (studying the relationship between openness and democratization, concluding that the authors “have presented a battery of evidence suggesting positive relationships running both ways between globalization and democracy, though exceptions to this generalization appear to obtain at particular times (during the Bretton Woods period) and places (in labor-scarce countries). As in any case where positive feedbacks are present, there is the possibility of dynamic instability that is, a positive or negative shock may send the system off in the positive or negative direction without limit. Here we offer a few speculations about this possibility.”) 122 See, Z. Elkins; A. Guzman; B. Simmons, Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000, 2008 U Ill L Rev 265–304, 277 (2008) (‘Our theory of BIT diffusion has a simple structure. BITs are viewed by host governments and investors as


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call them law if you will—that, depending on their influence, take on a universal character and are imbibed rather than enforced. To conclude, there are opportunities standing on the ground that takes the universal, political-normative view, to see a grander, more imaginative, more relevant picture when looking out onto the vista of the international investment world. BITs are not going to prevent war. They are not going to enrich everyone. But they have, over the past decade, become a vector in modern international life. Do not we—the investors, the governors, the scholars, the thinkers, the political activists, the practitioners—the “invisible college”—owe it to ourselves to at least attempt to honestly understand this phenomenon in all its complexity and dynamism before we attempt to tear it down by a war of old, dead, words, such as “legitimacy crisis”? For that, we need a new model. We need a little loss of certainty. We need more humility and curiosity.123

devices that raise the expected rates of return on investments. The treaties do this by assisting governments in making credible commitments to treat foreign investors “fairly.” ’ ); Sachs, Overview, lxi (“Studies that find that BITs did not stimulate FDI flows might overlook that BITs positively affect FDI flows by helping most countries to retains existing levels of FDI. It is also possible that governments, even if they are not entirely sure whether BITs and DTTs lead to higher FDI flows, think that these treaties do not hurt such flows and, in any event, can serve other purposes—although there are trade-offs in terms of accepting international disciplines, with the corresponding reduction of national policy space. For example, some governments may want to use the commitments they have entered into these treaties to advance domestic policy reforms. Conversely, governments could also be signing these agreements to signal to investors that they are prepared to bind their improved national policy frameworks and the regulatory changes that favor FDI in international agreements that cannot be changed unilaterally.”); T. Ginsburg, International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance, 25 Int’l Rev of L & Econ 107, 117 (2005); J. Yackee, Are BITs Such a Bright Idea? Exploring the Ideational Basis of Investment Treaty Enthusiasm, 12 U C Davis J Int’l L & Pol’y 195 (2005); A. van Aaken, International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis, 12 J Int’l Econ L 507–538 (2009) (BITs “may be interpreted as mechanisms for overcoming commitment problems between investor and host state in order to generate mutual benefits . . . Changing conditions are a prevalent characteristic in investment law.”); J. Trachtman, The Economic Structure of International Law (Harvard, 2008) (although skeptical of direct participation of private parties in international dispute resolution). See also, K. Vandevelde, The Political Economy of the Bilateral Investment Treaty, 92 AJIL 621 (1998); K. Vandevelde, The Economics of Bilateral Investment Treaties, 41 Harv Int’l L J 470, note 10 (2000); R. Dolzer, M. Stevens, Bilateral Investment Treaties 12 (Martinus Nijhoff, 1995); J. Lehmann, Regional Economic Integration and Dispute Settlement Outside Europe: A Comparative Analysis, 7 Int’l LF D Int’l 54–62 (2005) (common adjudication is apex of integration.) 123 On curiosity, see, W. James, The Principles of Psychology (Henry Holt, 1890) (detailing two kinds of curiosity: emotion/instinctive curiosity geared towards anything out of the ordinary, and scientific curiosity geared towards inconsistency or gaps in knowledge); D. Berlyne, Conflict, Arousal and Curiosity (McGraw-Hill, 1960) (diversive curiosity as the tendency to take risk, and specific curiosity as the inclination to investigate in order to understand); G. Lowenstein, The Psychology of Curiosity: A Review and Reinterpretation, 116 Psych Bull 75–98 (1994) (spontaneous arrival of curiosity when situational factors alert us that information is missing.)

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In search of the elusive image of the world of BITs and BIT arbitration, we journeyed far and wide—from the ivory towers to the fighting fringes. We saw four ways of looking at the BIT picture—the economic, normative, political, and universal—that, fused together, can transform the picture. There is much to feel good about when looking onto the world of BITs and BIT arbitration. There is no legitimacy crisis. To the extent there is a crisis, it resides in imagination. Is our imagination heading towards a crisis? For over a decade, we have been unable to explain or predict the phenomenon of BITs and BIT arbitration that matches up with observed and verified reality. It is a bewildering situation—the static image put forward by the critics appears, defied by observable reality. No less than a former President of the International Court of Justice has captured the bewilderment with the image that BITs and BIT arbitration are illegitimate: “Can it really be supposed that the States of North and South, East and West, developed and developing, of virtually all political complexions and economic models, have been misguided in concluding some 2800 bilateral investment treaties, and that it has taken a think tank here and a professor there to reveal to the world the error of their ways?”124 Yet, we regurgitate the same ideas and the scholarship churns. We do this in the comfort of the security of our perceptions. But this is false. Our perceptions are not reality. But we are comfortable because we live in an age where “as was said at the recent annual meeting of the American Society of International Law, in the end, perceptions probably matter more than facts do. Governments may need to react to what influential elites and NGOs believe, even if it is not true.”125 Remarkable. Amazing. Astonishing. Perceptions matter more than facts do. The explanation for a wrong view—a delusion really—is social rather than factual. People should agree because they are part of a community more than because they want to be right. This need to agree and fit in is imagination-killing. But it also leads to misguided policies and this is too high a price to pay for simplicity. When faced with a false image of the world,

124 S. Schwebel, A BIT about ICSID, 23 ICSID Rev—FILJ 1 (2008) (of the 679 or so “southsouth” BITs, “many appear to have been concluded with the benefit of careful preparation of model BITs by the Asian-African Legal Consultative Committee. That Asian-African Committee strongly supports dispute settlement by ICSID. Are we to believe that these pairs of developing States, contracting with each other, with the benefit of the advice of their own Legal Consultative Committee, acted not in their own interests but in the interests of the multinationals?”) He is referring to the three Model BITs formulated by the Asian-African Legal Consultative Committee (since called Asian-African Legal Consultative Organization) over the first five years of the 1980s, available, 23 ILM 237 (1984).) 125 J. Alvarez, The Evolving BIT, 7 TDM 1 (2010).


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legal experts and political scientists will labor to no avail. Commodity and trade experts will not save the situation. Statisticians, however mountainous their statistics, will not save it. Neither science nor technology can take the place of wisdom, through the whole tendency of our modern world is to try to make them do so. And wisdom resides in a broad, a mature, an informed, a reasonably skeptical, and a humble understanding of the world in which we live.126

But “a broad, a mature, an informed, a reasonably skeptical, and a humble understanding” of the international investment regime eludes us. This is because of the complexity, vastness and depth of the repeat interconnections in the system. Staring into the underlying physics of the global investment regime, we often hit against the very boundaries of language. We require a new vocabulary when thinking of the international investment regime—because the old vocabulary is the vocabulary of dead ideas. Only a new way of looking—and therefore of seeing—can give rise to a new vocabulary.127 State-centric notions of sovereignty are no longer adequate to describe economic globalization or how it is governed. For the future, we need a view that encompasses the spatial totality that goes beyond territorial boundaries.128 There is no longer an “outside” or an “inside.” There is not even a central political nucleus or power center exerting pressure on a periphery—I’m not even sure there is a periphery. Rather, the image is a live one, of constantly interacting actors and networks that, while not dominating one over another, have tremendous potential to disrupt one another: we return to the image of the dynamic sandpile, a picture of astounding indeterminacy and interdependency.129 126

Halle, Foreign Policy 318. See generally, R. Arnheim, Visual Thinking (UC Press, 1969); R. Arnheim, Art and Visual Perception: A Psychology of the Creative Eye, New Version (UC Press, 1974); J. Elkins, The Object Stares Back: On the Nature of Seeing (Harvest, 1997). See also, P. Allot, The Emerging Universal Legal System, 3 Int’l LF D Int’l 12–17, 16–17 (2001) (“The problem of international constitutionalism is the central challenged faced by international philosophers in the 21st century. It involves a fundamental re-conceiving of international society. The first and foremost step in meeting the challenge . . . is to re-make our international legal worldview, to begin to articulate the eventual structure . . . International social reality has overtaken international social philosophy. The Vattelian mind-world is withering away under the impact of the new international social reality . . . The deconstruction of the false consciousness . . . is only just beginning.”); O. Yasaki, A Transcivilizational Perspective on Global Order in the Twenty-first Century: A Way to Overcome West-centric and Judiciary-centric Deficits in International Legal Thought, 8 Int’l Comm Rev 29–63 (2006); C. Tomuschat, World Order Models: A Disputation with B.S. Chimni and Yasuaki Onuma, 8 Int’l Comm Rev 71–79, 76–79, (2006). 128 See generally, M. Koskenniemi, The Future of Statehood, 32 Harv Int’l L J 397 (1991); C. Schreuer, The Waning of the Sovereign State: Towards a New Paradigm for International Law?, 4 EJIL 447 (1993); N. MacCormick, Beyond the Sovereign State, 56 MLR 1 (1993); M. Koskenniemi, International Law in a Post Realist Era, 16 Aust YB Int’l L 1 (1995); M. Shaw, The State of Globalization: Towards a Theory of State Transformation, 4 Rev of Int’l Pol Econ 88 (1997); J. Jackson, Sovereignty-Modern: A New Approach to an Outdated Concept, 97 AJIL 782–802 (2003). 129 See, Supra, note 61. 127

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These are not despairing things to say.130 The contours of a new vocabulary are emerging, organizing around ideas of “good governance,” i.e., the political channeling of the normative agenda embodied in BITs and BIT arbitration. Jose Alvarez has begun to illuminate the way on a new art of seeing the international investment regime: How to describe the essence of this regime—or other international regimes such as human rights—remains a challenge. One could call this the empire of capital. One could call it, as B.S. Chimni has, an “emerging Global State” . . . [but this is] no longer territorially based since capital—if not yet labor—is no longer a prisoner of territory. The foreign investment regime exists in a realm beyond statehood, particularly since the categories of imperialized periphery and exploitative metropole are blurring. As David Kennedy has noted, multinational corporations, along with other entrepreneurs, have now ‘deracinated themselves, floating freely about the global.’ But if capital has been freed to a considerable extent of the legal and political constraints of any one state, it nonetheless remains subject to global rules determined by interstate pact, as well as by the rules imposed by international organizations and nongovernmental actors such as those of the market itself, and remains subject to enforcement by thousands of global entrepreneurs.131

It is a thrilling and enlivening challenge. We live in an age of immense opportunity and possibility. The time for empty words, policy that has no basis in facts, and the quiet corrosion of our intellect is at an end. We could afford it for the last decade or so. But the price now has become too expensive, because that price is nothing less than our future. It is a time for action. Thomas, that gentleman with a fine, discerning eye, would have wanted— nay, demanded—nothing less.

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According to myth, when Pandora’s Box was opened, all escaped, save hope. Hope remained, because it was at the bottom. So we must look deeply for it. 131 See, Alvarez, Contemporary International Law, 943, 974 (2008–2009). See generally, J. Rosenau, E. Czempiel, eds., Governance without Government: Order and Change in World Politics 1–29, 58–101 (Cambridge, 1992); D. Kennedy, A New World Order: Yesterday, Today and Tomorrow, 4 Transnat’l L & Contemp Prob 329 (1994); P. Cerny, Globalization and Other Stories: The Search for a New Paradigm of International Relations, 51 Int’l J 617, 624 (1996); B. Chimni, International Institutions Today: An Imperial Global State in the Making, 15 EJIL 1 (2004); Z. Elkins, B. Simmons, On Waves, Clusters and Diffusion: A Conceptual Framework, 598 Annals Am Acad Pol & Soc Sci 33 (2005); O. Yasaki, A Transcivilizational Perspective on Global Order in the Twenty-first Century: A Way to Overcome West-centric and Judiciarycentric Deficits in International Legal Thought, 8 Int’l Comm Rev 29–63 (2006); C. Tomuschat, World Order Models: A Disputation with B.S. Chimni and Yasuaki Onuma, 8 Int’l Comm Rev 71–79, 76–79, (2006); B. Simmons, F. Dobbin, G. Garrett, eds., The Global Diffusion of Markets and Democracy (Cambridge, 2008); D. Harvey, The Enigma of Capital & The Crisis of Capitalism (Oxford, 2010).

PART TWO

FIELD-SPECIFIC APPLICATIONS

INTRODUCTION MEMORIES OF THOMAS WÄLDE Detlev F. Vagts* It is always a shock to a teacher when one of his students predeceases him. It seems to be an inversion of the natural order of things. That is particularly true of the death of Thomas Wälde who was so very alive, vigorous and, at least from this octogenarian’s perspective, so very young at 59. Ironically, at the time of his accident, Thomas was engaged in—along with many other projects—organizing a Festschrift in my honor. Thomas was a student at the Harvard Law School in the academic year 1972–1973 and continued his research here for another year. He was rather younger than the typical German LL.M. student just completing his or her First State Examination. But he was already independent and inquisitive. He was also unique in my experience of graduate students in that we wound up writing an article together. Its subject was the societas europaea, a supranational form of incorporation designed to increase the mobility of enterprises throughout the European Common Market. It seemed at the time to be the coming thing but various developments derailed it so that it did not come into being until twenty-first century. After graduation Thomas kept in touch with his friends at the Harvard Law School and with the institution. He was concerned when in the last few years Harvard lost two of its established international law professors to retirement and another two to the lures of other institutions. It disturbed him that they were replaced by two very junior assistant professors and by a more senior teacher whose widely publicized position is that international law is an epiphenomenon of the interplay of State interests and plays no independent role in international affairs. Thomas felt that this undercut the claims of Harvard to have a global law school. After Harvard, Thomas did not return to the German academic environment, finding it too confining and abstracted from reality. Instead he headed into the world of intergovernmental organizations concerned with international investment. This brought him into association with the United Nations, particularly the Centre on Transnational Corporations (CTC). In

* Bemis Professor of International Law, emeritus, Harvard Law School.

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the 1970s the transnational or multinational corporation had just become a focus of scholarly investigation, particularly under the leadership of Professor Raymond Vernon of the Harvard Business School. The CTC performed various functions in this respect, including the collection of documents and the publication of a journal entitled ‘The CTC Reporter’. I was sufficiently involved with the CTC to keep in touch with Thomas and his work. In my development of a casebook on transnational business problems, I was guided by the expository work that Thomas had done in providing realism for the students who worked through those problems. I was impressed by the detailed specificity of his knowledge of the transnational business law field as compared with my rather generalized acquaintance with this field. I could see a real expert developing. After this stretch as an international civil servant Thomas made the shift to a private institution in Dundee, Scotland, in 1991, where he undertook to manage and develop the Centre for Petroleum and Mineral Law. Dundee was a transformed place due to the discovery of petroleum under the North Sea; it had something of a Texan quality to it as a result of the influx of oil field workers. Although geographically rather remote, it turned out to be a propitious place for such a Centre. Under his guidance it grew rapidly into a prestigious and effective organization. Its work in some ways paralleled that of the Harvard International Tax Program that did so much to train officials in developing countries to enforce the revenue laws and amass resources for impecunious countries. After a dozen yeas at the Centre, Thomas went off to a more independent style of life, functioning as a consultant, arbitrator and scholar. In particular he took on engagements as an arbitrator in important disputes about transnational investments. One can infer that he employed his unique knowledge and work experience towards outcomes that were just and reasonable. He was after all much more specifically qualified for the task than many of the generalist lawyers who were chosen for these functions. One can be sure that he took serious account of the interests of host countries in a way that tends to elude lawyers from the big metropolitan centers of the financial world. All of this reinforces one’s sense that Thomas’ passing leaves a hole not only in the sensibilities of his many friends but in the world of legal relations between corporate interests and the needy and vulnerable developing countries that have to relate to them. It is hard to see younger lawyers coming along paths similar to those Thomas explored. At least he left behind a large body of writings that can in a less personal way guide those who try to fill his shoes.

ARBITRATION TO SETTLE PRIVATE WAR-DAMAGE CLAIMS? THE ERITREA-ETHIOPIA CLAIMS COMMISSION REVISITED Hans van Houtte1 Thomas Wälde, with his curious and inquisitive mind, was always exploring new venues in dispute settlement. Now that it has become accepted that the suffering of private parties and companies in armed conflicts should redressed by the ‘guilty’ warring State, Thomas surely would have been intrigued by the question whether arbitration would be a useful vehicle to settle private war-claims. This contribution, to honour the dynamic and original scholar that Thomas was, will explore how the Eritrea Ethiopia Claims Commission [EECC] has arbitrated the compensation due for the sufferings which Ethiopia and Eritrea have inflicted respectively upon Eritrean and Ethiopian citizens in the war which raged between 1998 and 2000 between these two countries.2 A closer analysis of the EECC and its achievements very well illustrates the possibilities and limitations of arbitration as a process to settle private war-damage claims. This contribution will first briefly mention the genesis of reparation of private war-damage claims by the ‘guilty’ State (I). The focus will then shift to the actual focus of this paper, the EECC as an arbitral body to settle private war-damage claims3 (II). One of the crucial options when setting up a private war-damage claims is whether private war-damage can be directly claimed by the private party, who actually suffered the damage, or whether it has to be claimed by the State on behalf of its nationals. The EECC’s option

1 Professor of Law (KULeuven – Belgium); FCIArb; formerly Commissioner for Real Property Claims in Bosnia Herzegovina (1996–2003); member of the United Nations Claims Commission (1998–2001), Arbitrator at the Claims Resolution Tribunal for Dormant Accounts (1999–2004) and former President of the Eritrea Ethiopia Claims Commission (2001–2009). This contribution is made in his personal capacity and does not bind said Claims Commission. H. van Houtte may be contacted at: [email protected] 2 See on the Eritrea-Ethiopia war i.a. de Guffry, A., Post, H., Venturini, G., The 1998–2000 War between Eritrea and Ethiopia—An International Legal Perspective, The Hague Asser Press (2009), Plaut, M., ‘The Conflict and its Aftermath’, in. Jacquin-Berdal D. and Plaut, M., Unfinished Business, Ethiopia and Eritrea at War, The Red Sea Press Inc. (2005), 87, at pp. 117–119. 3 This chapter focuses only on the private war-damage, inflicted to nationals of one State by another State. It does not deal with the possibility for citizens to claim compensation from their own State, who may have received a lump sum as war-compensation of another State.

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for the latter has determined its way to operate (III). An efficient set-up of an arbitral settlement mechanism should optimally cope with the ‘numberscosts—evidence-time pyramid’. How this pyramid has equally determined the EECC ‘s settlement process will be discussed in the next section (IV). This pyramid also influenced the extent to which the individual claims could be dealt with in a mass-claims process (V). Thereafter the awards of the EECC will be discussed (VI). This contribution will conclude with an assessment of the EECC process to redress private war-damage and a critical evaluation of the strengths and weaknesses of arbitration as a formula to settle private war-claims. Much has to be covered in a few pages. The analysis will consequently have to be succinct. However, it may be hoped that the present contribution will inspire others to deepen the subject. Moreover, the author of this contribution is not ideally placed to make a critical analysis of the EECCprocess and achievements, having been its President. Nevertheless, having been intensely involved with the EECC from cradle to the end-of-mission, he may point to some interesting features which are not obvious to outsiders, but may be useful for a further analysis. I. Reparation of Private War-Damage by the ‘Guilty State’ Since the Antiquity the tribute, which the victor imposed upon the vanquished at the end of the war, did not reflect actual damage or cost but depended on the victor’s discretion.4 The conduct of war itself went hand in hand with war booty, looting and destruction of private property, but no specific compensation was granted therefore. On the contrary, goods taken became the property of the seizing soldier: part of the booty served as salary, while the rest was personal enrichment. The 1648 Peace of Westphalia, for instance, did not provide for compensation of war-damage inflicted in the Thirty Years’ War; on the contrary, it introduced a general pardon for all property which was taken or destroyed.5

4 Feilchenfeld, E., Kersten, U., ‘Reparations from Carthage to Versailles’, 1 World Policy (1957), 29, at p. 30. 5 Lesaffer, R., ‘Peace Treaties from Lodi to Westphalia’, in Lesaffer, R., [Ed.], Peace Treaties and International Law in European History. From the Late Middle Ages to World War One, Cambridge University Press (2004), 9, at p. 38; Lesaffer, R., ‘The Westphalia Peace Treaties and the Development of the Tradition of Great european Peace Settlements prior to 1648’, 18 Grotiana (1997), 71 at pp. 87–95.

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Only from the 18th century on was it suggested that the laws of war also had to protect private property.6 For instance, peace treaties of the 19th century provided for the payment of war-damage inflicted on the nationals of the victorious State. For instance, the Treaty of San Stefano (1878) obliged Turkey to pay ten million Roubles to Russia for damage inflicted upon Russian nationals. Likewise Paraguay agreed to compensate Argentina for damage inflicted upon Argentine nationals.7 A lump sum to compensate the damage suffered, was globally determined in the treaty itself or by a commission. The lump sum was not established by investigating and calculating the different private claims of the actual private victims, but in a discretionary manner.. Moreover, the compensation was granted to the State, not to its nationals who had actually suffered the damage; the latter depended on the goodwill of their government to effectively receive compensation from their own State— in many instances through a domestic compensation commission.8 The Versailles Treaty after the First World War did not only provide that the victorious States would be compensated for war-damage, inflicted to their citizens. An Inter-Allied Compensation Commission, only comprised of representatives of the victorious States, determined the amount of compensation to be paid to each victorious State for the destruction of the private property of its nationals. Each State would then redistribute the lump sum received among its citizens according to its domestic procedures.9 Moreover,—and what comes closer to the specific topic of this contribution—the Treaty of Versailles also provided that claims for property, taken from private citizens and companies by the enemy or put under sequestration, had to be arbitrated by so-called Mixed Arbitral Tribunals, which were to be set-up in the bilateral peace treaties between the respective allied countries and Axis-powers. During the years, these Tribunals processed a substantial number of claims. For instance, the Franco-German Arbitral Tribunal handled over 20,000

6 See e.g. Fisch, J., Krieg und Frieden im Friedensvertrag: eine universalgeschichtliche Studie über Grundlagen und Formelementen des Friedensschlusses, Stuttgart, Klett-Cotta (1979), pp. 103–107. 7 See van Houtte, H., Delmartino B., Yi, I., [ Eds.], Post-War Restoration of Property Rights under International Law, Volume I: Institutional Features and Substantive Law, Cambridge University Press (2008), pp. 13–14. 8 See van Houtte, H., Delmartino B., Yi, I., [ Eds.], Post-War Restoration of Property Rights under International Law, Volume I: Institutional Features and Substantive Law, Cambridge University Press (2008), pp. 3–16; Engmann, A., Reparationen 1792–1918, in 30 Niemeyers Zeitschrift für Internationales Recht (1923), 146; E. Feilchenfeld, E., Kersten, U., ‘Reparations from Carthage to Versailles’, 1 World Policy (1957), 29. 9 See van Houtte, H., Delmartino B., Yi, I., [ Eds.], Post-War Restoration of Property Rights under International Law, Volume I: Institutional Features and Substantive Law, Cambridge University Press (2008), pp. 14–17.

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cases and the Anglo-German and the Italian-German Tribunals processed each about 10,000 claims. All the Tribunals ceased their activities in 1930.10 After the Second World War, several ‘Conciliation Commissions’, which closely resembled the Mixed Arbitral Tribunals after the First World War, were set up between the respective Allied Powers and the Axis States to settle claims for property seized or put under sequester by the enemy and they lasted for some.11 The Mixed Arbitral Tribunals and the Conciliation Commissions had all the features of an adjudicative body.12 Their process was adversarial whereby the claimant carried the burden of proof. Each of the parties, i.e. the individual claimant and the respondent State, had to put forward their respective arguments, supported by the necessary factual evidence and legal authorities. After having examined the facts and the applicable law, the Arbitral Tribunals and Commissions decided each case individually. The Arbitral Tribunals were “mixed”, because they were composed of a national of the State of which the claimant was a national, a national of the responding State, and a chairman from a third country, who held a casting vote and could, if necessary, arbitrate between the conflicting interests of his two co-arbitrators. The same was true for the Conciliation Commissions, composed of two members appointed respectively by the State of the claimant and by the responding State, and chaired by a president from a third State. In the last thirty years, many bodies have been established to settle claims for war-damage inflicted upon individuals and companies. This list does not include the Iran-US Claims Tribunal, established in 1981, although it settles property claims of Iranian and US nationals against the other State. Indeed, these claims did not arise out of a proper war between Iran and the US, but out of a political crisis, i.e. the detention of American citizens at the US Embassy in Tehran in 1979 and the subsequent freezing of Iranian assets by the US. However, the Iran-US Claims Tribunal, which very successfully settled some 4,000 claims and has awarded for over USD 2 billion compensation, undoubtedly has put its mark on the subsequent creation of bodies to settle post-war claims.13 In 1990, the United Nations Compensation Commission [UNCC] was set up to settle compensation claims for losses, damage or injuries suffered by 10

See Wühler, N., ‘Mixed Arbitral tribunals’, in Encyclopedia of Public International Law, volume III, Amsterdam Elsevier (1997), 433 at p. 436. 11 See Seidl-Hohenveldern, I., ‘Conciliation Commissions Established pursuant to Art. 83 of the Peace Treaty with Italy of 1947’, in Bernhard, R., [ Ed.], Encyclopedia of Public International Law, Amsterdam Elsevier (1992), vol. I, 725, at p. 726. 12 Bayles, M., Procedural Justice: Allocating to Individuals, Kluwer Dordrecht (1990), p. 169. 13 See www.iusct.org.


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individuals and corporations, resulting from Iraq’s unlawful invasion and occupation of Kuwait The Commission concluded the claims-processing exercise in 2005, and payments to individuals concluded in 2007. In those fifteen years the UNCC processed 2,7 million claims of which it admitted circa 1.5 million. Of the USD 352 billion requested, it “merely” granted USD 52 billion.14 In 1996, a Commission for Real Property Claims was set up in Bosnia, which operated till 2003 and issued some 320,000 decisions.15 In 1997 a Claims Resolution Tribunal [CRT] was established in Switzerland to decide on the compensation for pre-1945 Swiss bank accounts, which became dormant and many of which had belonged to holocaust victims.16 In its first four years, the CRT examined 9,918 claims of which 3,936 were approved and resulted in the payment of CHF 65 million. In the next four years, some 72,000 claims were lodged, some of which are still in the process of settlement.17 At In 1999, a Housing and Property Claims Commission was established in Kosovo to settle claims from refugees and displaced persons who had lost possession of their property as a result of the 1999 Serbia-Kosovo conflict. This Commission, and its successor, the Kosovo Property Agency, have decided until now some 29,160 claims.18 In 1998 an International Commission on Holocaust Era Insurance Claims was established. By the end of 2006, it had achieved that some 48,000 claimants had received some USD 306 million in compensation.19 In 2000 the German Foundation “Remembrance, Responsibility and Future” set up claims processes to compensate German Forced Labourers and Holocaust Victims. By 2007, it had paid circa EUR 4,4 billion to 1,6 million people in over 100 countries.20 All of these recent instances and processes, except the Iran-US Claims Tribunal and the UNCC, were administrative in nature. The claims were to a large extent verified by staff members who checked whether the claimant fitted within a pre-determined category of eligible claimant and whether he had submitted sufficient evidence to sustain his claim. An administrative processing of claims usually requires clearly defined and mutually exclusive categories of claims and the claim, if successful, generally leads to a standard

14

See www.uncc.ch. See the End-of-Mandate Report: www.law.kuleuven.be/ipr/eng/CRPC_Bosnia/CRPC%20 bosnia.html. 16 Alford, R., ‘The Claims resolution Tribunal and Holocaust Claims against Swiss banks’, 20 Berkeley Journal of International Law (2002), 265. 17 See www.crt-ii.org. The deadline to lodge claims has expired. 18 See www.hpdkosovo.org. 19 See www.icheic.org. 20 See www.stiftung-evz.de. 15

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relief. For instance, for each category of claim a specific amount of compensation could be granted for successful claims. The process is typically nonadversarial: the claimant does not have a proper respondent to argue with, but only communicates with the decision-making body. In fact, the claims are not conflicts between contesting parties but factual questions requiring appropriate classification and categorisation.21 The processing of the claims becomes a more or less mechanical activity, whereby claims review or claims assessment can be delegated to the administrative staff. The focus is on written evidence, with little or no opportunity for presentation of oral evidence. Although the claimant may have to submit some evidence, the decision makers will often be pro-active and gather themselves the necessary data to complement the information submitted by the claimant. Because of the administrative character of the processing and the active role of the claims processors in gathering information and verifying whether the claim complies with the requirements to be successful, there is generally no need for claimants to be represented by legal counsel. Thus, claimants (have to) put their fate in the hands of the claims settlers. The UNCC and the CRT combined elements from both the administrative and adjudicative models. At the UNCC, 920,000 claims of persons who had to leave Iraq or Kuwait because of the war and requested payment of a fixed amount of USD 2,500 or USD 5,000—depending whether they claimed as individual person or on behalf of family (the Category A-claims)—were processed administratively on the basis of rudimentary evidence of their stay in Iraq or Kuwait before the invasion. 420,000 claims of people who suffered serious injury or losses and claimed not more than USD 100,000 (the Category C-claims) were also processed in an administrative manner, with no detailed individual review but only a sampling verification, with computerized data matching, statistical modelling etc. The other claims, i.e. the B-, D-, E- and F-Claims,22 were subject to a more adjudicative type of settlement with individual review by the administrative staff, experts and the panel members. Both sides could submit written observations so that the procedure was contradictory. However, except in very few instances, no hearings were held. The panels who reviewed the claims, did not decide them but only submitted recommendations to the Governing Council, a political body with the same composition as the UN Security Council. The actual decisions then were issued by this Governing Council. In brief, the adjudicatory dimension within the UNCC was limited. 21 Bayles, M., Procedural Justice: Allocating to Individuals, Kluwer Dordrecht (1990), pp. 170–172. 22 The B-claims concerned serious personal injury, the D-claims individual damage above USD 100,000, the E-Claims companies and the F-Claims concerned State claims.


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The CRT is even less adjudicative than the UNCC, although its decisions are called awards and are governed by the Swiss Arbitration Statute. In the CRT’s initial years, an arbitration agreement between claimant and the Swiss bank, which held the dormant account, was concluded. The proceedings were ‘documents only’, i.e. without hearing the parties, but the respondent bank was invited to submit its observations. The process remained, however, largely administrative in nature as the CRT staff was pro-active in gathering information and data matching. In later years, the CRT continued to issue ‘awards’, which indicates its adjudicative character but its proceedings became even more administrative and ‘respondent bank’ was only informed about the processing of a claim when it received the ‘award’, against which it then could appeal. In fact none of the recently created instances had the same adjudicative character as the Mixed Arbitral Tribunals or Conciliation Commissions, where individual private claimants had to argue their case in fact and in law against a respondent State, where the arguments of both sides were presented at a hearing, and where an individual decision was rendered by a panel of arbitrators. However, the EECC, which was established in 2001 and on which the remainder of this contribution will focus, was a truly arbitral, adjudicative instance, as will be explained hereafter. II. The EECC as an Arbitral Body In the 1998–2000 war between Eritrea and Ethiopia, tens of thousands of soldiers and over 100,000 civilians were killed, over one million people became ‘Internally Displaced Persons’ [IDPs], many more people became wounded or crippled and over 1.5 million unexploded ordnance and landmines remained strewn over the land.23 Moreover, women were raped, prisoners of war were mistreated, public buildings and dwellings were destroyed, private property was looted or confiscated without compensation. The war was ended by the Peace Agreement of 12 December 2000. Article 5 of this Agreement provided for the establishment of ‘a neutral Claims Commission’ to decide through binding arbitration all claims for loss, damage or injury related to breaches of international (humanitarian) law related to the war not only ‘by one government against the other’ but—what is more relevant for this contribution—‘by nationals (including both natural and

23 See i.a. from Plaut, M., the African Editor with BBC World Service, ‘The Conflict and its Aftermath’, in Jacquin-Berdal D. and Plaut M., Unfinished Business, Ethiopia and Eritrea at War, The Red Sea Press Inc. (2005), 87, at pp. 117–119.

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juridical persons) of one party against the Government of the other party or entities owned or controlled by the other party’. The EECC was a truly arbitral body as already intended by the drafters of the Peace Agreement.24 Although Article 5.1 called it a ‘neutral Claim Commission’, it established that it had ‘to decide through binding arbitration’. Moreover, its Article 5.2 provided that the Commission would consist of five ‘arbitrators’. Furthermore, the Commission was instructed, in Article 5.7, to base its own rules of procedure upon the Optional Rules for Arbitrating Disputes between Two States of the Permanent Court of Arbitration [PCA]. These rules, by which the EECC further regulated its arbitral process, contained the usual arbitration principles concerning appointment and challenge of arbitrators, submissions of Statements of Claims and Statements of Defense, presentation of evidence, appointment of court experts, interim measures of protection, conduct of the hearings and rendering of the awards. In brief, the process was clearly to be intended as an adjudicative process where both parties had to develop their respective arguments in a contradictory manner and where the EECC would adjudicate the claims. Article 5.5 of the Peace Agreement stipulated that the Commission would have its seat in The Hague. This, together with the reference to the PCA’s Optional Rules, clearly implied that the EECC was intended to operate within the PCA structure—what the Commission was very pleased to accept. The EECC was actually housed in the PCA offices at the Hague Peace Palace; its funds were administered by the PCA accounting department; its Registrar was provided for by the PCA; and, its hearings took place in the Peace Palace with the logistic support of the PCA staff. III. Individual Claimants or their State on their Behalf? Private war-damage claims are intended to cover damage suffered by private parties, physical persons as well as companies, inflicted to their person or to their property. To which extent should these private parties also be entitled to install the very claims against the alleged tort-committing State for the damage they suffered? Or, on the contrary, to which extent should the claims be brought on their behalf by the State of which they are nationals? Allowing private individuals to lodge a claim, would put the private parties at the helm of their claim. However, it risks to overburden the docket because many people may see this as an opportunity to take their chance and file a claim without serious grounds. However, when the private individuals 24 See UN Doc. A/55/686–S/2000/1183; also. www.pca-cpa.org under cases ‘Eritrea Ethiopia Claims Commission’.


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are the direct claimant, they will also receive the decisions which name them individually as entitled to relief grants them relief. It will then be more difficult to refuse them that the relief granted by the decision. The State, bringing a claim on behalf of its nationals, rather follows the pattern of traditional diplomatic protection, although under such diplomatic protection the espoused claim becomes the State’s own claim resulting in the fact that the State is entitled to its proceeds. At the EECC, on the other hand, the claim is still installed ‘on behalf’ of the private party, which implies that the private party remains the beneficiary of the claim’s proceeds. When the State takes over individual claims, it most probably will weed out unjustified claims so that only serious claims remain—what will substantially reduce the number of claims on the docket. However, in this case the State will be the addressee of the decision on the originally-private claim and there is no guarantee that the individual parties will benefit from it. In recent times, individual parties could, for instance, directly claim before the Bosnian Commission for Real Property Claims or the Kosovo Housing and Property Commission and its successor, the Kosovo Property Agency. However, these claims concerned the mere recognition of pre-war property rights over houses. It was then for the persons whose property right was recognized to implement this right by either requesting restitution of their house, selling their house or obtaining an alternative house from the housing authorities. The property claims did not involve a contradictory debate with an opposing party. They were investigated by the staff members and decided in an administrative manner by the Commission or Agency. In order to prevent futile and unjustified claims, the claims could only be filed after they had been screened by the Commission’s or Agency’s staff members and on condition that they contained the required data. In this manner, in six years some 240.000 claims were filed and processed by the Bosnian Commission for Real Property Claims.25 The Kosovo property commissions handled 29.160 claims in seven years.26 Matters are different when claims for private war-damage have to be filed against a State—as was the case before the EECC. Whenever the claim is addressed against a State, international law seems to prescribe that it has to be formally filed by another State on behalf of its nationals, not by these nationals themselves. Before the United Nations Compensation Commission, which had to settle war-damage claims against Iraq following from

25 CRPC End of Mandate Report 1996–2003, p. 7 (this report can be found at http://www. law.kuleuven.be/ipr/eng/CRPC_Bosnia/CRPC%20bosnia.html. 26 See e.g. Hassine, K., Housing & Property Directorate in Kosovo, Vienna NW Verlag (2009), at pp. 197–317.

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Iraq’s 1990 invasion of Kuwait, for instance, all 2.6 million claims had to be submitted by the 96 States involved on behalf of their nationals.27 The Peace Agreement, establishing the EECC, likewise provided in its Article 5.8 that ‘[c]laims shall be submitted to the Commission by each of the parties [Eritrea and Ethiopia] on its own behalf and on behalf of its nationals’ [insertion added]. The intention of the drafters was thus very clear: the States would be at the helm of the claims process. That Eritrea and Ethiopia were in the drivers’ seat in the claims process was also confirmed by Article 5.16 of the Peace Treaty, which allowed Eritrea and Ethiopia ‘to agree at any time to settle outstanding claims [. . .] through direct negotiation or by reference to another mutually agreed settlement mechanism.’ However, in Ethiopia, many people of Ethiopian nationality but of ethnical Eritrean origin, had suffered harm as well. Under the classic principles of international law, Eritrea would not be entitled to espouse these claims because these people were not its nationals. In order to grant the Ethiopians of Eritrean origin an adequate relief, Article 5.9 of the Peace Agreement added the sibylline provision: In appropriate cases, each party may file claims on behalf of persons of Ethiopian or Eritrean origin who may not be nationals. Such claims shall be considered by the Commission on the same basis as claims submitted on behalf of that party’s nationals.

In this way Eritrea also could install claims on behalf of Ethiopian nationals of Eritrean origin. In fact (and probably for political reasons), Eritrea and Ethiopia chose not to submit claims on behalf of their nationals or ethnic kin, but to install all claims as their own. The claims were thus lodged for suffered by the State through the person of its nationals. In other words, all damage was deemed to have been inflicted upon the respective States. That implied that all remedies had thus be granted to the State. The impact of this approach on the awards will be discussed below. However, at this point it is important to note that Eritrea’s decision not to submit claims on behalf of Ethiopian nationals of Eritrean origin entailed a negative impact on the claims of thousands of Ethiopian farmers of Eritrean origin who were expelled from their land and had to flee to Eritrea (the so-called ‘rural expellees’).28 Eritrea could not claim in its own name what nationals of another country had suffered; it was only entitled to claim its own expenses, namely the cost of receiving those expellees in Eritrea and building settlements for them. 27 The claims on behalf of Palestine citizens were submitted by the UNDP, the UNHCR or UNRWA. 28 See Partial Award, Eritrea Civilian Claims, para. 84–90.


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The only exception to the general rule that both States in fact claimed for damage inflicted to themselves through harm suffered by their nationals, concerns six claims on behalf of Eritrean business people who had lost their businesses in Ethiopia.29 Circumstances explain this special treatment: some of the six claimants had already started to claim compensation from Ethiopia before a Washington D.C. District Court when the EECC was installed. These claims were however rejected because in the Court’s view Eritrea could bring a claim on behalf of the claimants before the EECC. In view of this decision, Eritrea probably could not refuse to make use of the possibility granted by the Peace Treaty, and did lodge the claims on behalf of the individuals.30 IV. The Numbers-Costs—Evidence-Time Pyramid The establishment of an efficient settlement mechanism depends on four factors: the number of claims expected to be settled (A); the finances available to cover the settlement costs (B); the available evidence (C); the time allotted to settle all claims (D). These four factors will now be discussed successively. A. Number of Claims Eritrea and Ethiopia have chosen only to submit State-to-State claims and not to allow their nationals to file their own claims themselves. This implied that they could bring similar incidents but regarding different people, under the same claim and thus restrict the number of claims. In total, Eritrea thus filed 32 claims of which all but four31 not only concerned claims for damages directly suffered by the State of Eritrea, but also claims for damage 29

Eritrea Claims nrs. 27–32. See Castagnetti, L., ‘The Claims on behalf of Individuals before the Eritrea-Ethiopia Claims Commission’, in de Guffry, A., Post, H., Venturini, G., The 1998–2000 War between Eritrea and Ethiopia—An International Legal Perspective, The Hague Asser Press (2009), 409, at pp. 411–412. In fact this decision was overruled by the Court of Appeals, which, instead, considered the EECC to be a forum non conveniens: because of the EECC’s inability to make an award directly to Nemariam, and the possibility that the individual’s claim would be set off against claims from Ethiopia against Eritrea (U.S. Court of Appeals, Hiwot Nemariam, et al. v. The Federal Democratic Republic of Ethiopia and the Commercial bank of Ethiopia, 24 January 2003). The proceedings in the US thus continued parallel with the processing of Eritrea’s Claims nrs. 27–32. Ironically, the latter claims were dismissed to a large extent because of lack of evidence and because some of the breaches of international law, inflicted on the individual claimants, already were included in the Eritrea’s global claims. On the other hand the U.S. Court ultimately dismissed the claims because Ethiopia enjoyed immunity of jurisdiction (US Court of Appeals—District of Columbia), June 22, 2007, 491 F3d 470). 31 Claims 15, 19 and 23 for reimbursement to Eritrea of pensions Eritrea had paid to former Ethiopian public servants and Claim 25 for the aerial bombardment of the Hirgigo Power Plant. 30

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suffered by Eritrean nationals. Indeed, this was the case for eight claims, related to several locations on the Western front,32 and for six claims related to different locations on the Central front.33 However, although these front claims requested compensation for all citizens who suffered damage because of breaches of humanitarian law, they specifically referred to some 30,000 individuals who had specified their losses on claim forms. The front claim also specifically mentioned the damage done to hundreds of listed buildings. The claim for unlawful aerial bombardment of civilian targets covered specific structures such as the water reservoir in Harsile and several named churches.34 The ‘civilian claims’ for incidents behind the front lines concerned i.a. the unlawful detention of some 2,000 civilians,35 while the claim for unlawful displacement referred to some 40,000 civilians.36 The claim for loss of property in Ethiopia owned by non-residents included moreover the seizure of some 4,000 trucks.37 The claim for preventing displaced persons from returning was based upon some 60 individual cases.38 Eritrea’s claim for the mistreatment of prisoners of war [POWs] referred to some 2,600 individual POWs of which 1,287 were also held in detention for a long period of time after the war had ended.39 The claim for violation of the Vienna Convention on Diplomatic Relations also covered the unlawful seizure of private property of a few diplomats.40 In brief, Eritrea’s own claims concerned to a great extent compensation for damage inflicted to private individuals. Of course, the six claims, which Eritrea lodged on behalf of six individuals, also concerned damage directly suffered by these individuals.41 Where Eritrea filed 32 claims, Ethiopia only submitted 8 claims. However, although smaller in number, the claims likewise covered thousands of instances where damage had been inflicted upon individuals. Eritrea frequently relied on witness statements and claim forms, submitted and signed by its citizens; it thus added up the number of victims. Ethiopia had another approach: it more globally estimated the number of persons affected within a specific territorial or social group, which was injured (e.g. x % of the men of a specific region were beaten). This more global approach made that in many

32 33 34 35 36 37 38 39 40 41

Claims 1, 3, 5 and 9–13. Claims 2, 4, 6, 7, 8 and 22. Claims 25 and 26. Claims 15, 16 and 23. Claim 21. Claim 24. Claim 14. Claim 4. Claim 20. Claims 27–32.


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instances the compensation claimed was calculated upon the assumption that it had been inflicted on part of a given population, rather than that it was individually proven. For instance, Ethiopia claimed that in the front area, 13,995 civilians were killed, 82,223 persons were physically abused, 20,354 people were abducted and 9,4443 nationals had been forced to work for the enemy. Moreover, Ethiopia had estimated that 35% of the houses had been destroyed and 75% of them had been looted. Ethiopia also claimed compensation for the destruction and looting of the town of Zalambessa, consisting of 1,489 houses;42 as well as for the destruction of 162 named churches, mosques and other religious buildings.43 Ethiopia claimed compensation for the mistreatment of 120,000 Ethiopians in Eritrea (a number reduced by the EECC to some 90,000).44 The prisoners of war claim covered 1,100 known POWs.45 In some instances, however, Ethiopia claimed for specific damage inflicted upon specific individuals: for instance, it claimed compensation for the looting and production loss of the Saba Marble Quarry.46 The EECC was very reluctant to follow Ethiopia’s calculations and substantially reduced Ethiopia’s estimated numbers. On the basis of the submitted evidence, the EECC concluded to a substantially lower number of victims.47 An interesting feature in Ethiopia’s claims was its request to be compensated for all the damage inflicted because Eritrea had resorted to armed force in violation of Article 2 of the United Nation Charter (the so-called “ius ad bellum” claim).48 This claim aimed at obtaining compensation for all damage caused by a breach of international humanitarian law in the actual conduct of the war (the “ius in bello” damage), but nevertheless had to be compensated because Eritrea had started the war. The “ius ad bellum” claim included damage inflicted to individuals but not in breach of the rules on the proper conduct of war. However, as the compensation for “ius ad bellum” compensates a State for breach of its territorial sovereignty, it is directly due to the State and cannot be considered as compensation for damage inflicted to individuals.49

42

Final Award—Ethiopia’s Damages Claims, paras. 137–153. Final Award—Ethiopia’s Damages Claims, 180–198. 44 Final Award—Ethiopia’s Damages Claims, paras. 214–235. 45 Final Award—Ethiopia’s Damages Claims, para. 211. 46 Final Award—Ethiopia’s Damages Claims, paras. 199 ss. 47 Final Award—Ethiopia’s Damages Claims, paras. 66–135. 48 More specifically on the Commission’s Award on Ius ad Bellum—not subject to this contribution: Castagnetti, L., ‘Il problema del diritto all’uso della forza nelle relazioni internazionali di fronte alla Eritrea-Ethiopia Claims Commission’, 90 Rivista di diritto internazionale (2007), 738; Gray, C., ‘The Eritrea/Ethiopia Claims Commission Oversteps Its Boundaries: A Partial Award?’, 17 European Journal of International Law (2006), at pp. 699–722. 49 Final Award—Ethiopia’s Damages Claims, paras. 271–479. 43

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hans van houtte B. Available Finances

How claims are best settled depends largely on the funds available. The EECC depended for its financing exclusively on the contribution of Eritrea and Ethiopia, two of the world’s poorest countries.50 It thus tried to be as costefficient as possible, substituting meetings by electronic communications and video-conferences, keeping hearings as short as possible and limiting its staff to one, even not-fulltime registrar. The EECC also guided the parties by several Decisions in the preparation of their submissions in order to avoid that their arguments would be beside the point.51 Furthermore, nearly every month the President of the EECC held a teleconference with counsel of both parties to discuss and settle procedural matters which had arisen and risked to block the smooth continuation of the process. These teleconferences have avoided many procedural incident and delay in the preparation of the submissions. Finally, in order to avoid that parties would dwell on arguing compensation for matters where the EECC would not find liability, the proceedings were bifurcated with in a first stage, decisions to establish for which infringements the parties were liable (the ‘liability’ phase), and, in a second stage, decisions on the compensation due for this liability (the ‘remedy’ phase). Moreover, in the first phase only serious and grave breaches of international law would be retained in order to limit the number of incidents to be investigated and decided. The EECC’s limited financial resources necessarily had an impact on the way it had to structure the claims resolution process. Considerations of expense prevented the presentation and examination of many witnesses. The credibility of evidence thus depended more on how this evidence fitted with all other available evidence than on its intrinsic examination. Under the Rules of Procedure, the EECC could send persons to Eritrea and Ethiopia to obtain information, as the UNCC did in its time to the countries affected by the Gulf war.52 In fact, however, no use was made of this possibility because such fact-finding missions would not only have been delicate but would also have been rather costly. Neither did the EECC make use of the possibility, suggested in the Peace Treaty, “to check claims on a sample basis for further verification”.53 When requested by Eritrea to further analyze Eritrea’s claims

50 Article 5.15 of the Peace Agreement: “The expenses of the Commission shall be borne equally by the parties”. 51 See e.g. Decision 1 on the temporal scope of the Commission’s jurisdiction, Decision 3 on the Commission’s preference for monetary compensation as remedy without excluding other remedies if proven useful, Decision 4 urging both parties to focus on the need to sustain their arguments with evidence and Decision 7 giving the Parties guidance with regard to the ‘ius ad bellum’ liability. 52 Rules of Procedure, Article 11.2. 53 Peace Agreement, Article 5.10.


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forms, the EECC pointed out that it had not the same possibilities as the United Nations Compensation Commission, which had extensively examined claims forms submitted because: “[t]he Commission does not have the resources for such a fundamental re-assessment of a Party’s claim. It is not the UNCC, with (at peak) staff of several hundred persons and extensive financial resources.”54 The EECC could have employed “such professional, administrative and clerical staff as it deems necessary” and retained consultants and experts.55 It chose not to do so. C. Available Evidence The EECC followed the general rule that each party had the burden of proving the facts it relied on to support their claim or defense.56 Eritrea and Ethiopia thus submitted witness statements, claim forms, contemporaneous lists of refugees and displaced persons, rapports of non-governmental organizations, etc. The EECC often reduced a claimant’s estimates to the numbers stated in objective reports. At one occasion the EECC even attempted to gather evidence itself from a third party: for the assessment of the POW claims it solicited access to the confidential camp visit reports of the International Committee of the Red Cross. The EECC’s President visited the ICRC but was, however, refused access to this confidential information.57 Evidence often remained scarce in many instances. Nevertheless the EECC felt that it could not dismiss claims for lack of evidence when widespread injury was obvious although its specific extent could not be proven: “in commercial arbitration between two private parties, this might warrant dismissal of a damage claim for failure of proof. The Commission is not prepared to take that step.”58 Or, as the EECC stated more elaborately elsewhere: Evidence necessarily has played a role in these proceedings. Key issues often have boiled down to proof of facts, not issues of law. It is fundamental to the legal process that judgments regarding facts must be based upon sufficient evidence. This posed special challenges in these proceedings. Both the parties and the Commission recognize that conclusive proof of facts in a war that began eleven years ago often is not feasible. However, the difficulties of proof do not relieve the Commission of its obligation to make decisions only on the basis of sufficient evidence. At the liability phase, the Commission required clear and convincing proof of liability. However, in the remedy phase and for purposes of quantification of

54

Final Award—Eritrea’s Damage Claims, para. 71. Peace Agreement, Article 5.6; Rules of Procedure, Article 16.5. 56 Rules of Procedure, Article 14. 57 Partial Award—Prisoners of War, Ethiopia’s Claim 4, paras. 45–48; Partial Award— Prisoners of War, Eritrea’s Claim 17, paras. 50–53. 58 See e.g. Final Award—Eritrea’s Damages Claims, para. 70F. 55

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hans van houtte the compensation, it has required less rigorous proof. The considerations dictating the ‘clear and convincing standard’ are much less compelling for the less politically and emotively charged matters involved in assessing the monetary extent of injury. Moreover, the Commission recognizes the enormous practical problems faced by both Parties in quantifying the extent of damage following the 1998–2000 war. Requiring proof of quantification of damage by clear and convincing evidence would often—perhaps almost always—preclude any recovery. This would frustrate the Commission’s agreed mandate to address “the socio-economic impact of the crisis on the civilian population” under Article 5.1 of the Agreement. The Commission has made the best estimates possible on the basis of the available evidence [. . .] [I]t must do so even if the process involves estimation, or even guesswork, within the range of possibilities indicated by the evidence.59

In brief, there were two different standards for evidence, depending whether liability or compensation was concerned: to establish liability, the EECC used strict standards to examine the serious infringements which it would subsequently remedy. For the determination of compensation, it was prepared to use estimates, starting from the succinct evidence available. However, without evidence, no compensation. As the EECC stated in the very first paragraph of its Final Awards on Damages: “[c]ompensation can only be awarded where there is evidence sufficient in the circumstances to establish the extent of damages caused by conduct the Commission previously found to have violated international law.” D. Available Time The Peace Agreement made clear that the EECC was expected to settle its case load within a short period of time. The EECC had to start operations within 15 days after its constitution. All claims had to be submitted within one year after the conclusion of the Agreement, i.e. by 12 December 2001, and the EECC should “endeavor” to complete its work by 12 December 2004. Actually 15 awards on liability were rendered between 1 July 2003 and 19 December 2005 and the final awards on damages, which terminated the EECC’s activities, were issued on 17 August 2009.60 The wish that the EECC

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See Final Award—Ethiopia’s Damages Claims, paras. 34–37. All the Commission’s Decisions and Awards can be found on the website of the Permanent Court of Arbitration (www. pca-cpa.org) under ‘Cases’. Moreover many of them have been published in International Legal Materials: 60

Partial Awards on Prisoners of War rendered on July 1, 2003: Ethiopia’s Claim 4, 42 I.L.M. 1056 (2003); Eritrea’s Claim 17, 42 I.L.M. 1083 (2003). Partial Award Central Front, issued on April 28, 2004: Eritrea’s Claims 2, 4, 6, 7, 8 and 22, 43 I.L.M. 1249 (2004); Ethiopia’s Claim 2, 43 I.L.M. 1275 (2004).


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would finish its work within three years was too ambitious for such a vast task. In fact, that task took over six years. Nevertheless, these 7.5 years are still a reasonable term compared with the eleven years the Mixed Arbitral Tribunals took. V. The Introduction of a Mass Claims Process A mass claims process can be defined as “a process designed to deal with a high number of claims that arise out of the same extraordinary situation or event and are filed with the decision-making body within a limited period of time”.61 Mass claims mechanisms should only be envisaged when the number of potential claimants is very high and when the issues raised by the claims are sufficiently similar so that it is more efficient to adjudicate the claims in a single claims process than in a series of individual proceedings. Mass claims

Partial Awards Civilian Claims, issued on December 17, 2004: Eritrea’s Claims 15, 16 and 27–32, 44 I.L.M. 601 (2005); Ethiopia’s Claim 5, 44 I.L.M. 630 (2005). Awards issues on December 19, 2005: Western Front, Aerial Bombardment and Related Claims, Eritrea’s Claims 1, 3, 5, 9–13, 14, 21, 25 and 26, 45 I.L.M. 396 (2006); Western Front and Eastern Front, Ethiopia Claims 1 and 3; Jus ad Bellum, Ethiopia’s Claims 1–8, 45 I.L.M. 430 (2006) Moreover for the Commission’s Decision nr. 7: Guidance regarding Jus ad Bellum Liability, 46 I.L.M. 1121 (2007). See e.g. the case reports of Weeramantry, J.R, in 99 A.J.I.L. (2005) 465, 100 A.J.I.L. (2006) 201 and 101 A.J.I.L. (2007) 616 and of Weckel, Ph., in R.G.D.I.P. 2005, 224 and 480, 2006, 195 and 2007, 192. Furthermore Aldrich, G.H., ‘The Work of the Eritrea-Ethiopia Claims Commission’, 6 Yearbook of International Humanitarian Law (2006), 435; Foster, C.E., ‘The Partial Awards of the Eritrea-Ethiopia Claims Commission on the Treatment of Prisoners of War’, 1 New Zealand Yearbook of International Law (2004), 139; Kidane, W., ‘Civil Liability for Violations of International Law: the Jurisprudence of the Eritrea-Ethiopia Claims Commission in The Hague’, 25 Wisconsin International Law Journal (2007), 23, Klein, N., ‘State Responsibility for International Humanitarian Law Violations and the Work of the Eritrea Ethiopia Claims Commission so far’, 47 German Yearbook of International Law (2005), 214; Lichtenberg, J., ‘Eritrea Ethiopia Claims Commission’, 12 Tilburg Foreign Law Review (2004), 266; Ponti, C., ‘The Eritrea-Ethiopia Claims Commission on the Threat or Use of Force and Individual SelfDefense’, in de Guffry, A., Post, H., Venturini, G., The 1998–2000 War between Eritrea and Ethiopia—An International Legal Perspective, The Hague Asser Press (2009), p. 267 ss.; Marco Sassoli The approach of the Eritrea Ethiopia Claims Commission towards the Treatment of Protected Persons in International humanitarian law, in A. de Guffry, H. Post and G. Venturini, The 1998–2000 War between Eritrea and Ethiopia—An International Legal Perspective, Asser Press 2009, p. 341 ss.; Emmanuele Sommario, State Responsibility for the Violations of International Humanitarian Law in the Work of the Eritrea-Ethiopia Claims Commission, in de Guffry, A., Post, H., Venturini, G., The 1998–2000 War between Eritrea and Ethiopia—An International Legal Perspective, The Hague Asser Press (2009), p. 393 ss. 61 Resolution N° 7 of April 11, 2003 of the Kosovo Housing and Property Claims Commission, para. 1.4.

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processes are especially efficient to settle many claims of moderate amounts with the same entity as respondent. The war between Eritrea and Ethiopia surely was an extraordinary event which inflicted damage on hundreds of thousands of individuals. Of course all the damage was not of the same type. There were several categories such as killings and beatings, damage inflicted upon prisoners of war, destruction of dwellings, looting, abuse of civilians who were illegally detained, women raped, people illegally expulsed, etc. Each of these categories could be considered as a specific class in the mass claims process. The respondent for each of these claims was a State, either Eritrea or Ethiopia. The fact that the same classes of claims were addressed against Eritrea as well as against Ethiopia and concerned Ethiopian as well as Eritrean nationals, made the whole claim process most consistent: regardless whether the claim was installed by an Eritrean or Ethiopian citizen, it would be treated in the same way, judged by the same standards and result in the same remedy. This consistency was even enhanced by the fact that similar types of breaches were grouped together as much as possible, whereby Eritrea and Ethiopia alternated as claimants. In this way, for the same breaches, a party was claimant in the first week and respondent in the second week: the breaches of international law reproached to the other side in the first week, very often became the subject-matter of defense in the second week. Consistency thus prevented the parties to argue ‘white’ during the first week and ‘black’ during the second week with regard to the same principles of international humanitarian law. The awards were moreover issued simultaneously with cross references so that each party was at the same time beneficiary and subject of the awards. The Peace Agreement authorized the EECC “in order to facilitate the expeditious resolution of the disputes [. . .] to adopt such methods of efficient case management and mass claims processing as it deems appropriate”.62 The Commission seriously envisaged a mass claims process. For instance, it included in its Rules of Procedure, a chapter on mass claims procedures. Under these provisions, all claims for the mass claims processing would have to be filed on claim forms, established by the EECC. The filing would be electronically as well as in paper form.63 For private damage the Rules of Procedure provided two types of claims. Claims for compensation over USD 100,000 and claims where the individual compensation was requested on the basis of actually proven damage, had to be adjudicated individually and were governed by Chapter 2 of the Rules. Claims for a fixed amount of compensation for the specific main

62 63

Peace Agreement, Article 5.10. Rules of Procedure, Article 30.3.


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categories of breaches64 could be processed as mass claims under Chapter 3 of the Rules. The EECC would further devise each main category in subcategories, related to specific violations of international law.65 For each subcategory, two fixed amounts of compensation (e.g. USD 500 and USD 1,500)66 would be established, depending on the type of evidence available.67 It was also foreseen that a claim for expulsion or displacement could be filed by a ‘household’ instead of by an individual. In that event the individual amount would be multiplied by 3.68 However, the final amount to be granted for each sub-category would depend on the result of the Commission’s verification of the submitted evidence in some random samples, taken from that sub-category. The final amount would be reduced by the proportion of the verified claims, whose evidence was found to be inadequate.69 For instance, when the evidence of one third of the sub-categories sample would not be up to the required standard, the amount for each claim in that sub-category would be reduced by one third. As already mentioned above, Eritrea and Ethiopia finally decided not to have a mass claims process where they would submit claims on behalf of their nationals, but instead submitted the claims on their own behalf, i.e. for damage they suffered themselves, albeit through their citizens. Nevertheless, the claims submitted because a specific category of citizens had suffered damage, kept some features of a mass claims process: the amounts claimed were based upon a number of victims of a specific infringement multiplied by a fixed amount for that infringement. VI. The Awards In the end the EECC has granted to Eritrea USD 161,455,000 as total compensation of its claims. USD 137,625,000, i.e. 85% of this amount, was due because of damage inflicted on specific categories of its nationals. The awards, however, did not specify the affected individuals by name which, in all event, would only have had a limited relevance. After all, the amount was due to the State of Eritrea. Very often the award itself even indicated that

64 I.e. unlawful expulsion from one’s country, unlawful expulsion from one’s residence, injuries suffered by POW’s from unlawful treatment, suffering of civilians from unlawful detention and unlawful treatment during detention, claims for other loss, damage or injury 65 Rules of Procedure, Article 30.1 and Article 31. 66 Decision 5, B. Additional levels of fixed-sum compensation would be established as the claims process developed and evidence would be filed. 67 Decision 2, B. 68 Decision 5, C. 69 Rules of Procedure, Article 32.3.

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the compensation was granted because of damage inflicted on an “unknown” number of victims so that a linkage with specific individuals was definitely excluded.70 However, the six individuals, on whose behalf Eritrea submitted six claims, obtained together USD 2,065,685 whereby the award specified what amount was to be received on behalf of which individual. On the other hand, for the unlawful deprivation of Eritrean-Ethiopian nationals of their Ethiopian nationality, the award did not grant Eritrea compensation; the finding that this deprivation was unlawful was deemed an appropriate reparation thereof. Ethiopia was awarded USD 171,036,520 of which USD 135,221,000, i.e. 77%, was related to claims for damage inflicted on individual Ethiopians.71

70 The amount was composed of: – USD 13,500,000 for losses of residential and business property on the Central and Western Fronts in Serha, Senafe, Teseney, Alighidir, Guluj, Tabaldia, Gergef, Omhajer, Barentu, Tokombia and Molki Sub-Zoba; – USD 1,500,000 in respect of injuries to civilians due to loss of access to health care on account of damage to or destruction of Eritrean hospitals and other medical facilities and loss of medical supplies; – USD 4,000,000 for mistreatment of prisoners of war; – USD 2,000,000 for failing to prevent rape of known and unknown victims in the towns of Senafe, Barentu and Teseney; – USD 1,550,000 for forcible expulsion of the population of Awgaro; – USD 50,000 in respect of the unknown, but apparently small number of dual EritreanEthiopian nationals who were arbitrarily deprived of their Ethiopian nationality while present in third countries; – USD 15,000,000 in respect of wrongful expulsion of an unknown, but considerable, number of dual nationals by local Ethiopian authorities; – USD 2,000,000 for failure to provide humane and safe treatment for persons being expelled from Ethiopia; – USD 46,000,000 for expellee’s losses of property on account of Ethiopia’s wrongful actions; – USD 24,525,000 for Ethiopia’s failure to return or provide compensation after the war for vehicles it requisitioned from non-resident Eritreans; – USD 1,500,000 for other property losses of non-resident Eritreans; – USD 2,600,000 for imprisoning Eritrean civilians on security charges or detaining them for unknown reasons, under harsh and unacceptable conditions. 71 The amount was composed of: – USD 11,000,000 for death, physical injury, disappearance, forced labor and conscription of Ethiopian civilians; – USD 2,000,000 for failing to prevent rape of known and unknown victims in Irob, Dalul and Elidar Weredas; – USD 13,900,000 for looting and destruction of and damages to houses; – USD 20,195,000 for damage, destruction and looting in Zalambessa; – USD 2,500,000 for death, injury and property damage in Mekele; – USD 4,55,000 for looting, destruction and damage to religious institutions; – USD AMOUNT? for seizure and looting of the Saba Dimensional Stones Shares Company; – USD 7,500,000 for mistreatment of Ethiopian prisoners of war; – USD 2,000,000 for failure to protect Ethiopian civilians from threats and violence; – USD 1,500,000 for failure to ensure Ethiopian civilians in Eritrea access to employment;


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Here again, the victims were not identified by name and even their numbers were not specified. The EECC was aware that the compensation granted was much less than Eritrea and Ethiopia believed to be due. The very first paragraph of its Awards on Damages very well summed up all the constraints encountered by admitting that these awards. only reflect the damages that could be established with sufficient certainty through the available evidence, in the context of complex international legal proceedings carried out by the Parties with modest resources and under necessary pressures of time.72

The EECC was very much concerned that the individuals who suffered the mistreatment, would not somehow benefit from the compensation the awards granted to their State. It should not be forgotten that the EECC was created because of Eritrea’s and Ethiopia’s commitment to “address the negative socio-economic impact” of the war on the civilian population.73 The remedies which the EECC would grant, should thus benefit the people. However, because all claims, except the six ones on behalf of Eritrean business people, had become State-to-State claims, Eritrea and Ethiopia would receive the compensation on their own behalf. Moreover, as both States owed substantial amounts to each other, they risked to set-off the payments, so that only the balance (which after the awards were rendered, was owed by Eritrea to Ethiopia and was rather limited) would be paid. The possibility that the States then would pass compensation to the actual victims, would be small. The EECC was well aware of this risk. At the start of the damage phase, it inquired how Eritrea and Ethiopia intended to ensure distribution of compensation to civilian victims.74 Both States confirmed that they chose to

– USD 50,000, for failure to ensure that Ethiopian civilians in Eritrea were able to receive medical care to the same extent as Eritrean nationals; – USD 2,000,000 for wrongful detention and abusive treatment of Ethiopian civilians in Eritrean custody; – USD 1,500,000 for harsh treatment of Ethiopian civilians at the Hawshaite detention camp; – USD 10,000,000 for detaining significant numbers of Ethiopian civilians under harsh conditions during and after May 2000; – USD 500,000 for deaths and injuries suffered by detainees at Wi’a Camp; – USD 2,000,000 for failure to protect property of Ethiopian detainees expelled from Eritrea; – USD 1,000,000, for failure to protect the property of other departing Ethiopians; – USD 1,000,000 for failing to ensure the safe and humane repatriation of departing Ethiopians in transports that were not conducted or supervised by the ICRC. 72 Final Award on Damages, para. 2. 73 Peace Agreement, Article 5.1. 74 Letter President of April 13, 2006.

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pursue inter-State claims which implied that they had full authority to determine the use and distribution of any compensation awarded to them. Nevertheless they recognized at the April 2007 hearing that the whole process had a humanitarian purpose and solicited suggestions from the Commission to pursue this purpose. In its Decision 8 of July 2007, the Commission agreed that “it would probably be impossible and certainly inordinately expensive, to attempt to identify the specific individuals who suffered injuries” but invited Eritrea and Ethiopia to consider different means such as relief programs for health, agricultural and other services, to achieve the humanitarian objectives they initially envisaged by setting up the process.75 In the final memorials, Eritrea and Ethiopia ensured the Commission that they would keep these humanitarian aspects in mind, but did not make specific commitments. For relief to rape victims, however, Eritrea proposed that each country would set aside USD 500,000 to USD 1,000,000 of its own funds for locally administered programs for women’s health care and support services. Ethiopia, however, did not agree with this proposal. When the EECC finally awarded each of both sides USD 2,000,000 compensation for rape victims, it expressed its hope that both countries would use these funds to develop and support health programs for women and girls in the affected areas.76 The Commission communicated its concern that the actual victims could be left in the cold, when it reiterated at the very end of each of its Final Awards on Damages “its confidence that [. . .] funds received will be used to provide relief to their civilian populations injured in the war.” From an academic, historical and political point, it could be interesting to investigate to which extent Eritrea and Ethiopia have addressed this concern and have actually established relief programs for or granted compensation to those who actually suffered the war-damage. VII. Assessment The EECC had the rare opportunity to be able to operate in complete symmetry. Where generally the ‘losing’ State has to pay compensation for wardamages inflicted to nationals of the victorious State, at the EECC, Eritrea as well as Ethiopia had to provide compensation. That specific feature made adjudication easier because each side was generally claimant as well as

75 See on the website of the Permanent Court of Arbitration: http://www.pca-cpa.org/upload/files/EECC%20Decision%208.pdf 76 Final Awards on Damages Claims—Ethiopia Claims, paras. 106–110; Eritrea, paras. 236–239.


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respondent for similar facts. The EECC was thus able to arbitrate Eritrea’s and Ethiopia’s mutual claims. The adjudication, however, did not become a proper mass claims arbitration which would benefit the individual victims of war-damage. Eritrea and Ethiopia refused to engage in the mass claims proceedings the Commission had envisaged. Instead they preferred to lodge all claims as their own claims (except the six on behalf of Eritrean business people). The compensation granted became their own and may have been subject to set-off. In this way, the EECC had very limited impact to ensure that individual victims were to be granted redress. One may wonder, however, whether a proper mass claims arbitration, with thousands and thousands individual claims and claim forms, would have been feasible. It certainly would have been very cumbersome and expensive. Moreover, the EECC did not have substantial funds at its disposal like the Iran US Claims Tribunal had from the frozen assets or the UNCC from the export of Iraqi oil. Eritrea and Ethiopia probably would not have had the funds to pay out even a limited compensation to all claimants. The EECC thus has not been able to guarantee relief to the individual victims by arbitrating their individual claims. Its potential ‘to address the negative socio-economic impact’ of the war on the civilian population—the task entrusted by Eritrea and Ethiopia in the Peace Agreement (Article 5.1)—has been curtailed by those two States themselves. Nevertheless, the EECC has substantially contributed to the peace process by establishing, in a neutral and even handed manner, that both sides of the conflict largely respected the laws of war but also committed serious breaches of international law. In this way, it made clear that, in the Eritrea-Ethiopia War, there was no “good” and “bad” party, but that both sides had sometimes been “ugly”. The respective amounts, attached to the breaches of international law, reflected the EECC’s appreciation of the seriousness and scope of these breaches, even if—for reasons beyond the EECC—they would not actually compensate the individual victims.

FOREIGN DIRECT INVESTMENT FOR DEVELOPMENT: THE UNITED NATIONS CODE OF CONDUCT AND THE SEARCH FOR BALANCE IN INTERNATIONAL INVESTMENT RULES Karl P. Sauvant1 I. Introduction Thomas Wälde joined the United Nations one year before the negotiations on a Code of Conduct on Transnational Corporations2 began, in 1977. Indeed, these negotiations accompanied his journey in the United Nations system, since they were still ongoing when he left in 1990. While not directly involved in them, he was an avid observer3 of the process and of the discussions that took place at that time—discussions about a problematique that is still on the international agenda today, some 30 years after this first4 comprehensive effort to establish a multilateral framework for foreign direct

1 The author is Executive Director, Vale Columbia Center on Sustainable International Investment, a joint undertaking of Columbia Law School and The Earth Institute at Columbia University, New York. This chapter partially draws on work done for a UNDP Global Governance Project. I would like to acknowledge the work of Ilze Dubava for this text and the very helpful assistance of Delphine Papaud in finalizing this chapter. 2 When the United Nations started work in this area, the firms involved were called “multinational corporations” (see, for example, the first major report on this subject by that organization, Multinational Corporations in World Development, ST/ECA/190, United Nations (1973). When delegates debated the issue in the United Nations, two points were made: 1. the description “multinational” was seen to imply that the firms involved were owned or controlled by citizens of various nations, while in reality the overwhelming majority of them were in fact owned and controlled by citizens of one country, the home country, operating across boundaries; 2. at that time, the Andean Pact had adopted an agreement that foresaw the creation of “Andean multinational enterprises” owned and controlled by various members of the Andean Pact countries. See Andean Code on Multinational Enterprises and the Regulations with regard to Subregional Capital, 11 I.L.M. 357 (1972). To take these considerations into account and to avoid a confusion with the Andean Pact enterprises, delegates decided to change the terminology from “multinational corporation” to “transnational corporation,” and this term has been used in the United Nations since then. Of course, this change in terminology did not take into account that a number of firms operating transnationally are actually not incorporated and that, therefore, a more accurate label would have been “transnational enterprise.” 3 I had the pleasure of discussing this matter with Thomas when I had the privilege to deliver the Chalfen Memorial Lecture at the British Institute of International and Comparative Law in April 2006. 4 Arguably, the first effort was made in the context of the ITO, albeit not in as broad a manner as the United Nations Code had envisaged.

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investment [FDI] had begun.5 At the heart of these discussions (and associated negotiations) is the question of the treatment of foreign investors and, more precisely, of what rights and responsibilities foreign investors and host countries should enjoy or bear in their interaction with each other. The balance of these rights and responsibilities determines, at least to a certain extent, the impact of FDI on development, the advancement of which is of particular concern to developing countries. And this balance finds its expression in national laws governing FDI, as well as in international investment agreements [IIAs] dealing with this subject, with the latter setting the parameters within which the former can be adopted and implemented. Apart from being an observer of the negotiations of a United Nations Code, Thomas worked “on the ground,” first as a legal adviser in the United Nations Centre on Transnational Corporations and to the United Nations Industrial Development Organization and, from 1980, as an Interregional Advisor on matters related to petroleum and mineral resources in the United Nations Department of Technical Cooperation for Development. As such, he provided advisory services to developing countries in matters related to natural resources, helping them find the national regulatory framework that would maximize the developmental benefits reaped from these resources, most of which were owned or controlled by multinational enterprises [MNEs]. As Thomas defined this type of work at that time: “Advisory assistance [. . .] has a double function, that of assisting governments in bridging their experience gap and that of bridging the consensus gap between negotiating partners.”6 In fact, Thomas’ later focus on natural resources can be traced back to his formative years at the United Nations and the discussions that took place then, and to his hands-on experience in providing practical advice to developing countries. This chapter looks at the considerations that shaped the negotiations of a United Nations Code of Conduct on Transnational Corporations and at the search for balance in international investment rules that has since then continued to inform efforts to establish an international framework for FDI and MNEs.

5

Although the focus of the negotiations was on FDI, it was not clear whether, in the end, other investment should be covered as well. 6 Wälde, T., “Third World minerals development in crisis: the impact of the worldwide recession on legal instruments governing Third World mineral development,” Journal of World Trade Law 19 (1985), at p. 28. As the author noted in the first footnote: “This article is based on the over 40 advisory missions carried out between 1979 and 1984 for over 30 governments.”

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II. FDI and MNE Activities Arrive on the International Agenda Why did the issue of an international framework for FDI arise and why does it continue to be on the international agenda? The answer to the first of these questions is straightforward: around the mid-1970s, governments became aware of the importance of FDI and of the activities of MNEs, both in their national economies and in the world economy. In developing countries, the focus was on the exploitation of natural resources, typically undertaken by MNEs (although other “commanding heights” of the economy, like banking, also received attention). This heightened awareness about the importance of FDI7 was embedded in the postdecolonization political climate of developing countries seeking a voice in shaping the international economic system to suit their quest for development.8 OPEC’s successful oil price raise also played a role in encouraging developing countries to assert their bargaining power.9 In developed countries too, the rise of FDI and MNE activities was noted. In Europe, le défi américain10 arose passions as American firms were taking over European ones, while the question of the export of jobs through outward FDI received considerable attention in the United States. And the involvement of ITT, a multinational enterprise headquartered in the United States, in the coup against President Allende of Chile received world-wide coverage. As a result, the role of MNEs in national economies and in the world economy was put on the agenda of the United Nations, with a view toward reaching a better understanding as to what this role was and how to ensure that the benefits of FDI and of the activities of MNEs could be maximized while any negative effects could be minimized. Since then, the issue has become, if anything, more pressing, although our understanding of the role of FDI and MNEs in development has increased considerably.11 Suffice it to say that MNEs have become the most important

7 United Nations, Multinational Corporations in World Development, United Nations (1973). See also Barnet, R.J. and Mueller, R.E., Global Reach: The Power of the Multinational Corporations, Simon & Schuster (1974). 8 Which found its expression in, among other things, a spade of nationalizations, especially in natural resources. 9 This approach was captured in the well-known article by C. Fred Bergsten, entitled “One, two, many OPEC’s . . .? The threat is real,” Foreign Policy (1974), at pp. 84–90. 10 Servan-Schreiber, J., Le Défi Américain (The American Challenge), Denoël (1967). 11 Discussed in numerous publications and documented since 1991 in UNCTAD’s annual World Investment Report.

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private actors in the world economy. In 2008, there were over 80,000 MNEs,12 defined as enterprises that have established systems of common governance over their foreign affiliates (of which there are a total of over 810,000),13 either through direct ownership or non-equity forms of control. The common measurement of the importance of this governance is statistics on FDI.14 In 2008, world FDI outflows amounted to $ 1.9 billion, with the stock of this investment surpassing $ 16 trillion.15 Increasingly, the foreign affiliates of individual MNEs are woven together in integrated international production networks. In these networks, any part of the value-added chain can be located where it is the most efficient, both in terms of reaping the (corporate) benefit of an intra-firm international division of labor, and in terms of gaining access to resources (ranging from natural resources to skills) and markets. As a result, some one-third of the world trade is intra-firm trade. These firms also account for the bulk of research and development and of the international transfer of technology. All this makes MNEs important actors in national economies, although, on average, FDI inflows accounted in 2008 for only 12 percent of gross fixed capital formation world-wide. This average percentage is similar in developed countries (11 percent) and developing countries (13 percent), although the percentage varies widely within both groups.16 Still, the packages of tangible and intangible resources that are associated with FDI and the activities of MNEs—capital, technology, employment, skills, access to markets, etc.—can make an important contribution to national development and hence make FDI an important tool in this respect. Not surprisingly, therefore, all governments seek to attract FDI and seek to maximize the contribution that FDI and the activities of MNEs can make to development. At the same time, governments also know that FDI and the activities of MNEs can be associated with a range of negative effects, including the crowding out of domestic firms, restrictive business practices, transfer pricing, undesirable environmental effects, the curtailment of competition, and

12 See UNCTAD, World Investment Report 2009: Transnational Corporations, Agricultural Production and Development, UNCTAD (2009), p. 17. 13 Ibid. 14 However, these statistics do not include various non-equity forms of control, such as franchising agreements, management contracts, licensing agreements and the like, although all of them extend the governance of parent firms of MNEs beyond the assets controlled via FDI. Hence the importance of MNEs cannot be measured by FDI alone, but also needs to take into account other activities of these firms. 15 Ibid., pp. 247, 251. 16 Ibid., pp. 255–66.


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the control of critical resources by foreign entities. Governments, also not surprisingly, seek to minimize such negative effects.17 Any policy that governments pursue as regards to FDI and MNE activities—and, therefore, the national and international regulatory frameworks they establish in this respect—reflects how governments perceive the balance of costs and benefits of FDI and MNE activities, and hence their interests and objectives in this respect. Moreover, it was recognized early on that the cross-border nature of the activities of these firms requires an international approach to their regulation. Evaluating these costs and benefits in an international context and finding a regulatory balance that would maximize the positive effects of FDI and MNE activities and minimize their negative effects was the challenge entrusted to the negotiators of the United Nations Code of Conduct in the late 1970s and the 1980s—and it continues to be faced by negotiators of international investment agreements today. III. Interests and Objectives of the Principal Stakeholders In contrast to the trade area, there is no multilateral framework governing foreign direct investment and the activities of MNEs. This is not for want of trying. As early as 1948, the aborted Havana Charter for an International Trade Organization had sought to address investment issues, albeit in a limited way.18 This effort was resumed in a comprehensive manner in the late 1970s with the beginning of negotiation of a United Nations Code of Conduct on Transnational Corporations.19 The starting question was: what would be the object and purpose of such regulation?

17 For a full discussion of the impact of FDI on economic development, see UNCTAD, World Investment Report 1999: Foreign Direct Investment and Development (Geneva: UNCTAD, 1999); Moran, T.H., Harnessing Foreign Direct Investment for Development: Policies for Developed and Developing Countries (Washington: Center for Global Development, 2006); Stiglitz, J.E., Globalization and its Discontents (New York: W.W. Norton & Company, 2003); Gallagher, K.P. and Chudnovsky, D., Rethinking Foreign Investment for Sustainable Development: Lessons from Latin America, Anthem Press (2009). 18 See “Havana charter for an International Trade Organization,” Ch. III, article 12 “International investment for economic development and reconstruction,” E/Conf. 2/78, 24 March 1948. 19 For an analysis of the substance of the negotiations and the positions of groups of countries, see Wälde, T.W., “Der UN-Verhaltenskodex fuer transnationale Unternehmen: Schritte zu einem Weltwirtschaftsrecht,” Recht der Internationalen Wirtschaft 24 (1978), at pp. 285–90. The negotiations took place in the context of the United Nations’ wider work on FDI and MNE activities, undertaken by the United Nations Centre on Transnational Corporations (UNCTC); this wider work involved also research and technical assistance. See Sagafi-nejad, T., in collaboration with Dunning, J.H., The UN and Transnational Corporations: from Code of Conduct to Global Compact (Bloomington: Indiana University Press, 2008) and Moran, T.H.,

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The United Nations Code negotiations established the two dominant themes—and tensions—that have since then characterized efforts to establish an international framework for FDI and the activities of MNEs, namely (1) the struggle to find the proper balance between the rights and responsibilities of host countries on one hand and those of MNEs on the other;20 and (2) the struggle over the legal nature of these rights and responsibilities (mandatory vs. voluntary). Governments approach these two issues from the perspective of what is in the interest of their countries, including their own enterprises—in other words, in light of the balance of costs and benefits they expect from FDI and the activities of MNEs. These struggles, based on the underlying interests of governments (and the firms they represent), have determined the subsequent evolution of the international investment law and policy regime. So what are the underlying interests that drive the evolution of the international investment regime? Host countries, as already mentioned, seek to attract FDI (especially of the kind that furthers their economic development the most, as witnessed, for example, by the efforts of countries to target specific types of investment), and to maximize the benefits that they can derive from such investments— after all, FDI is only a tool to advance development. At the same time, they seek to preserve the flexibility they need to minimize any negative impact of FDI and of the activities of MNEs and to safeguard any important noneconomic objectives they pursue in their own national interest (including essential security interests). Typically, though, the concept of “national interests” is not defined and can include a range of military, political and economic considerations. When considering their interests, therefore, host country governments seek (to different degrees) to limit their mandatory responsibilities vis-à-vis foreign investors, while maintaining a legal right to regulate the entry of MNEs and their behavior once they are established in their territories. The interests of MNEs, for their part, are represented and pursued by the home countries of these firms, typically with a view toward protecting the foreign assets of their outward-investing MNEs and facilitating the operations of their firms abroad. The former involves the establishment of strong and broad protection and dispute-settlement standards, anchored not only in national laws and regulations but also in international (investment) agreements, especially with countries whose judicial systems are considered to be “The United Nations and transnational corporations: a review and a perspective,” Transnational Corporations 18 (2009), at pp. 91–112. 20 There is also the question of what rights and responsibilities, if any, home countries of MNEs should have.


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fragile, biased and/or inefficient. The latter involves the liberalization of entry conditions for MNEs into host countries and as few restrictions as possible on foreign affiliates operating in these countries. Home country governments typically do not want to assume direct obligations, except with regard to subrogation and the settlement of disputes between treaty partners. When considering their interests as home countries, therefore, governments seek broad mandatory responsibilities for host country governments regarding the treatment of MNEs and their foreign affiliates, while limiting any responsibilities of foreign investors or keeping any responsibilities voluntary. IV. The Changing Focus of International Investment Rules A. The Responsibilities of MNEs and the Rights of Governments The United Nations Code negotiations sought to address the rights and responsibilities of host countries and MNEs in a comprehensive and balanced manner.21 However, developed and developing countries approached these negotiations with different perspectives. Developing countries contended that the negative effects of FDI and of the activities of MNEs out-weighed the positive ones; developed countries, for their part, held that the positive effects out-weighted the negative ones, for both host and home countries. Developing countries imposed various controls on the activities of MNEs within their territories, e.g. through nationalizations, screening mechanisms, restricting sectors for inward investment, operational restrictions for foreign affiliates, controls on transfer pricing, and the like. Mirroring their domestic policy approach, developing countries (and the socialist countries that supported them)—all of them at that time overwhelmingly host countries (with FDI in the socialist countries being very limited)—focused in the Code negotiations on two things: (1) defining the responsibilities of MNEs (and they wanted these responsibilities to be binding); and (2) preserving their own rights as regards the treatment of these enterprises. To put it differently, host developing countries sought to keep their own responsibilities and the rights of MNEs as limited as possible. In line with these objectives, developing countries (and the socialist countries) also sought strong and mandatory language on intergovernmental cooperation and the implementation of the Code, with a view toward giving binding effect to the Code. This focus on the responsibilities of MNEs and on the rights of governments dominated 21 See http://www.unctad.org/sections/dite/iia/docs/Compendium//en/13%20volume%201. pdf (last checked 9 July 2010). The objective of arriving at a balanced Code was reflected in the title of the instrument, as it was deliberately called “Code of Conduct on Transnational Corporations” and not “Code of Conduct for Transnational Corporations” [emphasis added].

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the international approach to FDI and MNEs during the late 1960s and the 1970s. Developed countries, on the contrary, focused especially on the responsibilities of host countries with regard to foreign firms, reflecting their status as principal home countries of MNEs and the North-South context in which the negotiations took place. They wanted to keep the responsibility of MNEs as general as possible; and they sought strong language on treatment standards, but (because of the guidelines part) weak provisions regarding international cooperation and implementation. On the question of mandatory vs. voluntary, and in line with their overall approach, developed countries had a preference for a voluntary instrument, primarily because they did not want to impose (even general) mandatory behavioral standards on (at that time mostly “their”) MNEs. The negotiations of the Code, which had begun in 1977, reached their most intensive phase in the early 1980s then slowed down. The interests and objectives of the developed and developing countries concerning the dominant themes of the negotiations could not be reconciled. While substantial agreement on (typically) fairly general responsibilities of MNEs could be reached, host countries resisted the language sought by developed countries on the treatment of foreign investors. This made the Code unbalanced in the eyes of developed countries. Accordingly, they opposed a mandatory instrument with strong international cooperation and implementation provisions.22 This stalemate was resolved in favor of the approach of developed countries when the environment within which the negotiations took place changed. In particular, attitudes in host countries toward FDI and the activities of MNEs became more welcoming, as their evaluation of the cost and benefits associated with them became more positive. At the same time, developed countries intensified their efforts to negotiate bilateral investment treaties [BITs] for the protection and promotion of foreign investment, i.e., binding instruments that focus almost entirely on the responsibility of host countries. The negotiations of the Code fizzled out in 1992.23 The quest for a comprehensive United Nations Code was embedded in a number of other efforts to regulate FDI and the activities of MNEs, with a number of them leading to the adoption of instruments. Many of these nego22

Even if developing countries (and the socialist countries) had been more flexible on the provisions regarding treatment, international cooperation and implementation, it is not at all clear whether key developed countries would have accepted an instrument with mandatory provisions. 23 UNCTAD, World Investment Report 1993: Transnational Corporations and Integrated International Production, United Nations (1993). According to this report: “After informal consultations held from 21 to 23 July 1992, delegations concluded that, at present, no consensus was possible on the draft Code.” Id. at p. 33. This brought the negotiations on the United Nations Code of Conduct on Transnational Corporations to a formal end.


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tiations were driven by (host) developing countries, supported by the socialist countries, and pursued in the United Nations system. They all sought to affirm the rights of governments vis-à-vis foreign investors or their desire to impose responsibilities on MNEs. Most noteworthy among them were United Nations resolutions on permanent sovereignty over natural resources,24 the Charter of Economic Rights and Duties of States25 and the resolutions related to the establishment of a New International Economic Order,26 as these instruments reflected most clearly the position of host developing countries. Other instruments reflecting the skeptical approach of developing countries negotiated in a multilateral context at that time included the ILO Tripartite Declaration;27 codes of conduct on restrictive business practices,28 breastmilk substitutes,29 consumer protection,30 and the transfer of technology;31

24 See e.g., especially Permanent Sovereignty over Natural Resources, G.A. res. 1803 (XVII), 17 U.N. GAOR Supp. (No. 17) at 15, U.N. Doc. A/5217 (1962) and Permanent Sovereignty over Natural Resources of Developing Countries, G.A. res. 3016 (XXVII), 18 December 1972, 12 ILM 226. 25 Charter of Economic Rights and Duties of States, UN Doc. A/RES/29/3281(1974). The Charter of Economic Rights and Duties of States was adopted against the votes of Belgium, Denmark, the Federal Republic of Germany, Luxembourg, the United Kingdom, and the United States; Australia, Canada, France, Ireland, Israel, Italy, Japan, the Netherlands, Norway, and Spain abstained. The roll call vote is registered at 14 ILM 265 (1975). 26 Declaration on the Establishment of a New International Economic Order, UN Doc. A/ RES/S-6/3201 (1974), reprinted 13 ILM 715. Article 4 of the Declaration states: “The new international economic order should be founded on full respect for the following principles: . . . g. Regulation and supervision of the activities of transnational corporations by taking measures in the interest of the national economies of the countries where such transnational corporations operate on the basis of the full sovereignty of those countries; . . .” The Declaration was adopted by the General Assembly without a vote on May 1, 1974. 27 International Labour Organization Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, adopted by the Governing Body of the International Labour Office at its 204th Session (Geneva, November 1977) and amended at its 279th Session (Geneva, November 2000). Available at: http://www.ilo.org/public/english/employment/ multi/download/english.pdf (last checked 9 July 2010). The ILO Declaration contains also references to (already existing) binding instruments. 28 UNCTAD, The Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, UN doc. TD/RBP/CONF/10/Rev.1 (1981). The Set of Principles and Rules was adopted by the United Nations Conference on Restrictive Business Practices on April 22, 1980 and by the General Assembly in resolution 35/63 on December 5, 1980. These documents are available at: http://www.unctad.org/en/docs/tdrbpconf10r2.en.pdf (last checked 9 July 2010). 29 World Health Organization, International Code of Marketing of Breast-milk Substitutes (1981). The Code was adopted by the Thirty-fourth World Health Assembly by resolution WHA34.22 on May 21, 1981. These documents are available at: http://www.who.int/nutrition/ publications/code_english.pdf (last checked 9 July 2010). 30 Guidelines for Consumer Protection, adopted by the United Nations General Assembly Resolution 39/248 on April 9, 1985. 31 The Draft International Code of Conduct on the Transfer of Technology was negotiated between 1976 and 1985. It was not adopted by the United Nations General Assembly. The text of the draft is available at: http://stdev.unctad.org/compendium/documents/totcode%20. html (last checked 9 July 2010).

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and a model convention for double taxation treaties between developed and developing countries.32 Decision 24 of the Andean Pact33 was infused with the same spirit at the sub-regional level. Developed (home) countries were not inactive at the multilateral level. Even before the initiative had shifted to the developing and socialist countries at the beginning of the 1970s, they had succeeded in the adoption (1965) of a convention that established the International Centre for Settlement of Investment Disputes,34 an institution that was largely dormant until the number of international investment disputes began to rise substantially in the late 1990s. But developed countries were largely defensive, trying to limit the initiative of the developing and socialist countries by seeking to keep responsibilities of MNEs voluntary. Their only major initiative concerned the proposal for an international agreement on illicit payments, proposed by the United States; but since neither the developing countries nor other developed countries were supportive, this effort fizzled out as well.35 At the regional level, however, the developed countries adopted (1976) the OECD Declaration on International Investment and Multinational Enterprises.36 It consisted of Guidelines for Multinational Enterprises, complemented by Decisions by the OECD Council on follow-up procedures related to the Guidelines, national treatment, conflicting requirements, and international investment incentives and disincentives. Although this instrument was adopted within a relatively like-minded group of countries (“relatively” because Australia and Canada, in particular, were very much aware of their status as host countries), it reflected the tensions identified earlier in the North-South context, as well as a trade-off between the rights of foreign investors and the desire to regulate the activities of MNEs, with the guide-

32 United Nations Model Double Taxation Convention between Developed and Developing Countries, ST/ESA/102, United Nations (1980), adopted by the Committee of Experts on International Cooperation in Tax Matters in 1979. 33 “Decision 24: Common Regime of Treatment of Foreign Capital and of Trademarks, Patents, Licenses, and Royalties,” November 30, 1976, 16 I.L.M. 138 (1977). 34 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, entered into force on October 14, 1966, available at: http://icsid.worldbank.org/ ICSID/ICSID/RulesMain.jsp. Several years earlier, in 1958, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) was adopted by the United Nations Conference on International Commercial Arbitration. It entered into force on June 7, 1959. 35 See brief history and text of the Draft International Agreement on Illicit Payments available at: http://www.unctad.org/sections/dite/iia/docs/Compendium//en/9%20volume%201.pdf (last checked 9 July 2010). The draft was put before the General Assembly in 1979, but the General Assembly took no action. 36 OECD, Declaration on International Investment and Multinational Enterprises (Paris: OECD, 1976).


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lines being strictly voluntary, although monitoring and review arrangements were made. Since the Declaration was adopted after the New International Economic Order [NIEO] resolutions were passed and before the negotiations on a United Nations Code of Conduct had begun, it prepared the developed countries for those negotiations and signaled that, if they would agree to anything at all, it would have to be in the context of a package addressing the rights and responsibilities of host countries and MNEs, with the responsibilities of MNEs being voluntary.37 B. The Responsibilities of Host Countries and the Rights of Investors Thomas could observe how the objectives of the developing (host) countries drove the efforts to formulate international investment agreements during the 1970s.38 He could also observe how, around the middle of the 1980s, the initiative shifted to the developed countries. Negotiations on virtually every instrument that had not been concluded by then were eventually abandoned, most notably among them (as already mentioned) the United Nations Code of Conduct. The window of opportunity closed for those governments that sought stronger international regulation of FDI and the activities of MNEs. The second oil-price shock in 1979 had been absorbed, and the price of oil was actually falling, while the organization of producer cartels was not successful, weakening the actual and psychological bargaining power of developing countries. The debt crisis that had begun in the early 1980s39 not only further undermined the bargaining power of the developing world, but led to a greater appreciation of the benefits of long-term investment capital as embodied in FDI. Later on, the disintegration of the socialist camp deprived developing countries of an important ally. Most importantly, and partly as a result of these developments, the benefits of FDI came to be more appreciated and countries learned, at least to a certain extent, how to maximize their benefit from such investment. A better understanding of the effects of FDI

37 It should be noted in this context that the OECD countries had agreed much earlier among themselves on instruments liberalizing capital movements and invisible transactions (OECD, Code of Liberalisation of Capital Movements, and OECD, Code of Liberalisation of Current Invisible Operations, both adopted in 1961). 38 See Wälde, “Der UN-Verhaltenskodex,” op. cit. 39 In August 1982, Mexico’s finance minister informed the chairperson of the Federal Reserve, the U.S. Treasury Secretary and the IMF Managing Director that Mexico would be unable to meet its obligation to service its debt that month. By October 1983, 37 countries had rescheduled their debts, and more followed. See Federal Deposit Insurance Corporation, History of the Eighties: Lessons for the Future. Volume 1: An Examination of the Banking Crisis of the 1980s and Early 1990s, at 191, available at: http://www.fdic.gov/bank/historical/ history/191_210.pdf (last checked 9 July 2010).

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and the activities of MNEs allowed them to negotiate more effectively40 (when negotiations took place, especially in natural resource sectors) and to adopt legislation (e.g. competition laws) to minimize certain negative effects. Also, the rising number of MNEs increased competition among these firms for lucrative investment opportunities. The general acceptance of market-based development, as promoted in the framework of the Washington Consensus,41 provided the overall framework for a change in approach toward FDI and the activities of MNEs. As the benefits of FDI came to be seen as out-weighing its costs (and governments learned how to reduce the costs), the cost/benefit calculation of host developing countries changed. With it, the approach of these countries (and, eventually, also that of the formerly socialist countries) to the regulatory framework changed, from controlling FDI and MNE activities, to attracting MNEs and their investments. Red carpets replaced red tape and the laws, regulations and mechanisms that had been put in place to control MNEs; screening agencies became investment promotion agencies [IPAs]. This change in approach occurred both at the national and international levels. At the national level, countries (and not only developing ones) moved strongly—some more, some less—in the direction of creating a more welcoming framework for FDI. While systematic data are not available for the 1980s, they do exist for regulatory changes beginning in 1992. In particular, out of 2,650 changes in national FDI laws in countries across the world between that year and the end of 2008, 90 percent made the investment climate more welcoming for foreign investors.42 A good part of the changes involved the reduction or elimination of entry conditions for MNEs, facilitating their operations and offering incentives for foreign investors. Beginning in the 1990s, furthermore, countries not only sought to make the investment climate more welcoming, but they also made active and increasing efforts to attract FDI. The instrument of choice became the IPA. Eventually, nearly all countries established such agencies, increasingly also at the sub-national level. In 1995, the World Association of Investment Promotion Agencies was set up; by May 2010, its membership had grown to 249 members agencies, from 157 countries.43 World-wide, an estimated 10,000

40

At times assisted by Interregional Advisors like Thomas. John Williamson coined the phrase in 1990 “to refer to the lowest common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989.” John Williamson, “What should the World Bank think about the Washington Consensus?” World Bank Research Observer (15) (2000), at pp. 251–64. 42 See UNCTAD, World Investment Report 2009, op. cit., p. 31. 43 See http://www.waipa.org/why.htm (last checked 9 July 2010). 41


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government agencies at the national and sub-national levels have the mandate to attract foreign investors.44 Among the various instruments IPAs use for this purpose are investment incentives, whose incidence and importance have risen substantially over the past two decades. As a result, the world market for FDI has become highly competitive. It is against this background of a changing cost/benefit calculation and the regulatory changes at the national level that international investment rulemaking continued, but now with developed countries in the driver’s seat. In line with the objectives of developed (home) countries, efforts to define and enforce the responsibilities of MNEs were largely abandoned. Instead, the focus shifted toward host countries assuming binding responsibilities for the treatment (and especially the protection) of foreign investors, further strengthened by procedural rights that provided for investor-State dispute settlement in case investors felt aggrieved by the actions of host country governments; moreover, host countries increasingly assumed commitments (although hesitantly) regarding the improvement of conditions governing the entry and operations of MNEs. In other words, the pervasive liberalization trend at the national level became complemented by the rapid rise of IIAs (at the bilateral, regional or multilateral levels) focusing on the protection of investors and the liberalization of the conditions for their operations. The international investment regime that resulted from this treaty-making has become an important parameter for national policy making, setting the boundaries of what countries can or cannot do domestically in order to promote growth and development. There remains however an important difference between the extent to which developing countries were prepared to assume commitments at the multilateral level, compared to the regional and bilateral levels. At the multilateral level, the most important successes of the developed countries included agreement on the Multilateral Investment Guarantee Agency [MIGA] (1985),45 the General Agreement on Trade in Services [GATS]46 and the Agreement on Trade-Related Investment Measures [TRIMs],47 the latter two concluded in the framework of the Uruguay Round

44 Loewendahl, H., “The rise of emerging market multinationals: investment challenges ahead,” in: Sauvant, K.P. and McAllister, G. with Maschek, W., [Eds.], Foreign Direct Investment from Emerging Markets: The Challenges Ahead (New York: Palgrave Macmillan, forthcoming). 45 Convention Establishing the Multilateral Investment Guarantee Agency, 24 ILM 1598 (1985). 46 General Agreement on Trade in Services [GATS], 1869 UNTS 183; 33 ILM 1167 (1994). This agreement is particularly important, as FDI in services accounts for the bulk of FDI flows and stock. 47 Agreement on Trade-Related Investment Measures [TRIMs], 1868 UNTS 186.

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of GATT (1994). On the other hand, efforts to formulate Guidelines on the Treatment of Foreign Direct Investment (1992),48 undertaken in the framework of the World Bank Group, yielded only a voluntary instrument. The effort, led by the European Union and Japan, to include investment in the negotiations of the WTO Doha Round (launched in 2001) (as part of the “Singapore issues”) yielded a mandate49 to clarify key elements of an eventual multilateral framework on investment and to move to formal negotiations after the Cancun Ministerial Conference of the WTO (2003); but failure to reach consensus at that Conference led to the discontinuation of further discussions of investment in the WTO. In all these instances, it was the opposition of developing countries that prevented more far-reaching agreements: they resisted, where they could, the assumption of greater binding responsibilities vis-à-vis foreign investors that would reduce their national policy space and limit their right to regulate—mirroring in this manner the efforts of developed countries during the 1970s to limit the imposition of responsibilities on MNEs. The agreement to establish MIGA could be concluded (at the time of the debt crisis) because it was limited to offering FDI insurance to MNEs from developed and developing countries, i.e., it did not impose standards of treatment.50 The GATS and TRIMs Agreement were opposed by developing countries, but became part of a broader trade-off in the framework of the Uruguay Round. Besides, GATS most notably adopted a positive list approach to scheduling commitments (which allows countries to enter into commitments on a sector-bysector basis when they see fit to do so), while the TRIMs Agreement was restricted to clarifying the application of existing GATT Articles (III and IV) to four performance requirements. The World Bank Guidelines effort remained voluntary, as it was judged from the beginning that a mandatory effort would not be successful. Finally, the attempt by the WTO to launch negotiations on a multilateral investment framework faced, from the beginning, the resistance of key developing countries (although it was supported by others) and was eventually abandoned in the context of a stalled overall Doha Round. Among the reasons invoked was the fact that the benefits of a multilateral approach had not been

48 World Bank Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment 21 September 1992, published as Legal Framework for the Treatment of Foreign Direct Investment (Volume II, Guidelines) (World Bank, 1992), reproduced as 21 ILM 1363 (1992). 49 See Singapore Ministerial Declaration: World Trade Organization, Singapore Ministerial Declaration, 13 December 1996, WT/MIN(96)/DEC, para. 20. 50 MIGA offers political insurance to enterprises from its members for investments in developing countries against risks, such as expropriation, war and civil unrest, transfer restrictions, and breach of contract.


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demonstrated, while the costs of a multilateral agreement (in terms of having to enter binding commitments regarding the treatment of foreign investors, possibly coupled with cross-retaliation in cases of infringements) were clear. The WTO exercise, moreover, followed the aborted attempt of developed countries to negotiate, among themselves, a Multilateral Agreement on Investment, an effort that was abandoned in 1998 for lack of consensus among the negotiating parties—not because the tradeoff between rights and responsibilities of countries and firms was a stumbling block, but because, in the end, key constituencies did not see the benefit of a compromise in the OECD framework, a compromise that would have left out developing countries while adding little to the existing framework among developed countries.51 At the regional and bilateral levels, however, the regulatory framework for international investment developed rapidly, focusing almost entirely, in a mandatory manner, on the responsibilities of host countries vis-à-vis foreign investors. Developing countries were willing to enter into commitments at these levels since they took place in the context of trade-offs in specific regional settings and since, in the context of bilateral agreements, they could protect themselves through exceptions. Moreover, in their efforts to attract FDI in competition with other countries, they were individually prepared to grant rights that they were not willing to grant multilaterally.52 Bilateral treaties for the promotion and protection of investment, in particular, became the instrument of choice for defining the responsibilities of host countries. Their number grew rapidly, reaching 2,67653 at the end of 2008, involving (at the end of 2007) 179 countries.54 They are complemented by bilateral and regional free trade agreements containing substantial investment commitments; most modern free trade agreements are also free investment agreements. Moreover, the effectiveness of IIAs has risen with the active utilization of the investor-State dispute-settlement mechanism that most of them provide for. While there were few international investor-State arbitrations during the 1980s and the first half of the 1990s, by the end of 2009 at 51 The documentation of the MAI negotiation process is available on the OECD website. See http://www.oecd.org/daf/mai/ (last checked 9 July 2010). See also Graham, E.M., Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprises (Washington: Peterson Institute, 2000) and UNCTAD, “Lessons from the MAI,” UNCTAD Series on Issues in International Investment Agreements (New York and Geneva: UNCTAD, 1999), available at: http:// www.unctad.org/en/docs/psiteiitm22.en.pdf (last checked 9 July 2010). 52 See Guzman, A.T., “Why LDCs sign treaties that hurt them: explaining the popularity of bilateral investment treaties,” 38 Virginia Journal of International Law 639 (1998), pp. 639–88. 53 See UNCTAD, World Investment Report 2009, op. cit., p. 32. 54 See UNCTAD, World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge, UNCTAD (2008), p. 14.

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least 357 known55 international treaty-based arbitration cases had been initiated, over half during the preceding five years. V. Conclusion: Toward Rebalancing the Rights and Responsibilities of Host Countries and Investors The 1990s and early 2000s were the high-water mark of the creation of an investment environment favorable to MNEs and FDI. Led by the developed countries, virtually all governments liberalized, albeit to various degrees, their national regulatory regimes for FDI and strengthened the protection of foreign investors by enshrining it in binding international treaties that define the responsibilities of host countries and the rights of foreign investors. This opened markets for foreign investors and made it safer for them than at any time in the recent past to establish themselves abroad. In the struggle of defining rights and responsibilities in a mandatory manner, the interests and objectives of the developed countries prevailed. The result is a strong international investment regime, primarily geared toward protecting investors, liberalizing their operating conditions and providing them, in particular, with a dispute-settlement mechanism. To quote Thomas: Investment treaties [. . .] have built, indubitably, one of the most effective and truly legal regimes within the fragmented and mostly quite rudimentary institutional frameworks for the global economy. Comparable in terms of legal character and effectiveness to the WTO regime, the international investment regime is arguably more advanced, as it fully incorporates the most important and directly affected non-state actors. In a longer term perspective, claimants (and their lawyers), who are essentially driven by private interests, help ensure greater compliance and effectiveness for the treaties and their underlying objectives than can or is achieved by exclusively inter-state implementation procedures. It also goes beyond the prospective-remedy-only sanction available under the WTO.56

55 Only ICSID reports the number of cases; hence the actual number of disputes is likely to be somewhat higher. The following data are from UNCTAD, “Latest developments in investor-State dispute settlement,” IIA Issues Note, No. 1 (2010), p. 2, available at: http://www. unctad.org/en/docs/webdiaeia20096_en.pdf (last checked 9 July 2010). (UNCTAD has the most comprehensive database on international investment disputes). For a discussion of the reasons for this explosion of investment disputes, see Salacuse, J.W., “Explaining the increased recourse to treaty-based investment dispute settlement,” in: Sauvant, K.P. with ChiswickPatterson, M. [Eds.], Appeals Mechanism in International Investment Disputes, New York: Oxford University Press (2008), at pp. 105–26. 56 Wälde, T.W., “Improving the mechanisms for treaty negotiation and investment disputes: competition and choice as the path to quality and legitimacy,” in: Karl P. Sauvant, [Ed.], Yearbook on International Investment Law and Policy, 2008–2009, OUP (2009), at p. 514.


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And he added: “Investment arbitration is arguably the most astounding success in international law over the past decades [. . .].”57 Thomas witnessed the rise of the international investment law and policy regime and watched—and influenced—how it has gone from efforts to focus on the rights of host countries and the responsibilities of investors, to a focus on the rights of investors and the responsibilities of host countries. However, it is the very strength of the regime in reflecting the interests and objectives of home countries and their investors that is also its greatest weakness. The principal reason is that the regime, as it has emerged, does no longer necessarily and adequately reflect the evolving interests of all stakeholders in the regime, hence, is not stable. To quote Thomas: “[t]he main function of legal instruments—and their capacity to contribute to development oriented economic cooperation—seems to lie in their ability to foster what we may call ‘stability.’”58 As Thomas pointed out, “[i]t is, however, not appropriate to perceive ‘stability’ exclusively in the sense of the term ‘investment security’”. Rather, the appropriate concept for him was “dynamic stability” which he defined as the “ability to provide necessary reliability with requisite adaptation to external changes” and which, at least for his analysis at that time, served to define for him “the function of law in contributing to Third World economic development.”59 Central is that “a legal system must accommodate the interests of all Parties concerned.”60 Not surprisingly, therefore, the question of the proper balance between the rights and responsibilities of host countries and investors is back on the agenda, as is the question of what form this should take. This, in turn, is embedded in the broader issue of a certain re-evaluation of the costs and benefits of FDI and hence the interests and objectives that governments have in the investment area. Several factors suggest and support a movement toward a more balanced regime. To begin with, at the national level, some governments are no longer considering all incoming FDI as equally desirable. In particular, greenfield investment is typically preferred, as it creates new capacity and jobs. M&As, on the other hand, are at times looked upon with suspicion, especially if they take place in sensitive sectors and are undertaken by state-controlled entities. As a result, a number of countries have introduced laws and regulations that

57

Ibid., p. 543. Wälde, T.W., “North/South economic cooperation and international economic development law: legal process and institutional considerations,” in: Lambert, J.D. and Fesharaki, F. [Eds.], Economic and Political Incentives to Petroleum Exploration, International Law Institute (1990), at p. 59. 59 Ibid., p. 61. 60 Ibid., p. 62. 58

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specifically mandate the screening of M&As by state-controlled entities;61 in the United States, for example, the Foreign Investment and National Security Act62 establishes a presumption that such transactions are subject to investigation. Moreover, countries that have traditionally defined themselves primarily as home countries when it came to regulatory frameworks for FDI (i.e. primarily developed countries) have begun to pay more attention to the fact that they are also host countries, and important ones at that. This changes their interest situation as regards the objective of regulation, as, in that capacity (and like developing countries before), they, too, want to have sufficient policy space to pursue their policy objectives and exercise their right to regulate. This perspective is further reinforced, thirdly, by the fact that an increasing number of developed countries are becoming respondents in international arbitration cases and, hence, have a certain interest in circumscribing protections of foreign investors. Thus, by the end of 2009, 17 developed countries had been respondents in known treaty-based investorState disputes (compared to 45 developing countries and 15 economies in transition).63 This number might well rise substantially, given the high number of MNEs and foreign affiliates that, depending on the applicable treaties, may initiate investment disputes.64 Fourthly, to a certain extent, these new developments are driven by the growth in importance of FDI from non-traditional home countries, namely emerging markets. Outflows from these economies amounted to $ 350 billion in 2008, seven times the average of world FDI outflows during the first half of the 1980s.65 In a number of emerging markets, state-owned enterprises play a particular important role and increasingly use M&As to enter foreign markets; in the case of China, for example, some 80–90% of outflows are controlled by state-owned enterprises.66 In the future, furthermore, sovereign wealth funds may become more active, not only through portfolio investment but also foreign direct investment. The rise of these new actors

61 For a review, see Sauvant, K.P., “Driving and countervailing forces: a rebalancing of national FDI policies,” in: Sauvant, K.P. [Ed.], Yearbook on International Investment Law and Policy, 2008–2009, OUP (2009), at p. 514. 62 Foreign Investment and National Security Act of 2007, Pub.L. 110–49, codified as 50 U.S.C. App. 2170 (2007). 63 UNCTAD, “Latest developments in investor-State dispute settlement,” IIA Issues Note, No. 1 (2010), p. 2. 64 In 2009, at least 32 new cases were initiated; see ibid. 65 See UNCTAD, World Investment Report, United Nations (various years). 66 See Cheng, L.K. and Ma, Z. “China’s outward FDI: past and future,” (July 2007), p. 15 online: http://www.nber.org/books_in_progress/china07/cwt07/cheng.pdf (last checked 9 July 2010). (These figures do not include state-owned enterprises administered by regional governments).


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(and competitors), including from countries that may be regarded as strategic competitors, is a new element in the world FDI market and has contributed to the changing cost/benefit calculation of governments, as evidenced most notably in the regulatory changes in a number of developed countries. Indicative of this is how the number of notifications and investigations of cross-border M&As into the United States rose between 2003 and 2008, namely from 41 to 155 in the case of filings, and from 2 to 22 in the case of investigations.67 In line with a substantial decline of cross-border M&As into the United States in 2009, the number of notification decreased significantly that year (to between 70 and 75 transactions), while the number of investigations rose significantly, perhaps to as many as half of the number of filings.68 More broadly, the changing approach to investment is reflected in the nature of the regulatory changes that have taken place at the national level: while, during 1992–2002, only 6 percent of all these changes made the regulatory framework less welcoming for foreign investors, that figure rose to 12 percent during 2003–2004 and 21 percent during 2005–2008.69 Not unrelated to this is, fifthly, the higher propensity of at least some governments (including that of the United States), to place more emphasis on national interest, “essential security interest,” “emergency actions” and similar considerations, in order to reserve possibilities for themselves to take actions, under certain conditions, that contravene treaty obligations in the investment field. Incorporating such considerations into international investment agreements becomes particularly problematic when the relevant clauses are self-judging as this potentially undermines a central pillar of the international investment law edifice.70 These developments—in a process of “dynamic stability” described by Thomas—are likely to contribute to a rebalancing of the international investment regime toward a new balance regarding the rights and responsibilities of host countries and investors in international investment law. This is facilitated by the fact that the relatively clear-cut distinction between host and home countries (and their underlying interests) is fading. Emerging markets, 67 See Sauvant, K.P., “Is the United States ready for FDI from China? Overview,” in: Sauvant, K.P., [Ed.], Investing in the United States: Is the US Ready for FDI from China?, Edward Elgar (2010), at p. 12. The number of notifications for 2008 contained in that source is 165; it was subsequently revised to 155. 68 See Plotkin, M.E. and Fagan, D.N., “Foreign direct investment and U.S. national security: CFIUS under the Obama Administration,” Columbia FDI Perspectives, No. 24, 7 June 2010. At the time of the writing of this chapter, the final figures for notifications and investigations were not yet available. 69 See UNCTAD, World Investment Report 2009, op. cit. 70 See, for example, US Model BIT of 2004, article 18, available at: http://www.state.gov/ documents/organization/117601.pdf (last checked 9 July 2010).

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traditionally primarily host countries, are increasingly becoming home countries as well; as a result, emerging markets are becoming more sensitive to the concerns of investors. Conversely, the traditional home countries (principally developed countries) pay now more attention to their position as host countries. And all of them are interested in advancing their economic growth and development.71 As the underlying FDI interest situations of countries become similar, host/home country interests are likely to be rebalanced. This, in turn, affects how the two dominant themes—and tensions—that governed the United Nations Code of Conduct negotiations are addressed in the evolving international investment law and policy regime: (1) the struggle to find the proper balance between the rights and responsibilities of host countries on one hand and those of MNEs on the other; and (2) the struggle over the legal nature (mandatory vs. voluntary) that any rights and responsibilities should have. I am sure that Thomas would have been an active participant in the discussions of this very difficult process of advancing dynamic stability, had he had the chance to do so.

71 In fact, even during the 1970s, when the FDI/MNE problematique reached the international agenda, a number of developed countries were also interested, at least to a certain degree, in regulating the activities of MNEs, supporting for example (voluntary) guidelines for these enterprises. (For example, The Netherlands was a co-sponsor of the resolution initiating work by the United Nations on this subject; see ECOSOC Res. 1721, 53 U.N. ESCOR, Supp. (no. 1), U.N. Doc. E/5209 (1972) which called on the United Nations Secretary-General to establish a Group of Eminent Persons to study the effects of multinational enterprises on world development and international relations). Today, this interest has become much more pressing, for the reasons outlined earlier.

NEGOTIATED SETTLEMENT OF PUBLIC INFRASTRUCTURE DISPUTES Mark Kantor1 An issue that I have found often difficult (and which I have discussed recently in my training on oil-gas dispute management in St Andrews) is how to combine the appropriate style of interaction between a private investor at the time a dispute starts to loom (as we have it now in so many oil-gas-mining projects dealing with states directly or with state enterprises). The transaction lawyer (or here the relationship lawyer) will want to avoid anything that antagonises the other party; he-she will want to seek mutually successful renegotiation and maintenance of the relationship. But on the other hand, he-she (or others including outside counsel) will already envisage subsequent litigation (e.g. mostly contract or treaty-based arbitration). If you envisage subsequent litigation, you will want to use the leverage from the prospect of subsequently possible arbitration in the on-going negotiations to re-define the relationship. They take place “under the shadow” of subsequent litigation where both parties should (and often do) calculate the prospects, gains, risks and costs, direct and indirect (e.g. reputational, penalisation for litigation) costs. That is well known and not structurally and essentially diffreent [sic] from other dispute-related negotiations “under the shadow” of subsequent litigation possibilities. But how, so my question, can a corporate lawyer avoid the inevitable antagonisation and greater confrontational mood that comes almost inevitably when you raise your litigation option? On one hand you want the other party to know that you have this double-edged sharp tool. You also want him-her to appreciate better than they probably do with optimistic and group-think internal deliberations the true risks they run—which you are often better positioned to tell them than they are to appreciate themselves. But you also want—while using the negotiating tool of pointing towards the litigation prospects—to keep your options with respect to subsequent litigation options open and not commit yourself too early in any formal ways. I have here my own solutions (some discussed in my case study on the SwePol mediation done between two state enterprises and under the shadow of three volatile and politicised evolving regulatory regime and with several influential

1 Mark Kantor is an independent arbitrator and the Editor-in-Chief of Transnational Dispute Management. He teaches both International Business Transaction and International Arbitration as an Adjunct Professor at Georgetown University Law Center. Mr. Kantor is also a Senior Research Fellow at the Vale Columbia Center for Sustainable International Investment. He can be reached by email at [email protected] or through the web at www .mark-kantor.com.

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mark kantor add-on players) but I would be interested to know any reactions on this interface between sound and effective “relationship management” lawyering and the imperatives of being later able to build a sound and solid case. Prof. Thomas Wälde, OGEMID Fri, 14 Sep 2007 05:39:28 EDT

Prof. Thomas Wälde was drawn to discuss the problems of public infrastructure in developing countries. So too, he was drawn to discuss the benefits and limits of negotiated settlements for international investments in infrastructure projects. This essay offers some practical thoughts on the circumstances that encourage or discourage negotiated settlements of disputes between developing country authorities and foreign investors with respect to public infrastructure projects. I. Introduction Innumerable papers have been written and speeches given about finding a path toward settling infrastructure disputes. Too often, those pronouncements are based on assumptions about the underlying problem, or about the capacity of the disputing parties to settle, that are candidly unrealistic. Some amicable dispute resolution advocates demonstrate a missionary zeal for settlement that fails to come to grips with real barriers to resolution. Similarly, other, more hard-eyed critics overstate the barriers to settlement, preferring to describe one party or another as inevitably intransigent or faced by insurmountable moral hazards. At times, perhaps, one of those two polar views is justified by the particular circumstances. But, too often those observers overstate the opportunities for, or barriers to, settlement. This essay will review the experience with respect to a large number of independent power projects (IPPs) caught up in the Indonesian political and economic upheavals triggered by the Asian financial crisis. Most importantly, there are times when the gap between the parties is simply too large to bridge by negotiation. There may be no middle ground that will simultaneously preserve the fundamental economic interests of the principal parties to the dispute. That was the case for the Indonesian IPPs and thus the manner in which those problem projects were addressed is useful for understanding the parameters for negotiated resolution of infrastructure disputes. II. The Indonesian Experience The circumstances facing 27 Indonesian private power projects in 1997–1998 are illustrative of the issues considered in this Essay. Those projects, and their

negotiated settlement of public infrastructure disputes 201 fate, help us understand the potential for amicable resolution of infrastructure disputes between private and State parties. Moreover, those projects help us explore how general economic and political crises create real limits on the prospects for settlement. In general, the Indonesian power projects were negotiated based on a Rupiah/US Dollar exchange rate of around 2,400 Rupiah to the US Dollar. The project participants (both private and public) also assumed steady depreciation of the Rupiah thereafter throughout the life of the power purchase agreement. Moreover, the private investors and their lenders utilized several scenarios (best case, base case and worst case)2 to “stress test” the commercial and economic assumptions for the projects. For example, a “worst case” scenario might have assumed currency depreciation at a 10–15% faster rate than called for by the “base case.” Neither the investors nor the Indonesian government (or indeed anyone other than a few voices in the wilderness) contemplated critically worse Indonesian macroeconomic performance. We know this because the average rates charged by international lenders to borrowers in that region during the relevant period clearly did not reflect any expectation of upheaval. For example, the average spread over 3-month London Interbank Offered Rate (LIBOR) for international project finance borrowings (among the riskiest of transactions) in emerging Asia/Pacific countries in 1995 was only 119.8 basis points (1.198%) over LIBOR.3 The interest rate spreads for corporate and sovereign financings in the region at the time were, naturally, significantly lower. Thus, these rates clearly show that in 1995 the international financial community did not anticipate the catastrophic Asian financial crisis that commenced around June 1997. If project participants had seriously contemplated catastrophic circumstances, they simply would have refrained from negotiating the proposed project. In the event, though, the macroeconomic situation attendant upon the Asian financial crisis proved to be far worse than anyone expected. As a result, all of the 27 projects were halted and several entered into international commercial arbitration. In one of those disputes, Patuha Power Ltd. (Bermuda) v. PT. (Persero) Perusahaan Listruik Negara (“PLN”), the tribunal stated in it Final Award that “Indonesia found itself in a calamitous economic crisis”.4 The tribunal then went on to quote counsel for PLN as follows:

2 “Base Case: A cash flow projection with variables measured at their expected values.” Harvard Business School Project Finance Portal, Glossary of Project Finance Terms and Acronyms (http://www.people.hbs.edu/besty/projfinportal/glossary.htm). 3 See Jorge and Gondanecz, the term structure of credit spreads in project finance, Revised Draft: November 2005, at Table A1, p. 48, available at www.fmpm.ch/docs/9th/papers_2006_ web/9175.doc. 4 Patuha Power Ltd. (Bermuda) v. PT. (Persero) Perusahaan Listruik Negara (May 4, 1999), 14 Mealey’s Int’l Arb. Rep. B-1 (1999) [hereinafter Patuha-PLN Final Award] at B-30.

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mark kantor The Tribunal has to address the claims which are before it against the background of the economic collapse that preceded the presidential decrees in the last quarter of 1997 and made them necessary [. . .]. In 1998 to 1999, the Indonesian economy contracted by 15 percent, resulting in more than 5 million workers losing their jobs. The rupiah [. . .] has lost more than 80 percent of its value since the crisis first erupted [. . .]. Out of a population of 200 million, the number of seriously poor people in Indonesia is projected to reach 130 million in 1999 [. . .].5

During the height of the panic, the Rupiah/US Dollar rate fell to 16,000:1, before stabilizing around 11,000:1. That 11,000:1 ratio requires almost five times as many Rupiah to pay each 1 US Dollar of the power tariff than the original 2,400:1 rate. This effective quintuple increase occurred at a time when the Indonesian economy was suffering a 15+% reduction in Gross Domestic Product (GDP), serious increases in un- and under-employment and the other characteristics of a true economic, social and political crisis. In those circumstances, Indonesia could not easily afford any increase at all in its payments for its power purchase obligations, let alone a quintuple increase. “Splitting the baby” would not help; a 2½X increase (Rps6,000:US$1) in the Rupiah cash stream necessary to meet the US Dollar tariff obligations, or “just” a doubling (Rps4,800:US$1), could not be sustained by Indonesia any more than the actual quintuple increase. Yet, the investors in these power projects also could not absorb significant reductions in their US Dollar revenues. In all of those 27 projects, the project company had or was going to obtain limited-recourse project financing, with the debt capital and equity capital in US Dollars, as well as paying its turnkey construction contractor in US Dollars. Project financings call for long term financing of the project based upon the expected cash flows of the project rather than the balance sheets of the project’s shareholders. The project loans are limited-recourse loans, secured by all of the project assets including the revenue-producing power purchase contracts, rather than made in reliance on the general assets or creditworthiness of the project’s shareholders. By virtue of their collateral security rights, project lenders are legally entitled to assume control of a project if the project company defaults in its payment obligations or breaches other loan obligations. However, the lenders have no recourse against the shareholders. With a typical highly leveraged debt-toequity ratio of 75-to-25 (3:1), reductions in US Dollar receipts below 100% of the expected base case cash flows result in a dollar for dollar reduction in recoveries by the equity investors, since the debt lenders have a prior-

5

Id.

negotiated settlement of public infrastructure disputes 203 ity claim on all cash flows (consistent with the principle that “debt comes before equity”). If the reduction in US Dollar receipts falls below 75% of the contractually guaranteed US Dollar tariff, the cash flow from project revenues available for payments to the shareholders is wiped out because all of the project’s available cash flow is applied to the debt obligations. In such a situation, the equity investors accordingly will get zero back from their equity investments; in general, they will receive no recovery of their invested capital, let alone a return on that capital so long as actual cash flows remain below 75% of the cash flows necessary to cover debt service.6 Illustratively, let us assume the exchange rate for a US Dollar was equal to 11,000 Rupiah at the time of a payment by the Indonesian side, but the project received in a negotiated settlement the highly unlikely sum of 6,000 Rupiah per Dollar of tariff instead of 11,000 Rupiah per Dollar (2½ times the original rate of Rps2,400:US$1) for conversion into US Dollars. Then, the project would obtain less than 55% of its expected US Dollars, producing zero cash flow for equity funds and a shortfall of almost 27% for the principal amount of the loans as well. In such circumstances, that enterprise is deeply insolvent by any legal or commercial definition. High leverage in these projects was encouraged, of course, by both host State and the sponsors. The projects’ sponsors sought high leverage to boost their equity rates of return on their invested equity capital. Leverage will produce this result if the rate of return on the equity funds is significantly higher than the interest rate paid on the borrowed funds. In that circumstance, the difference will accrue to the equity capital. An example illustrates the power of leverage. Suppose a business receives $1 million in equity funds and borrows $4 million at an interest rate of 8 percent (a leverage ratio of 4:1). The business will then invest the $5 million in total funds into productive activities. If that business activity produces a rate of return of 10%, then the business has earnings of $500,000. Out of this $500,000 in earnings, the business must pay $320,000 in interest on the borrowed funds. Accordingly, $180,000 will left available as the return on the equity funds. This is an 18% rate of return on the $1 million in equity funds, a commendable rate of return. Of course, leverage works both ways. If the rate of return on business activities falls from 10% to 6%, then the business’s earnings will drop from $500,000 to only $300,000. The sum payable as 8% interest on the $4 million in debt, however, remains the same—$320,000. As result, the equity holders suffer 6 This is, of course, an oversimplified example. Actual results are affected significantly by (i) the amortization schedule for principal payments under the loan and (ii) the compounding of accrued and unpaid interest on those loans during the period when the project is being constructed and therefore is not yet producing revenues.

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a $20,000 loss, a –2 percent rate of return. By virtue of a highly leveraged capital structure, a 4% drop in return on the business’s productive activities will result in a 20% drop in return on the invested equity, from a nice profit to a painful loss. Host States also sought higher leverage to reduce the tariffs they would have to pay for the electricity from the power projects. Because “debt comes before equity” the holder of a debt claim owing by a borrower has a legal right to receive full payment of the debt from a troubled borrower before the equity investor is entitled to recover any of its equity investment from that borrower. Therefore, the risk faced by the lender is lower than the risk faced by the equity investor. Consequently, the cost of the debt (i.e., the interest rate on the loans) is lower than the cost prospective equity investors will demand as a requirement for investing their equity funds in the project (i.e., expected shareholder equity returns). The size of the electricity tariff must be set as a sum sufficient to cover the cost of funds for both debt and equity. If that is not the case, the investors will simply seek a different project with more attractive returns. Accordingly, increasing the proportion of debt financing as compared with equity financing for a project will in general lower the weighted average cost of capital for the project. Since the cost of the project’s capital must be covered out of the tariffs payable under the power purchase agreement, increasing leverage with additional lower-cost debt capital will result in a lower tariff payment by the host State. For developing countries, the alternative to highly-leveraged project financings of State-owned power plants was to finance those power projects by means of by sovereign borrowings. That alternative, though, had shown its severe limitations in the ‘70s and ‘80s. State ownership and operation of electricity projects had led in a number of countries to underinvestment, producing brownouts and blackouts in urban areas. Too often, many rural areas simply had no electricity at all. Capital-starved developing countries consequently looked to private markets to finance crucial infrastructure they themselves could not provide. The private suppliers of capital, in turn, required tariff rates of return capable of providing competitive market rates of return on invested capital commensurate with the risks. Given the leverage ratios employed by the parties in these privately-financed projects and the hard-currency nature of the project costs and financings, for the foreign investor even “splitting the baby” with a 2½X increase in the Rupiah/US Dollar exchange rate would have been an commercial disaster. Notwithstanding that, from the Indonesian perspective such an increase would have been entirely unsustainable. Thus, in the midst of the Asian financial crisis in 1998, the objective cash flow gap between investors and the host Government for Indonesian power projects was simply too large to bridge.

negotiated settlement of public infrastructure disputes 205 Given the bleak story just outlined, what actually happened? According to Wells & Ahmed,7 14 of the projects successfully renegotiated and commenced commercial operations between 1996 and 2006; the Indonesian government acquired five projects; and a further seven were terminated. Of the 27, only four involved the formal commencement of dispute resolution proceedings; Paiton I, Patuha, Himpurna (Dieng) and Karaha Bodas. Only one (Karaha Bodas) was not resolved. The Indonesian experience shows a variety of results, ranging from prompt settlement to aggressive litigation. In the end, though, all of the projects were resolved through negotiations, except for Karaha Bodas. The fact that there was a range of results, as well as final resolution in almost all of the cases, offers useful lessons for settlement of infrastructure disputes beyond just Indonesia. In the next section, we explore explanations for those results. III. Explanations To explain these results, Wells & Ahmed offer the following conclusions: 1. If the lead investor has other significant interests in the country or is remaining in the power business in the developing world, it is likely to renegotiate. 2. If the lead investor is exiting the business involved or the developing world, it is [sic] likely to turn heavily to the new international system of property rights—in particular to insurance or arbitration, or both. 3. If the lead investor is local, it has no access to the new international property rights and renegotiates. 4. If the lead investor is Japanese, it is likely to turn away from the confrontational approaches of the new property rights.8

These explanations are important, but not exhaustive. Several other significant factors were also at work. First and most significantly, the investors had not yet funded the great bulk of their project investments in a number of those 27 projects. At the time of the Asian crisis, several of the projects had invested only relatively small amounts of equity as development costs. Those particular projects came to a halt before the sunk investment costs were too large in absolute terms for shareholders just to write off without meaningful recovery. As a consequence, the sums at issue were not so large as to affect the finances of the sponsors. By way of example, the loss of 75% of the equity a large multinational sponsor has invested in a power project is significant if

7 Wells & Ahmed, Making Foreign Investment Safe: Property Rights and National Sovereignty (Oxford University Press 2007), at 264–269. 8 Id. at 267.

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the sum invested is $100,000,000, but far less important if the invested capital is $5,000,000—certainly when compared with the overall economic size of the sponsor. When relatively small sums are at issue between large “players,” settlements are far more likely than litigation. But what of the remaining projects, where the capital invested was in fact proportionately significant and a settlement still occurred? Other factors come into play, including the role of debt, personnel change, the “obsolescing bargain,” the impact of time, changes in the “regime,” and the presence of other opportunities creating “non-zero sum” solutions. Each of these factors is explored below. A. The Role of Debt Here, the presence of international lenders in the project transaction helps explain the practical parameters for negotiated settlements. For restructuring private power projects as a result of the Asian financial crisis, Woodhouse notes instructively the unwillingness of host Governments to insist upon settlement terms beyond those sustainable by the projects lenders. [T]he involvement of commercial banks appears to be a hard constraint on how far government officials will allow the actual stream of payments to a project to deviate from the terms of the original contract. Investors have been correct in their expectation that the involvement of financial institutions (particularly large international banks) deters host governments from squeezing the IPPs opportunistically to a level that would affect debt coverage. Indeed, every government official interviewed for this study who had been involved in a renegotiation identified debt payments as a hard constraint on their willingness to pressure a project. . . . . This result, however, does not suggest a positive outcome; where equity is regularly squeezed out of projects, new investment will be slow to follow.9

Even where significant capital had been invested in the project, certain of the remaining deals had not yet drawn down their debt financings from commercial banks, the capital markets or national export credit agencies. In others, however, the project had already borrowed significant sums from international lenders. It is easy to see why the presence of funded commercial loans significantly alters the negotiating equation. Commercial banks use, for example, 3-month LIBOR deposits (“borrowing short”) to fund long term (say, 12 year) loans to a project company (“lending long”). If the project company does not pay interest or principal on its project loans on their due 9 Woodhouse, The Obsolescing Bargain Redux: Foreign Investment in the Electric Power Sector in Developing Countries, 38 N.Y.U. Journal of International Law and Politics 121, 180–181 (2006). See also Wells & Gleason, Is Foreign Infrastructure Investment Still Risky, Harvard Bus. Rev (Sept./Oct. 1995) at 50.

negotiated settlement of public infrastructure disputes 207 dates, then the bank lender does not have its expected source of monies to repay the maturing deposit on its due date. Therefore, the bank lender will need either to find another source to repay that deposit really fast (i.e., “roll over” or replace the deposit in an unexpectedly large amount) or to invade its equity capital to avoid defaulting on its unconditional obligation to repay the deposit. That risk exists on every 3-month rollover date for a loan funded on the basis of 3-month LIBOR.10 “Borrowing short and lending long” is risky business, even though that is exactly what banks are encouraged to do as a matter of public policy in order to increase the sums of credit available in society. Banks react to this risk by trying to be conservative in their lending practices. Thus, they seek to lend only to good-credit borrowers, they decline to extend credit to a borrower who is in economic difficulties, and they take measures to maximize their recoveries on troubled loans. Compounding this situation is the fact that our governments permit (and indeed encourage) commercial banks to maintain very low amounts of equity capital compared to other business institutions, again to increase credit available in society. Highly leveraged companies face greater risks than more heavily capitalized companies. Most of the money that a bank employs to fund loans to its customers is derived from loans made to that bank (principally deposits and short-term commercial paper borrowings). The bank borrows from its depositors and short-term lenders and, in turn, on-lends that money to its own borrowers. If a borrower fails to repay its loans to that bank, however, the borrower’s payment default will create a significant risk that the bank will then be unable to repay its own creditors (also known, of course, as its depositors). A few numbers illustrate just how low the level of equity capital is at commercial banks when compared with equity capital at other businesses. Most US large businesses maintain debt-to-equity ratios of around 1-to-1 or 2-to-1 (i.e., if a company has a debt-to-equity ratio of 1:1 that means 50% of its total capital comes from borrowed money and 50% from equity funds). In 2001–2002, for example, the average debt-toequity ratio of US heavy construction contractors was 1.11–to-1; agricultural producers had an average ratio of 1.70-to-1; real estate developers had an average ratio of 2.72-to-1; and property & casualty insurance companies averaged 2.48-to-1. As noted above, limited-recourse project financings such 10

The timing of deposit maturity dates, and interest payment dates on the project loan, is of course affected by the source of funding for the loans; e.g., one-month, three-month or six-month LIBOR. Moreover, most banks do not in fact “match fund” a particular loan from a particular deposit. Instead, the bank will fund the loan out of a “pool” of its available deposit and other funds. While that approach to managing a bank’s liabilities will complicate the leverage discussion in the text, the fundamental points about borrowing from short-term sources to make long-term loans, and the impact of extremely high-leverage on the associated risks, remain the same.

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as the private power projects in Indonesia are seen as highly-leveraged, with ratios of 3:1 or more, and thus risky businesses. Commercial banks in the US, however, had an average debt-to-equity ratio in 2001–2002 of 12.90-to-1. Put another way, on average more than 92% of a bank’s total capital was debt (including its deposit liabilities), while less than 8% was equity.11 Banks are extremely highly leveraged,12 This enables banks to charge gross “margins” of only 2–3% for risky project finance loans (and much lower margins for loans that are less risky than project finance loans in developing countries) and still earn profits for their shareholders. If a bank’s costs are, for example, 75% of its revenues, then 75% of the 2–3% margin will be applied to pay those costs. Only the remaining 25% will be pre-tax profits on the loan. An example of a $75,000,000 loan priced at LIBOR + 3% illustrates this point. For simplicity, assume that no principal payments have yet been made on the loan, and the full principal amount of the loan is therefore still outstanding. In this example, the bank lender is funding its $75 million loan out of the London Interbank Market for deposits. The rate of interest accruing on those funding deposits is thus the LIBOR for the relevant deposit. The bank lender is on-loaning the amount of the deposit to its own borrower, and charging that borrower LIBOR+3%. The bank lender will only receive the 3% per annum from this loan as gross income, since it will only retain the 3% margin after paying over to the funding bank (the depositor) the portion of the borrower’s scheduled interest payment that comprises LIBOR in order to satisfy the interest due on the deposit. In one year, therefore, the bank lender will receive $2,250,000 as payments in excess of LIBOR (3% of $75 million, per annum). That $2,250,000 (the 3% margin) is not all pre-tax profit, however. From the 3%, the bank lender must pay employee salaries and benefits, capital expenditures, maintenance of premises and indeed all of the expenses of operating its banking business, other than interest on the funding deposit that has already been paid from the LIBOR sum. Therefore, the actual pre-

11 The ratios for banks in other OECD countries are similar. Bank regulators employ the Bank for International Settlements in Basle, Switzerland as a forum for coordinating bank regulatory policies internationally, and the principal economies in the world subscribe to the capital adequacy standards set out in the Basle accords. In general, a bank with 8% equity capital is considered “well-capitalized” under those accords. 12 Prior to the financial crisis of 2008–2009, investment banks have been even more highly leveraged than commercial banks, with equity of only about 3% in many cases. Investment banks such as Goldman Sachs that converted to “bank holding companies” during the crisis were compelled as a consequence of that regulatory conversion to significantly increase their capital bases.

negotiated settlement of public infrastructure disputes 209 tax profit to the bank lender from making the LIBOR + 3% loan is far less than 3% per annum. On this example, if a bank has an aggregate pre-tax profit margin of 25% (i.e., its profits are 25% of its gross revenues), then the pre-tax profit to the bank lender would be 25% of the 3% per annum, or 0.75% per year. Thus, on a per annum basis the bank lender will receive a yearly pre-tax profit equal to only $562,500 (0.25% of the $2,250,000 gross income amount) resulting from the $75 million loan. Even if the profits per loan are fairly small, the small profits on the many loans based on debt comprising 92% of a bank’s capitalization can add up to produce large overall rates of return on the bank’s 8% equity. Importantly, however, the reverse is also true; as explained above, by operation of the principles of leverage the losses on bad loans can result in very large overall rates of loss on the bank’s small equity capital—a point driven home to all of us by the world financial crisis of 2008–2009. Thus, banks must be even more conservative to avoid large losses (or at least a severe reduction in profits) triggered by making significant quantities of bad loans. When banks resist any reductions in the principal or interest owing on defaulted loans, they are reacting exactly as we would expect a lender that is extremely highly leveraged and “borrows short to lend long” to react. How does this affect settlement negotiations? Well, in the midst of economic crisis, Indonesia and other Asian economies required continued access to international commercial banks and capital markets, as well as access to funding from bilateral and multilateral financial institutions such as US Eximbank, JEXIM, ECGD, KfW and others. Official credit agencies, for example, were principal supplier of credit support in a number of the affected Indonesian power projects, including the multi-billion dollar Paiton I and Paiton II projects. Thus, in Paiton I alone, US Eximbank provided $850 million of financial credit and political risk support, OPIC provided $200 million in loans, Japan Eximbank provided $900 million of financial credit and political risk support, and the Japanese Ministry of Trade and Industry provided partial guarantees for $450 million of credit. The credit support from the ECAs took the form of sharing credit or political risk on loans made by commercial lenders. The primary sources of those loans for the projects were international commercial banks. Commercial banks were also the primary source of possible new financings necessary for Indonesia to support trade and investment activities to overcome the financial crisis. Indeed, given their knowledge of and relationships with Indonesian borrowers, the international banks which had made the loans to the 27 IPPs were the very same commercial banks that would be the source of hoped-for “new money” loans to Indonesia for those purposes. If Indonesia sought strongly aggressive restructuring terms from those banks for the

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existing loans, then the banks would have little incentive to accept the next request by the Indonesians for new loans. Moreover, whether or not a State’s official credit agencies provided support, if Indonesia had negotiated even more aggressively in projects where a foreign investor was involved, a risk existed that the investor’s home State might react by slowing its consideration of bilateral and multilateral financial assistance to Indonesia during the crisis. The price of Indonesia taking a stronger position in its stance towards those projects could thus have been loss of access to those sources of capital at a time when the Asian financial crisis made access to that capital essential to avoid further economic disaster. The role of access to capital markets may be an important determinative for terms of a settlement; if a State concludes it can do without access to international capital markets, as Argentina effectively did in 2001–2002, then the impact of settlement on lenders will be far less of a “hard constraint” on the State than was the case for Indonesia in the 1990s. Indeed, if a State is not facing full economic crisis, but is taking political and economic steps that cut off access to international capital markets in any event, then the issue of access to international financial sources may not play a significant role in compelling that State towards compromise. That may have been the situation for several Latin American States in 2006–2010. Of course, dramatically increased oil and gas revenues for a handful of countries have provided those countries with a source of international capital as an alternative to borrowings from international financial institutions.13 B. The Role of Personnel Change Changes in personnel play an important role. For individuals involved in negotiating the contractual terms of a transaction, seeing a counterparty “break its promises” is particularly hard to accept. Too much time energy and sweat equity had gone into those extraordinarily intensive negotiations for those negotiators, regardless of the side of the table on which they sat, to accept easily their loss. Additionally, acknowledging losses carries with it obvious and negative career consequences for the executives with responsibility for the distressed investment. Over time, though, those individuals may depart the scene for other tasks or other employers. Once the individuals with a personal stake in not sustaining large losses have left the scene, the new negotiators are less likely to be constrained by an emotional investment in

13 It would be interesting to see how oil-rich States approach settlement discussions with oil at $50+/bbl as compared with $100+/bbl.

negotiated settlement of public infrastructure disputes 211 the transaction. Commercial lenders, most obviously, have a mechanism for implementing this transfer of responsibility, by moving control of a troubled loan from account officers to the workout group. Many corporate parties, however, do not have such internal organizational arrangements. Accordingly, the passage of responsibility to new individuals and groups must occur through attrition and the vagaries of the employment process. In the latter case, only time will produce staffing turnover. Transfer of responsibility within Government authorities is even harder to describe. It may occur gradually or not at all. Or, in circumstances like the Indonesian upheavals of the late 1990s, some parts of a Government may turn over dramatically as a result of regime change while other parts endure and indeed are empowered by the very same regime change. Governmental authorities, it is well known, find it particularly hard to compromise “the taxpayers’ money.” Civil servants committed to serving their fellow citizens may not consider it appropriate to make concessions they regard as against the public interest. The process of settlement is complicated by the involvement of numerous agencies and authorities in the development and implementation of a settlement bargain, with often cross-cutting interest and perspectives. Partisan politics may also play a role, as officials may be loath to invite political attacks from opponents for “selling out” the country by accepting a compromise proposal. Some further argue that Government officials are concerned about “sticking their necks out to accept something for which they might be criticized later.” Instead, officials may prefer to wait for a court or arbitral tribunal to make the decision. In some countries, a change in regime may even carry with it the risk of criminal proceedings against prior counsel for the State. Rumors circulated in 2007 that the new Ecuadorian administration might bring criminal actions against former outside counsel in the bilateral investment treaty claim between Occidental and Ecuador. From:

Oil-Gas-Energy-Mining-Infrastructure Dispute Management on behalf of __________________ Sent: Thu 2007–02–22 00:40 To: OGEMID@xxxxxxxxxxxxxx Subject: Criminal actions against ex-counsel to the GOE in the Oxy case I just want to bring to your attention that the current Ecuadorian administration may initiate criminal actions against the lawyers of the local law firm that the previous administration hired to represent the Government in the Oxy case (many of whom I know personally). The argument runs that they left the Government in “a total state of defenselessness.” (See

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article below) It is certainly worrisome that some of our colleagues have to work under this type of circumstances. Look forward to hearing your comments. Best, **** Augusto Tandazo, jurista petrolero, manifestó que el Ecuador puede remediar arbitraje interpuesto por la empresa petrolera Occidental ante el CIADI, sin embargo precisó que para ello es necesario una Procuraduría que se ponga la camiseta de Ecuador, y un Gobierno que le de seguimiento a este caso. El jurista manifestó que es necesario separar dos temas, uno lo que sucede con respecto al arbitraje dentro del CIADI, y otro el de la traición de la Procuraduría General del Estado y de los abogados contratados por la misma para que defiendan al Estado en el caso Occidental, y que no se lo puede dejar pasar. Tandazo recordó que el Presidente Correa envió una carta al Procurador General del Estado en la que indicaba que conformaría una comisión de la verdad para que se analice el tema de la defensa de Ecuador en el caso Occidental, y aseveró que de este tema no solo tendrán que salir responsabilidades civiles y administrativas, sino también penales, ya que con la actuación de la Procuraduría y de los abogados contratados para el caso, se dejó al Estado en una total situación de indefensión. Asimismo, expresó que el Ecuador puede remediar la situación que dejaron el anterior Procurador y los abogados contratados actuando de manera frontal, directa, enérgica y fundamentada ante el CIADI, y aseveró que la anterior defensa del Estado ecuatoriano no le dio importancia al hecho de que existe una resolución de la Junta de Gobernadores del Banco Mundial, en la que se establece que el Secretario General del CIADI no puede registrar una solicitud de arbitraje porque sí, sino que tiene que filtrarla y analizarla para determinar si es que tiene el consentimiento de las partes, y precisó que en este caso no existe el consentimiento escrito de Ecuador, por lo cual ese debería ser el argumento que se presente. Tandazo, entrevistado en Radio Centro, explicó que el Ecuador tiene muchos argumentos en el arbitraje presentado por la OXY ante el CIADI, sin embargo precisó que el Estado necesita una Procuraduría que se ponga la camiseta del Ecuador y un Gobierno que le de un seguimiento al caso, y precisó que es necesario recordar que el país tienen 7 arbitrajes al momento.

negotiated settlement of public infrastructure disputes 213 El jurista indicó que existe un arbitraje al que le tiene más recelo que al de la Occidental, y es el que solicitó City Oriente en octubre pasado con respecto a las reformas a la Ley de Hidrocarburos, y puntualizó que esto es peligroso, ya que si se llegan a botar las reformas realizadas por el Estado, entonces se perderán todos los ingresos extras que tiene el Ecuador. While the rumors proved unfounded in the case of Ecuador, the risk of criminal proceedings against counsel is not to be taken lightly in some countries. Consequently, until a final and enforceable judgment or award is rendered by a tribunal, and perhaps even afterwards, it is hard to achieve a compromise with some government authorities. That will be particularly so if the government authorities consider the initial bargain to been unfair, extracted only through temporary superior bargaining advantage or infected by corruption or cronyism. C. The Obsolescing Bargain The situation is exacerbated by a transaction that is subject to the problem of the “obsolescing bargain.” Simply put, before the project has been constructed the equity investors have considerable leverage in the bargaining process. Once the capital has been invested and the project has been built and is operating, bargaining leverage shifts to the host State. [N]egotiating leverage in a large private infrastructure project shifts during the project life cycle. Initially, the government needs private investors and thus offers attractive terms. Once operational, the investors require a long amortization period to attain their expected return while the host government has already secured what it needs; the original bargain has become obsolete. Theory predicts that the host will force a change in terms—either by outright nationalization or by squeezing revenue streams as far as possible.14

D. The Role of Time A further point to take into account is the role of time. Time plays into the equation in at least three important economic ways; (i) the continuing growth of interest obligations on project debt, (ii) the impact on how the project sponsors and lenders recognize losses on their investments for accounting purposes and (iii) changes in external circumstances.

14

Woodhouse, supra n. 2 at 127.

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1. The continuing growth of interest obligations on project debt Looking first at the continuing growth of interest on a project’s debt, it is worth recalling that interest unconditionally continues to accumulate on the project’s debt throughout the dispute period. Illustratively, if a $500,000,000 project is financed 75% with debt at a 6.5% per annum fixed interest rate, then for every month of delay resulting from a dispute the project must pay more than US$1.3 million (US$1,354,167) per month in additional interest to its lenders. That continued accumulation of interest expenses, unless checked, will quickly overwhelm the ability of the project sponsors to obtain recovery of their equity investment, let alone a profitable return on their invested capital. Such a transactional structure may drive both short-term moves to compromise and long-term moves to settle. The means of checking that growth in debt claims are clear: payment, negotiated compromise or bankruptcy. The ability to find time for a negotiated settlement therefore depends crucially on the attitudes of the lenders who hold those claims. If short-term compromise with those lenders occurs, then time becomes available for longer-term negotiations between project and the other counterparties, including the host State. 2. Accounting principles The willingness in turn of lenders to offer a short-term compromise brings us naturally to the role of accounting principles in the settlement process. To outsiders, the dry subject of accounting may not seem to be an important driver of settlement dynamics. To persons who have lived through workouts and restructurings, though, the impact of RAP (Regulatory Accounting Principles), GAAP (Generally Accepted Accounting Principles) and IAP (international Accounting Principles) quickly becomes central. This can be illustrated with two points: (i) the impact of regulatory accounting principles on banks and other regulated lenders; and (ii) the difference in impact of accounting principles between lenders and commercial project participants. By operation of regulatory accounting principles (RAP) accepted by principal central bank and monetary authorities worldwide, lenders such as commercial banks generally must stop accruing interest income once a loan is 90 days or more in arrears. For example, the US Federal Deposit Insurance Corporation provides the following instructions to its bank examiners: The Report of Examination includes information on overdue and nonaccrual loans. Loans which are still accruing interest but are past their maturity or on which either interest or principal is due and unpaid (including unplanned overdrafts) are separated by loan type into two distinct groupings: 30 to 89 days past due and 90 days or more past due. Nonaccrual loans may include both current and past due loans. In the case of installment credit, a loan will not be considered overdue until at least two monthly payments are delinquent. The same will

negotiated settlement of public infrastructure disputes 215 apply to real estate mortgage loans, term loans or any other loans payable on regular monthly installments of principal and interest.15

Importantly, the result of placing a loan on non-accrual status is to require the bank to hold reserves (i.e., additional capital ) against its troubled loans very soon after the interest or principal default occurs. The obligation to put a loan on non-accrual status thus triggers very real economic costs that, candidly, affect individual careers as well as a bank’s balance sheet and income statement. Even if principal payments on a loan are not yet scheduled to be made (or occur only once or twice a year), interest payments usually occur no less than once every three months in large international financings. The next potential interest payment default is therefore always just 90 days away, if not closer. When a large number of loans go on non-accrual status during the same period, the impact on the capital adequacy of the bank can jeopardize the bank’s solvency. For example, in 2009 over 140 US banks became insolvent or were taken over by the US bank regulatory authorities as a result of the 2008–2009 financial crisis. In light of the highly-leveraged structure for commercial banks discussed above, the impact of non-accrual status on the profits of a bank is both swift and disproportionately painful. As a consequence, banks will take significant steps to defer, or capitalize, overdue interest payments rather than put the loan on non-accrual status. The internal process of coming to grips with the troubled status of a loan therefore occurs fairly early and can involve several layers of a bank’s internal organization. Banks, unlike commercial parties and governments, are motivated by this regulatory accounting rule to reach short-term compromises quickly. Moreover, the time pressure created by the rules for non-accrual status and reserves also acts to trigger the process of migrating responsibility away from the original project officers to the workout office. In contrast, the shareholders of an international investment do not face the same immediate accounting pressure. Losses on equity investments are typically recognized under US Generally Accepted Accounting Principles (GAAP) when the carrying amount of the asset “may not be recoverable.” Under SFAS 144: impairment is the condition that exists when the carrying amount of a longlived asset (asset group) exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value.

15 Federal Deposit Insurance Corporation, Risk Management Manual of Examination Policies, Section 3.2—Loans (http://www.fdic.gov/regulations/safety/manual/Section3–2.html).

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Similarly, International Financial Reporting Standards (IFRS) call in IAS 36 for assets to be tested for “impairment” only if there is some indication that the carrying value of the assets may have been impaired. These principles are a much more flexible concept than the non-accrual rules for loans, not being tied to any particular fixed period of time (90 days) nor to any particular event (payment default). In practice, equity investors will often take quite a long period of time before accepting commercial reality and recognizing their losses by writing down the value of the investment on their accounting records. Once the losses have been recognized, of course, the equity investor has “accepted the pain”. Accordingly, more scope then exists for a negotiated solution. Occasionally, the date for recognizing the loss is affected by a mergers and acquisition (M&A) transaction, in which the acquirer writes down the acquired investment to its reduced “fair value” upon consummating the acquisition. It is surprising to see how often settlement of a long-standing dispute is effected around the same time as the acquisition of one of the disputing parties, an event that of course triggers both accounting revaluations and changes in personnel. Interestingly, some project participants in international projects come from jurisdictions where accounting rules are less rigorously enforced, for example Japan. In those circumstances, the impact on settlement behavior of accounting rules may be less significant than the impact on project participants who come from jurisdictions in which accounting rules are more rigorously enforced. Wells & Ahmed describe this phenomenon: “[i]f the lead investor is Japanese, it is likely to turn away from the confrontational approaches of the new property rights.” Japan is not alone in approaching accounting for impaired assets with far more flexibility than US and EU authorities. China, for example, is another country where accounting principles are currently perceived by political, economic and business observers as flexible. As a consequence, the approach of Chinese shareholders towards infrastructure disputes may be substantially different from the approach taken by Western investors. 3. Changes in External Factors Time also creates opportunities for changes in external factors. When the Asian financial crisis crystallized, demand for electricity in Indonesia dropped dramatically. The 27 private power projects, of course, had been authorized by Government authorities, corporate boards and bank credit committees alike based on estimates of demand for power that proved in 1997 to have been very unrealistic. Revised projections, taking account of the new macroeconomic circumstances created by the Asian financial crisis, showed far less need for the power to be generated by more than two dozen new power

negotiated settlement of public infrastructure disputes 217 plants. At the same time, critics loudly proclaimed that the initial demand estimates had been wildly inflated in any event. Yet, as the impact of the crisis dissipated over the subsequent years, electricity demand in Indonesia rebounded quickly. In the years after the crisis, the reduced expectations of the private parties (created by recognition of loss, changes in personnel, etc.) coupled with renewed need for the power to be generated by private power projects, narrowed the settlement gap to a point where compromise became feasible again. Indeed, by 2007, Indonesia had begun to solicit new private power projects as demand once again outstripped supply although difficulties agreeing terms with prospective investors has delayed completion of negotiations. “Four foreign countries interested to take part in Indonesia’s power development: official www.chinaview.cn 2009–12–19 16:45:16 JAKARTA, Dec. 19 (Xinhua)—Prominent power firm and lenders from Russia, Japan, Kuwait and Germany have pledged their interests to take part in Indonesia’s huge power plant projects expected to commence next year, a local media report said Saturday. Fahmi Mohtar, Director of Indonesian state-run power firm, PT Perusahaan Listrik Negara (PLN), conveyed that he had received representatives of those power firms who conveyed their interests, according to the Detik.com. The Russian power firm, United Energy System of Russia (RAO UES), wanted to take part in the construction of Indonesia’s hydropower plants, coal-fired power plants and geothermal power plants, Fahmi was quoted as saying. Meanwhile, Germany, Japan and Kuwait wanted to provide funds to finance Indonesia’s power plant projects, he said. Germany wanted to finance coal-fired and geothermal power plant constructions outside Java with funds from German Development Bank (KFW/Kreditanstalt fur Wiederaufbau). Kuwait offered unlimited funds to finance power plant projects, Fahmi said. He said that talks with those parties over power plant projects they can take part in are underway. Indonesian government is in dire needs of power supply in several regions across the country. It had set two phases of fast-track power plant projects with capacity of 10,000 MW in each phase with total projects are expected to be settled in 2014.”

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Did regime change make a difference as well? The Asian financial crisis triggered the collapse of the Suharto regime, a regime rife with corruption, cronyism and nepotism (KKN) that infected all aspects of Indonesian life (including the power projects). Initially, no compromise over “corrupt” projects seemed politically possible—despite the simultaneous failure by Indonesian authorities to pursue seriously the corruption claims against Gen. Suharto and his “friends and family.” But, at the same time, the incoming authorities needed the support of US, Japanese and bilateral and multilateral financial institutions to overcome the continuing impact of the Asian financial crisis. Those institutions (US Eximbank, OPIC, JEXIM and others) had funded some of the most prominent of the 27 Indonesian power projects. The bilateral and multilateral institutions and their governments would not lightly accept repudiation of those projects, especially if the Indonesian side was unwilling to pursue its own malefactors. The leverage held by Western government authorities as sources of finance also served to compel efforts to compromise, most famously moving the Indonesian government to rein in the effort by its electricity state enterprise (PLN) to repudiate its obligations under the project agreements in the Paiton project and block international arbitration under those agreements in Indonesian courts. F. Not Zero Sum For some project participants, Indonesia was able to offer other ventures as partial compensation for the compromises in the affected power projects. That enabled the terms of the compromise to eat more deeply into the equity investment in the particular power project, while still limiting the overall adverse impact on the equity investors themselves. The credibility of such offers of non-cash compensation became stronger, of course, when demand for electricity rebounded in Indonesia, thereby creating potentially profitable alternative ventures again. As demand for power again outstripped Indonesia’s ability to finance, construct and operate power projects from its own resources, the Indonesian State again began to look at private power projects and international financing sources to close the infrastructure development gap. G. Crystallizing the Sum in Dispute A further important element is the need for negotiating parties to have a clear picture of the amount at stake in the dispute. It may be helpful to compare, in this regard, sovereign debt rescheduling negotiations with commercial restructuring negotiations. The amount at stake in a negotiation over

negotiated settlement of public infrastructure disputes 219 defaulted debt is normally clear as a matter of both law and fact; the accrued but unpaid principal and interest, calculated in accordance with the terms of the debt instrument. Moreover, if the debt instrument is governed by New York or English law, the prospects for successful borrower defenses based on “changes in circumstances” theories such as “odious debts” and similar excuses from performance are demonstrably low.16 Further, lenders and borrowers alike are aware that obtaining a court judgment does not, of itself, produce recovery of the awarded sums. It is still necessary to enforce the judgment, and the legal barriers created by sovereign immunity and separate entity defenses at the enforcement stage are well-known and quite formidable. However, relatively liquid international markets exist for trading sovereign debt instruments, whether creditworthy or impaired. Consequently, transparent current market prices exist to assist lender and borrower alike in comparing market values with the judgment amount for the debt. Thus, lenders and borrowers do not need to go through a complex litigation proceeding just to crystallize the sum at issue in the negotiation or to assess the prospects for recovery outside settlement. In contrast to claims for payment of defaulted debt instruments, the judgment amount and the market value of a commercial claim (for example, the investment treaty claims by investors against Argentina resulting from the crisis of 1999–2001) are both far less easy to crystallize. The amount of the judgment (or arbitral award) itself will depend on currently unsettled law regarding computation of compensation under international investment law principles. Even for complete destruction of a company’s value (e.g., expropriation), the amount to be awarded can range from “net invested capital” to “fair market value” to “net book value” to “benefit of the bargain” computations, depending it would appear on the attitude of the particular tribunal. Indeed, host States argue the injured business is worthless at the same time the investors assert multi-billion dollar claims for the same business. Tribunals too often determine compensation sums in an unpredictable and erratic fashion. Even when the legal standard for compensation is clear, the factual circumstances surrounding the calculation of the sum to be awarded are often

16 “As it happens, no national or international tribunal has ever cited Odious Debt as grounds for invalidating a sovereign obligation. Each of the treaties and other examples of state practice cited even by the doctrine’s most thorough and principled advocates appears fundamentally flawed—it lacks one or more of the doctrine’s essential elements and/or is accompanied by a chorus of specific disavowals of the doctrine by indispensable parties. But even if the examples were on point, the fact that Odious Debt’s most fervent proponents to this day must cite an 1898 treaty and a 1923 arbitration as their best authorities suggests that the law-making project is in trouble.” Gelpern, “What Iraq and Argentina Might Learn from Each Other”, 6 Chicago Journal of International Law 391, 406 (2005)

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very complex, requiring forecasts of future performance, assumptions about debt-to-equity ratios, interest rates, foreign exchange rates, discount rates, growth rates, revenue streams, capital expenditures and expenses and numerous other hotly contested components of the valuation. As the US Internal Revenue Service has stated, valuation “is essentially a future prophecy”.17 As a result, competing views of the sum to be awarded in compensation can often differ radically, even when based on the same legal compensation principles. Moreover, international investment law regarding “change in circumstances” defenses to expropriation and “fair & equitable treatment” claims, such as “essential security,” “state of necessity” and “force majeure” is also unsettled, as is witnessed by inter alia the various decisions in the awards involving Argentina and, respectively, CMS, Enron, Sempras, LG&E, Metalpar, Continental Casualty and National Grid. Similarly, the conflicting decisions in Lauder v. Czech Republic and CME v. Czech Republic demonstrate that the factual assessment of the impact of multiple sources of causation, intervening causes and joint contribution on liability (and thus the sum to be awarded) can also be unpredictable. Once a judgment or award is rendered in an investment claim, of course, the beneficiary of that decision faces the same sovereign immunity and “separate entity” defenses at the enforcement stage as does the holder of a judgment on account of defaulted sovereign debt. Illustratively, Article 55 of the ICSID Convention expressly preserves the sovereign immunity defense at the enforcement stage. Article 55 Nothing in Article 54 [recognition and enforcement of ICSID arbitral awards] shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.

Thus, the arbitration process may be necessary to crystallize the amount really in dispute, rather than the too-often exaggerated claims and defenses found in the judicial or arbitral proceedings. The holder of a commercial claim is, only after the proceeding, in the same position as the holder of a debt claim is even before judicial proceedings—knowing the crystallized sum of the claim and knowing as well the barriers to realization created by the enforcement defenses.

17

IRS Revenue Ruling 59–60 (1959).

negotiated settlement of public infrastructure disputes 221 IV. Conclusion? What practical conclusions can we draw from this story? 1. Time is a crucial component in finding a compromise solution, whether because it forces loss recognition or because it permits brighter economic prospects to return. 2. To obtain that crucial time, project participants need to find a way to address the continuing growth of debt claims resulting from the accrual of interest. 3. For companies in jurisdictions where accounting rules are enforced on a relatively reliable basis, the inability to avoid recognizing losses can be a driver toward settlement by creating the flexibility necessary for compromise to occur. 4. Differing accounting principles towards the clarity and timing of loss recognition help explain differences in behavior between lenders and equity investors. 5. Governments find it particularly hard to compromise. 6. External factors like renewed growth play a crucial role in bridging economic gaps. 7. Personnel changes matter. 8. And, finally, crystallizing the sum truly in dispute allows the disputing parties to more promptly move towards serious negotiations.

INTERNATIONAL CORPORATE SOCIAL RESPONSIBILITY AND INTERNATIONAL LAW Peter Muchlinski* This chapter seeks to assess how, to date, international law has embraced the concept of “International Corporate Social Responsibility” [ICSR]. It is based on a number of publications written by the author.1 As such it aims to bring together a number of themes that are central to the development of this new issue for international law. In particular, it seeks to consider what ICSR actually is, why this matter is on the agenda at all and what underlying principles it works from. It then brings matters up to date with an examination of one aspect of the wider ICSR debate, namely, how are corporate responsibilities in the field of human rights being developed in the UN? This is pertinent as the UN Special Representative of the Secretary General on Human Rights and Business, John Ruggie [SRSG], has challenged the system of international law to come up with a response to the demand that corporations act in accordance with international human rights standards in their operations. That said ICSR is a much wider concept than just human rights, as will be shown below. Nonetheless, a focus on human rights may be useful

* Professor in International Commercial Law, The School of Law, The School of Oriental and African Studies, University of London. An early draft of this paper was presented at the British Institute of International and Comparative Law Annual Conference, London, 5 June 2009. Aspects of the paper were also presented at the Memorial Symposium for Professor Thomas Wälde at St Andrews, Scotland, on 15–16 October 2009. 1 See Peter Muchlinski “Multinational Enterprises as Actors in International Law: Creating “Soft Law” Obligations and “Hard Law” Rights in Math Noortmann and Cedric Ryngaert (eds) Non-State Actor Dynamics in International Law: From Law Taking to Law Making? (London, Ashgate Publishing, forthcoming 2010) 9; Peter Muchlinski “Corporate Social Responsibility” in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds) The Oxford Handbook of International Investment Law (Oxford, Oxford University Press, 2008) 637; Peter T. Muchlinski Multinational Enterprises and the Law (Oxford, Oxford University Press, 2nd ed, 2007) at 100–104 and Part III “The Social Dimension”; Peter Muchlinski “International Business Regulation: An Ethical Discourse in the Making?” in Tom Campbell and Seumas Miller (eds) Human Rights and Moral Responsibilities of Corporate and Public Sector Organisations (The Hague, Kluwer Law International, 2004) 81; Peter Muchlinski “Human rights, social responsibility and the regulation of international business: The development of international standard by intergovernmental organizations” 3 Non-States Actors and International Law 123 (2003); Peter T. Muchlinski “Human Rights and Multinationals: is There a Problem?” 77 International Affairs 31 (2001); P.T. Muchlinski “The Social Dimension of International Investment Agreements” in J. Faundez, M. Footer and J.J. Norton, eds Governance, Development and Globalisation (London, Blackstone Press, 2000) 373.

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as it is in this area that direct legal obligations for corporate actors are most likely to develop.2 I. The Meaning of “International Corporate Social Responsibility” (ICSR) A. Definitions of ICSR in International Instruments ICSR obligations may be seen as the quid pro quo for the protection of investors and investments under international investment protection agreements and international economic rules such as those of the WTO.3 Such obligations can be drawn rather widely. For instance, the Draft United Nations Code of Conduct on Transnational Corporations listed the obligations of transnational corporations [TNCs] across a wide range of issues including respect for the sovereignty of the host State and its political system, respect for human rights, abstention from corrupt practices, refraining from using the economic power of the TNC in a manner damaging to the economic well-being of the countries in which a firm operates, including observance of tax and anti-monopoly laws, and ensuring full disclosure concerning the activities of the firm.4 Similarly, the OECD Guidelines for Multinational Enterprises [MNEs] contain a section on “General Policies” which is worth reproducing in full as it offers what appears to be an emerging consensus on the social obligations of MNEs:5

2 See Jennifer A. Zerk Multinationals and Corporate Social Responsibility (Cambridge, Cambridge University Press, 2006) at 310: “While it is important not to confuse CSR and human rights, it is likely that any direct obligations for multinationals will emerge primarily from human rights law.” 3 For a discussion of the concept of social responsibility and its implications for international standard setting and investment protection see UNCTAD The Social Responsibility of Transnational Corporations (New York and Geneva, United Nations, 1999); UNCTAD World Investment Report 1999 (New York and Geneva, United Nations, 1999) ch. XII; UNCTAD World Investment Report 2003 (New York and Geneva, United Nations, 2003) Ch. VI. See too UNCTAD Social Responsibility UNCTAD Series on issues in international investment agreements (New York and Geneva, United Nations, 2001) all available online at www.unctad .org/iia. 4 See UNCTAD International Investment Agreements: A Compendium (New York and Geneva, United Nations, 1996) Vol. I. 161. 5 The remaining chapters include: “Disclosure, Employment and Industrial Relations, Environment, Combating Bribery, Consumer Interests, Science and Technology, Competition and Taxation”.

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Enterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders. In this regard, enterprises should: 1. Contribute to economic, social and environmental progress with a view to achieving sustainable development. 2. Respect the human rights of those affected by their activities consistent with the host government’s international obligations and commitments. 3. Encourage local capacity building through close co-operation with the local community, including business interests, as well as developing the enterprise’s activities in domestic and foreign markets, consistent with the need for sound commercial practice. 4. Encourage human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees. 5. Refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to environmental, health, safety, labour, taxation, financial incentives, or other issues. 6. Support and uphold good corporate governance principles and develop and apply good corporate governance practices. 7. Develop and apply effective self-regulatory practices and management systems that foster a relationship of confidence and mutual trust between enterprises and the societies in which they operate. 8. Promote employee awareness of, and compliance with, company policies through appropriate dissemination of these policies, including through training programmes. 9. Refrain from discriminatory or disciplinary action against employees who make bona fide reports to management or, as appropriate, to the competent authorities, on practices that contravene the law, the Guidelines or the enterprise’s policies. 10. Encourage, where practicable, business partners, including suppliers and sub-contractors, to apply principles of corporate conduct compatible with the Guidelines. 11. Abstain from any improper involvement in local political activities.6 As may be apparent from this wide-ranging list of issues, the precise classification of ICSR standards is difficult as, potentially, the phrase could cover all aspects of corporate regulation. By contrast, the UN Global Compact

6 OECD Guidelines for Multinational Enterprises, 27 June 2000, p. 14. http://www.oecd .org/dataoecd/56/36/1922428.pdf.

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contains a more specific set of standards.7 The Ten Principles on which the Global Compact is founded concern the areas of human rights, labour, the environment and anti-corruption. These are said to enjoy universal consensus and are derived from a number of significant international instruments.8 From the above, it is clear that social responsibility may take both an economic, social and ethical dimension in that MNEs are expected to conduct their economic affairs in good faith and in accordance with proper standards of economic activity, while also observing fundamental principles of good social and ethical conduct. B. ICSR and Corporate Governance The OECD Guidelines mention good corporate governance as a general policy to be respected by TNCs. However, ICSR should be distinguished from corporate governance as a concept. The latter is a specific term of art used to denote the organisation of ownership, participation, disclosure and decisionmaking in corporations rather than a general term that concerns the conduct of wider relationships between the corporation and various social actors. That said the interaction of the two concepts is significant from the perspective of putting ICSR aims into operation. For example one way to ensure corporate responsibility in the field of employment rights or health and safety might be to have adequate worker participation and consultation within the firm. Thus the law may require the setting up of works councils or the placing of worker representatives on the company board. In this way the ICSR goal of observance of workers rights is given real force through corporate governance laws.9 Equally the observance of human rights by the firm might

7

See www.unglobalcompact.org. Ibid. These are: The Universal Declaration of Human Rights; The International Labour Organization’s Declaration on Fundamental Principles and Rights at Work; The Rio Declaration on Environment and Development and The United Nations Convention Against Corruption. The Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment, and anti-corruption: “Human Rights: Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2: make sure that they are not complicit in human rights abuses. Labour Standards: Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour; Principle 5: the effective abolition of child labour; and Principle 6: the elimination of discrimination in respect of employment and occupation. Environment: Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies. Anti-Corruption: Principle 10: Businesses should work against all forms of corruption, including extortion and bribery.” 9 See further Muchlinski Multinational Enterprises above n. 1 at 354ff on European rules on worker participation in MNEs. 8


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entail the institution of a human rights impact assessment system within the managerial decision-making structure of the firm.10 These two examples raise the question of whether international law advocates a specific approach to corporate governance through the concept of ICSR. Given its scope and subject-matter the Global Compact advocates a “stakeholder” model of corporate governance. Such a model is apparently espoused by the OECD Guidelines, which, as noted above, assert that, “[e]nterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders [. . .]”11 Traditionally the main stakeholders that have been protected by legal rules on corporate governance are shareholders.12 Such an approach to corporate governance leads to a narrow economic model of the corporation which is seen as a vehicle for enhancing “shareholder value”. However a modern “stakeholder” approach requires that other groups—workers, suppliers and distributors the local community and society as a whole—are considered in the decision-making structures of the company. It creates a more social conception of the company.13 While the OECD Guidelines modestly advocate this approach the OECD Principles of Corporate Governance have been said to follow a shareholder oriented model.14 This is not entirely the case as the OECD Principles leave this issue to national law. Where national

10 See further Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises Human rights impact assessments—resolving key methodological questions (UN Doc A/HRC/4/74, 5 February 2007). 11 See n. 6 above. 12 See further Brenda Hannigan Company Law (Oxford, Oxford University Press, 2nd ed, 2009) at 115 and see too the UK Corporate Governance Code 2010 which defines corporate governance in these terms at p. 1: “The first version of the UK Code on Corporate Governance (the Code) was produced in 1992 by the Cadbury Committee. Its paragraph 2.5 is still the classic definition of the context of the Code: “Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting. Available at http://www.frc.org.uk/documents/pagemanager/ Corporate_Governance/UK%20Corp%20Gov%20Code%20June%202010.pdf. 13 On which see further Simon Zadek The Civil Corporation (London, Earthscan, revised ed, 2007). 14 OECD Principles of Corporate Governance (Paris, OECD, 2004) available at http://www .oecd.org/dataoecd/32/18/31557724.pdf. For this position see Paddy Ireland and Renginee Pillay “Corporate Social Responsibility and the New Constitutionalism” in Peter Utting (ed). Corporate Social Responsibility and Regulatory Governance: Towards Inclusive Development? (UNRISD/Palgrave-Macmillan forthcoming) available at http://kar.kent.ac.uk/11696/.

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laws include wider stakeholder obligations then companies are obliged to follow these and to answer to legal remedies for illegal acts. In addition the UN Special Representative’s work shows a clear preference for a stakeholder approach. In his 2008 Report to the Human Rights Council, the UN Special Representative made clear that the failure of companies to meet their responsibility to respect human rights, can subject companies to the courts of public opinion—comprising employees, communities, consumers, civil society, as well as investors—and occasionally to charges in actual courts. Whereas governments define the scope of legal compliance, the broader scope of the responsibility to respect is defined by social expectations—as part of what is sometimes called a company’s social licence to operate.15

Though not expressly directed at issues of corporate governance, the implication of this approach is to place a wider stakeholder perspective at the heart of the responsibility to respect human rights. Indeed it is hard to see how any such responsibility could exist if this approach were not taken. A pure “shareholder value” approach would put into question the very notion of human rights responsibilities for companies, given that human rights claimants are in no economically significant relationship with the company, as compared to shareholders, who carry the investment risk. This excludes human rights claimants from any rights over the company save so far as allowed under the general law of obligations and tort. Under company law they are without remedy. From the above ICSR can be seen as an overarching concept that covers the general social and economic obligations of corporations that together can be said to define “good corporate citizenship” and includes best managerial practice in corporate governance to achieve this end. What remains unclear, however, is the precise model of corporate governance that ought to inform this concept.16 A wider stakeholder model would appear indispensable to such aims. In addition there is pressure to evolve a comprehensive system of corporate accountability that ensures ICSR leads to effective change in cor-

15 Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, Protect, Respect and Remedy: a Framework for Business and Human Rights UN Doc. A/HRC/8/5 7 April 2008 para. 54. 16 It is interesting to note that John Ruggie has commissioned research on the relationship between corporate governance under company law and the corporate duty to respect human rights: Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, Business and human rights: Towards operationalizing the “protect, respect and remedy” framework UN Doc. A/HRC/11/13 22 April 2009 at paras. 24–27.


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porate behaviour.17 In this connection the legal status of the various instruments that contain ICSR standards becomes significant. C. Legal Status of ICSR Instruments Historically, business groups have been wary of any attempts to extend greater international legal accountability for the social consequences of their activities. Corporate responsibility was seen as little more than the making of profits and the protection of shareholder value18 This approach dominated corporate responses to early attempts, in the 1970s, to extend social responsibility norms for MNEs into international law. Thus, in relation to the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (The Tripartite Declaration) the employer’s representatives argued for non-mandatory guidelines and got their way.19 The Tripartite Declaration would not have been passed had a mandatory code been sought.20 Equally the adoption of the voluntary OECD Guidelines on Multinational Enterprises in 1976 was an attempt to pre-empt a more intrusive UN Code on Transnational Corporations, which itself was never adopted.21 However, this attitude of resistance could not last indefinitely. More recently, corporations have come to accept that some kind of accountability for the social consequences of their actions may be inevitable under international law and they have sought to influence the resulting framework.22 This change in attitude can be illustrated by reference to the emergence of a sense that firms should respect and observe human rights standards in the course of their operations, which is discussed below. A major characteristic of this change is the contrast in the legal status of norms relating to investor protection and corporate accountability. The former, being located mainly in binding International Investment Agreements [IIAs], create a regime of protective rules by which host countries should treat foreign investors, thereby reducing investment risk. The latter are

17 See Ireland and Pillay, above n.14 and see generally Peter Utting and Jennifer Clapp Corporate Accountability and Sustainable Development: Ecological Economics and Human Well-Being (New Delhi, Oxford University Press, 2008). 18 See for a statement of this position David Henderson Misguided Virtue: False Notions of Corporate Social Responsibility (Wellington, New Zealand Business Roundtable, 2001). 19 The latest version of the ILO Tripartite Declaration is from 2006 and is available at http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/documents/publication/ wcms_094386.pdf. 20 See further John Robinson Multinationals and Political Control (Aldershot, Gower, 1983) at 172. 21 See further Muchlinski Multinational Enterprises above n. 1 at 660–62. 22 See generally Jennifer Zerk above n. 2 at 23–25 and see Muchlinski Multinational Enterprises above n. 1 at 100–104.

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located mainly in “soft law” instruments of a non-binding nature and create a “best efforts” guide to good corporate practice, such as the OECD Guidelines, the UN Global Compact or the ILO Tripartite Declaration mentioned above. It is arguable that this is not a balanced regime as it favours binding investor protection without reciprocal binding norms. That this should be so arises out of the very process of international law making in the field of corporations and foreign investment. The starting point is the positivist assertion that corporations are not subjects of international law and so no international law relating to them can exist. International law can only exist in relation to States. And yet there is a growing body of international norms that do deal with corporations and their investments. As noted, some of these norms seek to impose standards of good behaviour on corporations. In this respect, international law is seeking to develop regulatory standards below which corporate behaviour should not fall. That these standards are mainly non-binding comes not from the fact that corporations are not subjects of international law but from the role that corporate interests play in the evolution of this system. How firms lobby home and host States and intergovernmental organisations [IGOs] is a key element here. Equally the binding nature of norms relating to investor protection also arises out of this process. Thus in this regard corporate actors can be seen as “law makers” even though the traditional law making process of international law does not formally accord any status to such entities in that process.23 II. Why ICSR and Who Wants It?24 A. The Prioritisation of Investor Protection To date, a predominant concern of international law in relation to business has been the development of rules and procedures to promote and protect foreign investment both by individuals and corporations. It grew out of the belief that uncontrolled State power was a potential obstacle to the security of such investments, which could not always be adequately protected by national laws and procedures. This was particularly the case in newly independent post-colonial States, emerging from foreign control and administration dur-

23 See further Peter Muchlinski “Multinational Enterprises as Actors in International Law: Creating ‘Soft Law’ Obligations and ‘Hard Law’ Rights” in Math Noortmann and Cedric Ryngaert (eds) Non-State Actor Dynamics in International Law: From Law Taking to Law Making? (London, Ashgate Publishing, 2010) 9–39. 24 This section is adapted from Muchlinski “Corporate Social Responsibility” above n. 1 at 638–642.


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ing the decades after the Second World War. In such States an understandable hostility to foreign domination, a necessary spur to the independence struggle, might be combined with highly State centric policy instruments and practices, inspired by the model of the Soviet Union and its satellites, to create an administrative climate that was heedless to notions of respect for contractual obligations, or private property rights, when faced with the immediate needs of national reconstruction and development. Such policy responses took place in the context of the Cold War between the East and West, exacerbating the perception that foreign investors and their investments were not safe in the wider post-war world.25 Yet the post-colonial States offered major investment opportunities whether as sources of natural resources or potential new markets for goods and services. In order to seek a solution to the confidence problem that investing in these States had created Western governments responded by introducing bilateral investment protection and promotion treaties [BITs]. B. Balancing Investor Protection and ICSR It has been argued that the protective standards contained in BITs display one overarching protection standard based on the investor’s legitimate expectations.26 If so then this indicates an entry point for reconsideration of the balance between the protection of investor’s rights and their wider social responsibilities. The protection of the investor’s legitimate expectations requires an understanding of what those expectations are and how they come about. Clearly, such expectations will be conditioned by a number of factors. These will include, most obviously, the need for a stable and predictable investment environment free from arbitrary and capricious decision-making by the host State and its agencies. Thus far, existing BITs can serve to provide a useful function in protecting this class of expectations. However, the investor’s expectations are not only tied up with preferences for certain types of governmental conduct. They arise out of the wider environment in which the investment is being made. They cannot, therefore, arise in some a-social context. It is what John Ruggie has termed the “social licence to operate”.27 Investors cannot enter a country as if there was no society or community there, upon which their activities will impact, whether for good or ill. Equally, the security and profitability of the investment will be closely 25 See further M. Sornarajah The International Law on Foreign Investment (Cambridge, Cambridge University Press, 3rd ed 2010) ch. 1. 26 See Todd Grierson-Weiler and Ian Laird, “Standards of Treatment” in Muchlinski, Ortino and Schreuer (eds) above n. 1 ch. 8. 27 See text at n. 15 above and see too Ruggie 2009 above n. 16 at para. 46.

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linked with the investor’s assessment of its feasibility within the context of the society that it enters. Good investment decisions are made in this light. It is also a major motivation behind increasing corporate concern about the social impact of their investments. The long term stability of an investment will be enhanced if it is able to bring tangible benefits to the society in which it is located. Accordingly, corporations may build in a social responsibility component into their project plans to further this goal.28 Equally they will not be surprised by, or seek to change, regulatory regimes that can ensure a good social return on the investment.29 The consequences of not building such a component may be too costly in the changing environment of global business activity, set as it is in a new order of social and political expectations of business. For example, based on studies conducted into the issue of the cost of human rights violations for companies, the SRSG asserts that: corporate failure to respond to allegations of human rights impacts may result in further backlash and recurrence of complaints. A number of complaints that went without company response were resubmitted. At a minimum, this indicates that it is in a corporation’s interest to respond to these allegations without delay. Even though impacts can be complex and easily multiply, it is equally simple. Managing respect for human rights at the outset of company activities can eliminate or mitigate the unintended succession of abuses and accompanying risks.30

Thus it is in the corporate self-interest to act in conformity with human rights standards, a major aspect of ICSR. Whether BITs in their current form can respond to these aspects of investor’s expectations is open to discussion. For now the reasons behind the new expectations of business conduct will be briefly examined.

28 See further Christopher Bartlett, Sumantra Ghoshal and Paul Beamish Transnational Management, Text cases and Readings in Cross Border Management (Boston, McGraw-Hill, International Edition, 5th Ed, 2008) at 94–5 citing Shell and BP’s commitments to sustainable development as an example of how multinational enterprises might seek to articulate the benefits they bring to less developed countries. 29 See in this connection Methanex v United States Award of 3 August 2005 available at http://www.state.gov/documents/organization/51052.pdf or 44 ILM 1345 (2005) where the tribunal held that investors should be aware of the regulatory environment and the possibility of regulatory change in the absence of assurances to the contrary by the host country. In this case, the issue concerned environmental regulation. Such regulation can help to stimulate positive environmental performance from firms and to enhance their competitive position in this area. That in turn may result in calls for regulation not for deregulation. 30 Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises Addendum “Corporations and human rights: a survey of the scope and patterns of alleged corporate-related human rights abuse” /HRC/8/5/Add. 2, 23 May 2008 para. 100.


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C. New Expectations for Responsible Business Conduct The “international corporate social responsibility” of MNEs as the main type of foreign investor, can be seen as a response to popular perceptions concerning the loss of corporate accountability as an effect of economic globalisation.31 It may be said to flow from the obligations that corporations owe to the societies in which they operate. This may be justified philosophically by appeals to a “social contract” and to the need of all actors, including nonState actors, to observe the preservation of human dignity through adherence to fundamental human rights.32 There remains a great deal of disagreement over the precise extent of this issue. Indeed, there are equally strong voices arguing that the whole question of ICSR is much exaggerated and may well lead to policies that will harm the beneficial effects of international business activity.33 Such opposition has existed through out time. Calls for corporate responsibility are as old as business itself. Indeed when one thinks of the campaign to emancipate slaves in the 18th and 19th centuries is this not a call for the social and moral responsibility of commercial actors?34 Equally, calls for ICSR can be viewed as no more than the extension, to the international

31 See Ruggie 2008 above n. 15 at para. 3: “The root cause of the business and human rights predicament today lies in the governance gaps created by globalization—between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences. These governance gaps provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation. How to narrow and ultimately bridge the gaps in relation to human rights is our fundamental challenge.” See further David Korten When Corporations Rule the World (West Hartford, Conn, Kumarian Press, 1995) ch. 11 “Marketing the World” and Naomi Klein No Logo (London, Flamingo Harper-Collins, 2000). For a more alarmist account see Noreena Hertz The Silent Takeover: Global Capitalism and the Death of Democracy (Arrow Books, 2002). 32 See further Thomas Donaldson The Ethics of International Business (Oxford, Oxford University Press, UK Paperback Ed, 1992) and Peter Muchlinski “International Business Regulation: An Ethical Discourse in the Making” above n. 1; Muchlinski Multinational Enterprises n. 1 above ch. 13. 33 See from a neo-liberal perspective David Henderson Misguided Virtue: False Notions of Corporate Social Responsibility (Wellington, New Zealand Business Roundtable, 2001). For a critical development perspective see Michael Blowfield and Jedrzej George Frynas (eds) “Critical Perspectives on Corporate Social Responsibility” 81 International Affairs No. 3 May 2005. 34 On the issue of the abolition of slavery as an early campaign for commercial social responsibility (used to denote the fact that most slave owners were individual plantation owners not companies) see further the history of what may be the worlds first campaigning international human rights NGO, Anti-Slavery International (Originally the Anti-Slavery Society) available at http://www.antislavery.org/english/what_we_do/our_history.aspx. The fact that this campaign led to the eventual outlawing of slavery and, indirectly, to its later condemnation as an international crime, points to the possibility for international law to reform, by regulation, corporate and other business practices that are seen as anti-social or criminal.

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arena, of standards of regulation that are well known and highly entrenched in national laws, regulations and practices. They are the result of centuries of reform towards a more civilised performance of commercial activities and a recognition that, in the absence of regulation, human nature can direct itself to the commission of evil for personal gain.35 This belief is also apparent in the most recent position taken by the SRSG when he equates the need to protect against corporate wrongdoing in relation to human rights with the types of governance gaps and failures that produced the current economic crisis and which led to a permissive environment for corporate wrongdoing in general.36 D. The Role of NGOs The principal movers for reform on the international level are nongovernmental organisations [NGOs] campaigning for the increased regulation of corporate foreign investors, mainly from and environmental and developmental perspective, with observance of human rights also becoming an increasingly important topic. Their impact in the investment field was first strongly felt in the course of the negotiations for the Multilateral Agreement on Investment [MAI], where they sought to highlight the absence of any social responsibility provisions for MNEs, leading them to the view that the draft MAI was too one-sided and cared only for the protection of investors. Indeed, the MAI went further than many existing IIAs in that it not only covered post-entry treatment of investors and their investments but gave positive rights of non-discriminatory entry to them, as well as rights to delocalise disputes and take them to international arbitration.37 In the result the NGOs succeeded in placing environmental protection and labour rights issues into the draft negotiating text, though this was never adopted as the negotiations broke down in 1998. In addition, NGO campaigning has highlighted numerous cases of abuse of human rights by or with the complicity of corporations. Perhaps the most important example has been the sustained campaign against the use of baby milk substitutes in developing countries, which has resulted in international codes of conduct.38 Other examples

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See further Jennifer Zerk above n. 2 at 15–29. See Ruggie 2009 above n. 16 at paras. 7–11 and 119. 37 See further Zerk above n. 2 at 18–21 and P.Muchlinski “The Rise and Fall of the Multilateral Agreement on Investment: Where Now?” 34 Int’l. Law. 1033 (2000). 38 See the World Health Organization International Code on the Marketing of Breast Milk Substitutes (Geneva, WHO, 1981) at http://www.who.int/nutrition/publications/code_english .pdf. See further Baby Milk Action website at http://www.babymilkaction.org/pages/boycott .html and the International Baby Food Action Network at http://www.ibfan.org/index-ibfan .html. 36


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include the campaigns for justice for the victims of the Bhopal accident39 as well as more recent human rights campaigns in a range of areas.40 Thus from the above it can be seen that appeals to ICSR in international law arise out of a concern for greater balance in the legal regime affecting corporate actors placed against the backdrop of an apparent accountability deficit arising out of the globalisation of international business through the operations of MNEs and from the existence of regulatory gaps which create a permissive environment for corporate wrongdoing. Taking into account how this legal regime is developing, the influence of corporate lobbying appears to be being countered by NGO lobbying and influence. Concerned NGOs can, through the use of alternative policy models, shift the debate away from industry specific concerns towards a more socially responsive agenda which can remain a powerful source of opinion even where national and parliamentary sovereignties may be weakened by globalisation.41 In addition, the corporate lobbying of States and IGOs will not always bear fruit. The power of MNEs to set regulatory agendas should not be overestimated. Though they can act as powerful and influential lobbyists, MNEs do not possess anything like the power of States.42 They lack diplomatic and military power, and their economic power, though considerable, is highly contingent.43 Much depends on the general strength, and competitive conditions, of the market or sector in which firms operate, the overall state of the economy, and the degree of unique competitive advantage possessed by the firm. In effect only the most important firms will have the ability to lobby effectively. This tends to be the most financially powerful firms that can afford to spend the most on lobbying activities.44

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See further the International Campaign for Justice in Bhopal at http://www.bhopal.net. See further the highly informative Business and Human Rights Resource Centre website at http://www.business-humanrights.org/Home. 41 Muchlinski Multinational Enterprises above n. 1 at 109. See further John Braithwaite and Peter Drahos Global Business Regulation (Cambridge, Cambridge University press, 2000) ch. 26. 42 For a discussion of how MNEs have lobbied for changes in international investment law and policy see further Peter T. Muchlinski “‘Global Bukowina’ Examined: Viewing the Multinational Enterprise as a Transnational Law-making Community” in Gunther Teubner (ed) Global Law Without a State (Aldershot, Dartmouth Publishing, 1997) 79 at 90–97. 43 In this regard the oft cited idea that the capital output of leading MNEs is greater than the GDP of certain nation states is quite misleading. The bases upon which the profits and losses of MNEs are calculated differ so greatly from the methods by which the GDP of states is calculated as to make such a comparison meaningless. 44 See further Hui Chen, David Parsley, Ya-Wen Yang, “Corporate Lobbying and Financial Performance” June 2008 available at http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=1014264 who base their findings on publicly available data on the lobbying expenditures of leading US firms in the period 1998–2005. See too Dale D. Murphy The Structure of Regulatory Competition: Corporations and Public Policies in a Global Economy (Oxford, Oxford University Press, 2004). 40

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Equally the lobbying power of MNEs will be constrained by the fact that they are dependent to a significant degree on their home State to protect their capacity to do business transnationally. Furthermore, home States are unlikely to sacrifice wider foreign policy goals to the protection of the special interests of particular corporations or industries located in the home country.45 But where State and corporate interests intersect then business friendly regimes may be sought at the international level. Therefore, it would be wrong to say that corporate influence exists in a uniformly favourable environment. States will not always prioritise corporate concerns and other non-State actors with an interest in the content of corporate regulation under international law will also have an input. III. The Case of Human Rights and Corporations46 A. Early References in International Instruments Turning to human rights obligations of corporate actors, as noted earlier there appears to have been an acceptance of the need to observe certain international standards in corporate operations, but with an emphasis on self-regulatory approaches backed up by enforcement sanctions at national level. The initial position was that corporate actors could not be held responsible for human rights violations which were exclusively the responsibility of States. Indeed the original version of the OECD Guidelines on Multinational Enterprises is silent on human rights in general.47 The only human rights related issues were those found in the Guideline on Employment and Industrial Relations which required only that employers follow national standards in employment relations and encouraged MNEs to respect the freedom of association and non-discrimination in employment. It was not until the 2000 revision of the Guidelines that an express reference to human rights was made.48 By contrast the Draft UN Code of Conduct for Transnational Corporations contained a provision on human rights:

45 See John H. Dunning and Sarianna M. Lundan Multinational Enterprises and the Global Economy (Cheltenham, Edward Elgar, 2nd ed, 2008) at 693–4. 46 This section is adapted from Muchlinski above n. 24. 47 OECD Guidelines for Multinational Enterprises, 21 June 1976, 15 ILM 977 (1976). 48 Ibid., revision of 27 June 2000, II General Policies 2 “enterprises should [. . .] respect the human rights of those affected by their activities consistent with the host government’s international obligations and commitments.” Available at http://www.oecd.org/dataoecd/56/ 36/1922428.pdf.


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Transnational corporations should/shall respect human rights and fundamental freedoms in countries in which they operate. In their social and industrial relations, transnational corporations should/shall not discriminate on the basis of race, colour, sex, religion, language, social, national and ethnic origin or political or other opinion. Transnational corporations should/shall conform to government policies designed to extend equality of opportunity and treatment.49

The main disagreement was not upon the need to include such a provision in the UN Draft Code but as to its legal force, as seen by the “should/shall” options. In this the Draft Code lays down what has since become the most contentious issue in the debate over the extension of human rights obligations to MNEs and other business enterprises, namely, whether a legally binding obligation in this regard is possible under international law. Here again the influence of corporate actors is seen in the vigorous initiatives taken to develop self-regulatory responses and to avoid legally binding obligations.50 In order to explain this development it is first necessary briefly to trace the more recent discussions of the issue before UN human rights bodies. B. The UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights During the late 1990s the UN Sub-Commission on Human Rights took an interest in the role of human rights obligations for TNCs. The approach was one of concern about the possibly deleterious effects of profit oriented business activities on the observance of human rights especially in the case of developing countries.51 The response was to establish a Sessional Working Group whose task was to examine the possibility of drawing up a set of norms for the human rights responsibilities of TNCs and other business enterprises. In 2003 this process resulted in the adoption, by the Sub-Commission of the UN Norms on the Responsibilities of Transnational Corporations and 49

UNCTC The United Nations Code of Conduct on Transnational Corporations (UNCTC Current Studies Series A No. 4, New York, United Nations, 1986) para. 13 at 31 or UN Compendium above n. 4. 50 Thus corporate actors have been keen to develop internal human rights impact assessment systems, and supporting “soft” initiatives such as the UN Global Compact while also arguing vigorously against direct obligations under international law, as reflected in opposition to the now abandoned UN Norms on Human Rights and Business (see further below). See Ann Zammit Development at Risk: Rethinking UN-Business Partnerships (Geneva, South Centre and UNRISD, 2003) at 153–4. 51 See further David Weissbrodt and Muria Kruger “Human Rights Responsibilities of Business as Non-State Actors” in Phillip Alston (ed) Non-State Actors and Human Rights (Oxford, Oxford University Press, 2005) 315 at 322–28; Larry Cata Backer “Multinational Corporations, Transnational Law: The United Nations Norms and the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social responsibility in International Law” 37 Columbia HRLR 287 at 321–32 (2006).

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Other Business Enterprises with Regard to Human Rights (UN Norms).52 The UN Norms sought to establish a normative “top-down” approach to the extension of human rights obligations to business actors. They would do so through the use of the corporate “sphere of influence” to require firms to include observance of the UN Norms as a condition of contracts with suppliers and distributors, and to observe the UN Norms internally in their dealings with employees and with the wider community. This self-regulatory approach would be backed up by monitoring and supervision by civil society groups, IGOs and others, while States would be expected to provide legal remedies through which business actors could compensate those who had been exposed to human rights infringements. This was a problematic position that gave rise to strong criticism of the UN Norms. In particular, although the UN Norms contained many binding norms of international human rights law some of the rights that were included may not have such a legal status.53 Furthermore, the traditional positivist argument that human rights obligations can only be carried by States has been repeated against the UN Norms. Thus the United States argued that, “human rights obligations apply to States, not non-State actors, and it is incumbent on States when they deem necessary to adopt national laws that address the obligations of private actors.”54 In addition, as the SRSG 52 Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (hereafter UN Norms). (UN Doc. E/CN.4/Sub.2/2003/12/ Rev.2(2003) 13 August 2003, available at http://www1.umn.edu/humanrts/links/normsAug2003.html, or www.business-humanrights.org. See too Commentary on the Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (hereafter Commentary) (UN Doc.E/CN.4/Sub.2/2003/38.Rev.2(2003) available at http://www1.umn.edu/humanrts/links/commentary-Aug2003.html or www.businesshumanrights.org. See further for a summary and analysis of the principal provisions of the Norms Muchlinski Multinational Enterprises above n. 1 at 519–24, David Weissbrodt and Muria Kruger “Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights” 97 AJIL 901 (2003), Amnesty International The UN Human Rights Norms for Business: Towards Legal Accountability (London, Amnesty International, 2004); Rebecca M.M. Wallace and Olga Martin-Ortega “The UN Norms: A First Step to Universal Regulation of Transnational Corporations’ Responsibilities for Human Rights?” 26 Dublin Univ. LJ 304 (2004) and Backer above n. 45 at 333–55. 53 See further “In the Matter of the Draft “Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with regard to Human Rights” Opinion of Professor Emeritus Maurice Mendelson QC (4 April 2004) appended to the CBI submission to the UN High Commissioner for Human Rights (on file with author). This opinion was available at www.ohchr.org/english/issues/globalization/business/docs/confederationbritish2.doc .but this web page is not longer active. A summary of the opinion can be found at http:// www.reports-and-materials.org/UN-submissions-excerpts-02–Dec-2004.doc. 54 United States Statement on Item 17 of the Sixty First Session of the UN Human Rights Commission, 20 April 2005 available from www.business-humanrights.org. See too opposition from the UK, Saudi Arabia, Egypt and India “Company norms ‘must be on UN rights agenda” Financial Times 8 April 2004 at 9. The International Chamber of Commerce was the foremost business group opposed to the UN Norms.


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asserted, “preliminary research has not identified the emergence of uniform and consistent State practice establishing corporate responsibilities under customary international law.”55 The SRSG felt that the UN Norms defined a, “limited list of rights linked to imprecise and expansive responsibilities, rather than defining the specific responsibilities of companies with regard to all rights.”56 C. The New UN Framework for Corporate Responsibility and Human Rights In place of the UN Norms approach the SRSG proposed a corporate “responsibility to respect” human rights. This is a distinctive notion that seeks to determine what precise responsibilities companies have in relation to rights. In this connection the SRSG emphasizes that while corporations can be considered “organs of society”, they are specialized economic organs, not democratic public interest institutions. As such, their responsibilities cannot and should not simply mirror the duties of States. Accordingly, the Special Representative has focused on identifying the distinctive responsibilities of companies in relation to human rights.57

Thus the SRSG sees the economic functions of corporations as the starting point for the “responsibility to respect”.58 This concept is developed by the SRSG to explain the limits of human rights obligations of corporate actors in what he would see as a more realistic framework, avoiding what he terms “strategic gaming” over who is responsible for what. This is not a return to some kind of “enhanced shareholder value” concept of corporate governance. It is, rather, an attempt to differentiate, as a matter of international law, between State obligations to protect human rights and corporate responsibilities to respect human rights. These can only be carried out by way of changes in processes of corporate governance backed up by national legal sanctions, given the current state of international law. Equally, this approach does not exclude binding legal duties on corporations under international law for all time. It is a response to the legal realities of today based on existing systems of corporate risk assessment.

55 See Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises John Ruggie Business and human rights: mapping international standards of responsibility and accountability for corporate acts UN Doc. A/HRC/4/35 19 February 2007 at Para. 34. citing Zerk, above n. 2 and State survey in A/HRC/4/35/Add. 3. 56 See Ruggie 2008 above n. 15 at para. 51. 57 Ibid., at para. 53. The reference to “organs of society” alludes to the use of this phrase in the UN Norms which is taken from the Universal Declaration on Human Rights. 58 On the social perspective of the UN Norms and their challenge to established notions of corporate governance see further Backer above n. 45 at 357–74.

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Central to the “responsibility to respect” is corporate “due diligence” a process that is already well known to firms as a method for assessing risks. In relation to human rights obligations this should require the development of a corporate human rights policy, the use of human rights impact assessments, the integration of human rights policies throughout the company and the tracking of performance.59 The proper exercise of due diligence would avoid corporate complicity in human rights violations.60 However the SRSG’s approach is not devoid of mandatory regulation. The self-regulatory approach is backed up by legal enforcement mechanisms at the level of the State which retains the duty to protect human rights. Indeed the SRSG is positive in his view that national legal remedies should be strengthened and made more accessible to claimants.61 More recently, in the light of discussions with stakeholder groups a number of further questions concerning due diligence have emerged.62 First, the concept is not used in strictly transactional terms by the SRSG but is a wider concept which focuses on the entire life cycle of a project or business activity aimed at avoiding and mitigating human rights risks. Secondly, not only the primary investor but also the bank or other lender financing the investment would have to undertake due diligence, though how this differs from the due diligence of the primary investor requires further clarification. Thirdly small and medium sized enterprises and members of supply chains will also have to undertake due diligence although the precise scope and extent of this is yet to be determined. A fourth issue is how to integrate human rights concerns into the decision-making processes of the firm: if it is a free-standing procedure the firm may not achieve sufficient connection between corporate decisions and human rights concerns while a fully integrated procedure may devalue the special qualities of human rights risk assessment. Finally, the issue of the relationship between due diligence and liability remains open to concern. Some fear that this process could create the risk of new liabilities by providing otherwise unavailable information against the company. This concern is rejected by the SRSG who feels that, to the contrary, a well managed due diligence assessment could avoid liability as it encourages a robust risk assessment, encourages positive action to mitigate known risks and transparency about the state of the company’s knowledge of the risk, avoiding accusations of misrepresentations and cover-ups. That said it is hard to see the adoption of “human rights due diligence” by companies as being devoid of legally binding responsibilities. The concept 59 60 61 62

Ruggie 2008 above n. 15 at paras 59–64. Ibid. at paras 73–81. Ibid. at paras 83–91. See Ruggie 2009 above n. 16 at paras. 71–84 on which this paragraph is based.


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of due diligence is based on the need to comply with legal and financial liabilities and to reduce the risk of such liabilities undermining a business venture. Similarly, the adoption of human rights due diligence assessment connotes the need to avoid liabilities arising out of the risk that a business venture may cause third parties to suffer human rights infringements. Failure to heed such a risk and to assess it adequately, or to devise a risk avoidance strategy in the light of a due diligence assessment, could lead to civil liability in tort in given cases.63 Under English common law directors have a duty of care to act in the interests of the company and to fulfil their fiduciary duties towards the shareholders.64 They did not have wider binding duties of care to other stakeholder groups, including possible victims of human rights violations. Under English law the duty to act in the interest of the company has been reformed by s.172 of the Companies Act 2006 to become a “duty to promote the success of the company”.65 It is framed in a more inclusive way than the earlier law, though it remains firmly within the enhanced shareholder value approach to corporate governance in that the main duties of the director are still to, “promote the success of the company for the benefit of its members as a whole.” The section goes on to list a number of wider factors that directors should have regard for when making decisions in the best interests of the company: (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.

The reference to the impact of the company’s operations on the community and the environment has been interpreted as being capable of including human rights considerations. While s.172 does not amount to a binding obligation to take such concerns into account it is and advance on the previous law in that it accepts that,

63 See further Peter Muchlinski “The Corporate Responsibility to Respect Human Rights: Implications for Corporate Regulation and Governance” paper presented at the Canadian Business Ethics Research Network (CBERN) Business and Human Rights Symposium Toronto 25–28 February 2010 on which the two following paragraphs draw. 64 See Hannigan above n. 12 at 205 and Re Smith and Fawcett Ltd [1942] Ch. 304 at 306. 65 Companies Act 2006 (c46) at http://www.opsi.gov.uk/ACTS/acts2006/pdf/ukpga_ 20060046_en.pdf.

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peter muchlinski community and environmental impacts along with other considerations in section 172 are now expressly linked to the company’s success—in other words, the legislature recognized that shareholders may be concerned that the company’s interests could be harmed by negative social impacts.66

Bearing in mind that this duty refers to the success of the company and not to the interests of third parties affected by the decision, it is clear that the duty of care for human rights abuses needs some further development. In particular, it needs to be placed in the context of a wider tort based duty of care applicable to the director and to the company. The company law duty of care is too easily met compared to the tort based standard as it is designed to balance the needs of the company and its members to be protected from incompetent management and the need to give directors flexibility and freedom to engage in entrepreneurial activity. That is what acting to promote the success of the company means in practice. By contrast the tort based duty focuses on the avoidance of harm to the foreseeable victim and so draws the line of balance differently. Here the civil law standards of reasonable foreseeability of harm are a more appropriate guide to the parameters of the duty of care than specific company law concerns. Arguably the company law standard is irrelevant as it does not cover the question of harm to parties outside the company. From the above it is clear that while there are no longer any major doubts that corporate responsibility is a proper issue for international law to consider much still remains uncertain as to how this should be put into operation. In the human rights field there appears to have been an initial opposition to any standards being imposed on corporate non-State actors, followed by an acceptance that some level of international regulation might be needed in view of the complex transnational nature of corporate activities, which in turn gave rise to lobbying processes aimed at controlling the degree to which active regulation would emerge. The major home States of firms affected by proposed developments such as the UN Norms sought to avoid any strong regulatory system from evolving, preferring to support a self-regulatory approach backed by national enforcement mechanisms. Thus the United States argued that, “human rights obligations apply to states, not non-state actors, and it is incumbent on states when they deem necessary

66 Special Representative of the Secretary-General (SRSG) on the Issue of Human Rights and Transnational Corporations and other Business Enterprises, Corporate Law Tools Project: Report of Expert Meeting on “Corporate Law and Human Rights: Opportunities and Challenges of Using Corporate Law to Encourage Corporations to Respect Human Rights” Toronto 5–6 November 2009 at 6.


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to adopt national laws that address the obligations of private actors.”67 In response to such constraints, the work of the SRSG has been key and his approach has encouraged international business actively to develop the kinds of due diligence mechanisms that the UN Special Representative favours.68 In addition, in his most recent Report of 9 April 2010 the SRSG has encouraged the reconsideration of national legal barriers to the development of national level regulation and litigation for corporate breaches of human rights.69 The position of the SRSG represents a significant policy shift from that which informed the UN Norms and one which may well have more enduring results for enhancing corporate accountability in this field, despite the absence, for now, of mandatory international legal obligations. IV. Concluding Remarks This chapter has sought to give an overview of the state of ICSR in international law. The very fact that this topic is being discussed in IGOs, and has resulted in numerous “soft law” instruments, is in itself a remarkable achievement, given the outright hostility to any discussion of these issues in the past. It shows that corporate opinion in these matters is open to change and that corporate influence over regulatory agendas, though undoubtedly considerable, is also open to change where it is co-ordinated by lobbying from other interest groups, notably civil society groups, and also States that may seek a better balance between corporate rights as investors under international law and corporate obligations. It is clear, however, that a primarily self-regulatory approach in relation to human rights obligations is the main

67 United States Statement on Item 17 of the Sixty First Session of the UN Human Rights Commission, 20 April 2005 available from www.business-humanrights.org. See too opposition from the UK, Saudi Arabia, Egypt and India “Company norms ‘must be on UN rights agenda” Financial Times 8 April 2004 at 9. The International Chamber of Commerce was the foremost business group opposed to the UN Norms. 68 See further John Ruggie Human rights impact assessments—resolving key methodological questions UN Doc. A/HRC/4/74 5 February 2007. The best example of such a reaction is that of Shell Oil which, in response to alleged complicity in human rights abuses in the Niger Delta region, revised its social responsibility policy and included human rights impact assessment into its business planning. See further Royal Dutch Shell Shell General Business Principles available at http://www-static.shell.com/static/aboutshell/downloads/who_we_are/ sgbps/sgbp_english.pdf. see too Business Leaders Initiative on Human Rights Human Rights Matrix at http://www.blihr.org/. 69 See further Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, “Business and Human Rights: Further steps toward the operationalization of the “protect, respect and remedy” framework” UN Doc. A/HRC/14/27 9 April 2010 at paras. 013–113. available at http://www.business-humanrights.org/SpecialRepPortal/Home/ReportstoUNHuman RightsCouncil.

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way of achieving progress because, in the current state of international law, little else may be possible for now. Significantly though, the SRSG does not rule out future developments, including some type of international institutional innovation, which might lead to improved effective remedies against corporate wrongdoing in relation to human rights.70

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Ruggie 2009 above n. 16 at paras. 106–114.

THE LEGAL LANDSCAPE OF INTERNATIONAL ENERGY INVESTMENT AFTER THE 2008 GLOBAL FINANCIAL CRISIS Robert Pritchard1 I. Introduction: A Continually Changing Legal Landscape In 2008, oil prices soared to record levels, only to collapse in July 2008 when the entire world plunged into what is now commonly called the GFC, a global financial crisis of historic severity. Oil prices had been steadily building up in the five years that preceded the GFC.2 When the late Professor Thomas Wälde joined the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee in 1991, the main concerns of energy investors typically revolved around the risk of contractual difficulties with host governments. However, by the time of Wälde’s untimely death in October 2008, the legal landscape of international energy investment had been transformed to one where investors are also required to manage a more complicated, unsettled and widening array of risks and uncertainties. This transformation was fundamentally a result of the reform and liberalisation of the energy sector; issues of energy security and climate change which have reached the top of the international political agenda; the proliferation of intergovernmental organisations (IGOs)3 and

1 Managing Director, ResourcesLaw International, Sydney; Executive Director, Energy Alliance of Australia. Robert Pritchard was the first Chairman (1982–84) of the Section on Energy and Natural Resources Law of the International Bar Association. 2 From the mid-1980s to September 2003, the inflation-adjusted price of crude oil on the New York Mercantile Exchange was generally below $25/barrel. Driven principally by a steady build-up of demand pressures from 2003, the price peaked at $147/barrel in July 2008. In 2009, the year after the GFC, global oil consumption declined by 1.7%, the largest decline since 1982, and global natural gas consumption declined by 2.1%, the largest decline on record (source: BP Statistical Review of World Energy, June 2010). In 2009, the oil price bottomed at $35/barrel. In 2010, it recovered to within a range of $65–85/barrel. 3 IGOs of particular relevance to the energy industry include the International Atomic Energy Agency (IAEA), established in 1957, the Organization of the Petroleum Exporting Countries (OPEC), established in 1960, the International Energy Agency (IEA), established in 1974, the Intergovernmental Panel on Climate Change (IPCC), established in 1988, the International Energy Forum (IEF), established in 1991, the Carbon Sequestration Leadership Forum (CSLF), established in 2003, the International Renewable Energy Agency (IRENA), established in 2009 and the Major Economies Forum on Energy and Climate (MEF), established in 2009.

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non-governmental organisations (NGOs);4 the exposure of the energy industry to a more complex range of political, economic and environmental risks and uncertainties; and, most recently, the effects of the GFC. The legal landscape nonetheless continues to change. In 2009, the International Energy Agency (IEA) forecast a global energy investment requirement through to 2030 of US$26 trillion, an annual average of around US$1.1 trillion.5 This forecast was in essence a ‘stand still’ level, which did not include the investments that the IEA thought would be required to reduce the number of people without access to electricity below an estimated 1.5 billion. The real investment requirement would be well in excess of these figures if the number of unserved people were to be reduced. Less than a quarter of the IEA’s forecast capital is needed in oil exploration and development. The electricity sector will require 52% of the total due to the highly capital-intensive nature of power generation, transmission and distribution. Figure 1 illustrates this. In Wälde’s Liber Americorum, one of his former students, Mirian Kene Kachikwu, reminded us that governments intervene in the domestic marketplace to accomplish a wide variety of goals, including correcting for market failures, to shift income among groups, to raise revenues, and to advance particular social, political, or environmental goals.6 She highlighted how the long-term nature of energy projects and investments makes energy companies particularly sensitive to changes in the conditions of operation. She suggested that an energy company needed to recognize that “there is a measure of likelihood that political events may complicate its pursuit of earnings [. . .].”7 New categories of ‘mid-tier’ risks, such as tax increases, human rights and environmental risks, have materialised in the past decade, many of them more difficult to quantify than ‘traditional’ risks, both in terms of their

4 There are thought to be around 40,000 NGOs that operate internationally but there is no generally agreed definition. They are often described as civil society organisations. Those of particular relevance to the energy industry include the International Council on Large Electricity Systems (CIGRE), established in 1921, the World Energy Council (WEC), established in 1923, the International Gas Union (IGU), established in 1931, the World Petroleum Council (WPC), established in 1933, the International Organisation for Standardisation (ISO), established in 1947, the International Petroleum Industry Environmental Conservation Association (IPIECA), established in 1974, the World Coal Institute (WCI), established in 1985, the World Business Council for Sustainable Development (WBCSD), established in 1995, and the World Nuclear Association (WNA), established in 2001. 5 IEA, ‘World Energy Outlook 2009’, Paris, France (2009), p. 5. 6 Kachikwu, M.K., ‘The Changing Face of Political Risk in the Energy Industry’ in Werner, J. and Ali, A.H. (eds), A Liber Americorum: Thomas Wälde—Law Beyond Conventional Thought, CMP Publishing, (2009), 87 at p. 88. 7 Id., p. 88.

the legal landscape of international energy investment Coal 3% $0.7 trillion Power 52% $13.6 trillion

Oil 24% $6.3 trillion

Shipping 4%

Transmission Power generation and 50% distribution 50%

Refining 16%

Exploration and development 80%

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Biofuels 1% $0.2 trillion

Gas 21% $5.5 trillion

Transmission and Exploration distribution and 31% development LNG chain 4%

61%

Total global investment: US$26 trillion (in year 2008 dollars) In this figure, power generation includes both renewable and fossil fuel generation Figure 1: Cumulative Energy Supply Investment in the IEA Reference Scenario, 2007–2030 (in US dollars)

frequency and their severity. Some of these political events may give rise to claims of ‘indirect expropriation’ but most will not.8 The principal purpose of this chapter is to elaborate on how governments have tended to intervene in the energy industry and how, in the contemporary era, they need to resist this temptation in the interests of attracting global capital and maintaining their economic competitiveness. II. The Globalisation and Liberalisation of the Energy Industry A. The Globalisation of the Energy Industry The energy industry, or at least the oil industry, has been one of the most ‘global’ of industries since its inception. Today, it is almost impossible to carry on any type of business in the energy industry without engagement in the international energy markets and involvement in cross-border investment.

8 See Cameron, P.D., ‘International Energy Investment Law: The Pursuit of Stability,’ Oxford University Press, Oxford, UK (2009) and the discussion of expropriatory taxation at pp. 188–190 and regulatory measures, including environmental measures, at pp. 199–203.

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The 1973 oil crisis is, for the purpose of this discussion, a handy starting point. Since 1973, the global energy economy has undergone two major structural changes, the implications of which are still not fully understood. The first is an unprecedented increase in trade and investment activity in freely operating global and regional energy markets, perhaps most obvious in the natural gas sector. The second major change is the wave of liberalisation that has engulfed domestic energy markets, best exemplified by the abandonment of central planning in the former communist economies.9 Since 1973, coal and natural gas have substantially increased their respective share of primary energy consumption. The major energy importing nations, especially China, have also substantially increased their total energy imports. It can be said that nearly all forms of energy trade have ‘gone global’. This has resulted in most energy importing nations becoming more vulnerable to energy supply disruptions than they were at the beginning of the period.10 It follows that the IEA emergency stockpiling system is now relatively less effective than it was when created (it was only ever intended to deal with emergency situations anyway). Remarkably, increased competitive activity in global and domestic energy markets over the post-1973 period to date has easily counterbalanced the increased supply vulnerabilities of energy importing nations. Most of the world has continued to prosper from the availability of affordable energy (not forgetting the chronic energy impoverishment of many developing economies). Despite energy markets increasingly being susceptible to interruption and constrained by environmental regulations, energy has remained both available and affordable to most consumers. B. The Liberalisation of the Energy Industry In order to understand the energy industry in this day and age, it is of fundamental importance to appreciate the significance of electricity supply. Affordable, secure and reliable electricity supply enables economic development to take place, a prerequisite for poverty alleviation. Today, 25% of the world’s population (an estimated 1.5 billion) still remain without access to electricity and the basic benefits that accompany electrification. Increasing electricity demand, especially in the rapidly growing developing countries, has become the main driver of global energy trade and investment. Energy

9 Pritchard, R., ‘Introduction: The Contemporary Challenges of Economic Development’ in Pritchard, R., (ed.), Economic Development, Foreign Investment and the Law, International Bar Association and Kluwer Law International, London, UK (1996) 1 at p. 2. 10 Alhajji, A.F. and Williams, J.L., ‘Measures of Petroleum Dependence and Vulnerability in OECD Countries’, Middle East Economic Journal 46:16, 21 April 2003.

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demand is projected to rise by 45% between 2006 and 2030. Almost 90% of this increased energy demand will be driven by the needs of developing countries. Satisfying this demand will underwrite their economic growth and increased standards of living. In the 1990s, the electricity supply sector commenced a process of liberalisation and major structural adjustment. In most countries, state-owned utilities had traditionally been dominant, and prices were politically determined. Many countries started in the 1990s to introduce private finance by encouraging independent power producers [IPPs] to provide new generating capacity. Instead of a state-owned utility building new capacity, IPPs built and financed new plants on the basis of long-term power purchase agreements. Typically, the state-owned utility assumed all of the market risk (the risk that there would be buyers for the power when generated at prices that covered costs) with the IPP assuming the financing, construction, completion and performance risks. The most important financing mechanisms for utilities, whether public, mixed or private, were project financing and bond issues. By the late 1990s, independent power projects had begun to languish, and privatisation of the utilities themselves emerged as the dominant trend, with an increasing emphasis on transparency and inclusiveness of regulatory processes. C. The Liberalisation of International Investment Law and the Transcendental Effect of International ‘Soft Law’ As Wälde observed in 1995, government policies had come to be characterised by the liberalisation of foreign investment regimes, involving a trend towards free access, unhindered operations, elimination of screening and approval requirements and guarantees of repatriation of capital and profits. Government majority requirements were fading out and divestment requirements had virtually disappeared.11 To Wälde, this meant that “the need and scope for ‘negotiation’ between foreign investors and national governments shrinks—with a tendency towards disappearance.” This prompted him to predict that: Foreign investment law will wither away and fuse into a developed system of commercial law and regulation of the economy. Countries have then no reason to provide a distinctive treatment for foreign investors and foreign investors have no reason to insist on particular privileges and guarantees any longer.12

11 Wälde, T.W., ‘A Requiem for the ‘New International Economic Order’: The Rise and Fall of Paradigms in International Economic Law’, CEPMLP Internet Journal Volume 1–2, University of Dundee, (June 1995) p. 15. 12 Id., p. 17.

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Although foreign investment law can never entirely wither away (because sovereign countries will always wish to maintain strategic control over crossborder movements of capital and goods), Wälde’s prediction was largely accurate and the advent of the GFC has certainly done nothing to slow down the process. Wälde was one of the first to recognise that the dominant challenge for governments had become their own competitiveness in the world economic race. This led him to strongly advocate the use of law as an instrument of facilitation for “what happens naturally”: The trend towards privatisation and liberalisation has expanded the space for commercial freedom and reduced the capacity of single governments to impose regulatory regimes on transnational trade, investment and financial flows. [. . .] International economic law is effective not when it opposes “natural” economic trends, but when it facilitates them.13

Bilateral investment treaties [BITs] became commonplace after 1965 to protect investors against the unilateral exercise of state power by host economies and to facilitate and encourage investment flows. By the end of 2008, there were 2676 BITs in force around the world.14 Most BITs prohibit expropriation or other forms of dispossession unless conditions are met. First of all, considerations of public purpose or national interest must be involved; secondly, measures taken must be nondiscriminatory and non-arbitrary; thirdly, prompt, adequate and effective compensation (that is, consistent with the real value of the investment affected) must be paid in a freely convertible currency; and fourthly, due process must be followed with provision for some form of judicial review. The protection of the legitimate expectations of foreign investors has now become firmly rooted in arbitral practice, enabling foreign investors to rely on representations made by host states.15 The issues involved in international investment protection are often not dissimilar to those that arise in domestic disputes involving changes in investment conditions and compulsory acquisition.16 By the end of 2008, there were also 273 other international agreements in force containing investment provisions.17 These agreements included 13

Id., pp. 20–21. UNCTAD, ‘Recent Developments in International Investment Agreements (2008–June 2009)’, IIA Monitor No. 3 (2009), Geneva (2009) p. 2. 15 Schreuer, C. and Kriebaum, U., ‘At What Time Must Legitimate Expectations Exist?’ in Werner, J. and Ali, A.H. (eds), A Liber Amicorum: Thomas Wälde—Law Beyond Conventional Thought, CMP Publishing, London (2009). 16 Talus, K., ‘Revocation and Cancellation of Concessions, Operating Licenses and Other Beneficial Administrative Acts’ in Schill, S. (ed.), International Investment Law and Comparative Public Law, Oxford University Press, Oxford, UK (2010) (forthcoming). 17 Id., p. 8. 14


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regional economic integration agreements, framework agreements on economic cooperation and closer economic partnership agreements. One recent example is the 2009 ASEAN Comprehensive Investment Agreement. Most international investment treaties provide that, for the resolution of disputes relating to energy investments, investors and host states may choose to have recourse to ICSID procedures (for example, under an investment protection treaty), the arbitration rules of UNCITRAL, the rules of the International Chamber of Commerce or to other rules by ad hoc agreement as the need arises. According to the UN Conference on Trade and Development [UNCTAD] in August 2009, a post-GFC recovery might bring a boom in private investment which “could possibly trigger a new wave of economic nationalism and further measures to protect ‘national champions’ in advanced economies.”18 UNCTAD was of the view that international investment agreements “that effectively promote FDI are needed today more than ever” and “can be a tool to stem the rising tide of protectionist dangers”. In the last few years, however, the question has often been raised by international energy lawyers whether the pro-investment pendulum has swung too far and whether some rebalancing is needed to allow governments greater discretion to regulate.19 During the years that international investment law has been liberalising, a regime of international norms has been accumulating and now threatens to transcend the legal landscape in the form of ‘soft law’, that is, rules or agreements that are not legally binding.20 In a strict sense, the expression ‘soft law’ is an oxymoron. Soft law is a difficult, undefined and still evolving area of investment law.21 It is to a large extent propelled by the proliferation of IGOs and NGOs referred to in the introductory section of this chapter. Unenforceable rules can be regarded as law as much as binding rules but many difficult questions arise, for example: What is the effect of the 2009

18

UNCTAD, footnote 14 supra, pp. 10–11. In addition to the discussion of Stéphane Brabant et al. in chapter 14 of this volume, see in this regard the several opinions expressed in Karl Sauvant’s inaugural yearbook on international investment law: Sauvant, K.P. (ed.), Yearbook on International Investment Law and Policy 2008–2009, Oxford University Press, New York, NY (2009). 20 Wälde, T.W., ‘The Role of International ‘Soft Law’ in Natural Resources and Energy Investment’, Oil, Gas and Energy Law, Vol. 2 Issue 4 (October 2004), <www.ogel.org>. See also Kabir, A., ‘Overview of The OGEL-CEPMLP Database of Voluntary Guidelines and Related Primary Soft Law Material’, (October 2004), <www.ogel.org/news>. 21 Barton, B., et al., Chapter 21, ‘Conclusions’ in Barton, B., et al. (eds), Regulating Energy and Natural Resources, Oxford University Press, UK (for the Academic Advisory Group of the Section on Energy, Environment, Natural Resources and Infrastructure Law, International Bar Association) (2006). 19

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Copenhagen Accord?22 Or the non-binding UN Declaration on the Rights of Indigenous Peoples?23 Or government policies that have not yet found expression in legislation? Further, what may be the effect of now well-known, voluntary codes of conduct, such as the Extractive Industries Transparency Initiative (EITI)24 and the Equator Principles?25 Or ISO 26000, the new draft guidance standard for social responsibility?26 As well, what may be the effect in particular jurisdictions of the ‘dicta’ setting out the reasoning behind judicial opinions? And what may be the effect in particular jurisdictions of non-binding commercial instruments, such as heads of agreement and letters of intent? We are only in the early days of establishing the answers to these difficult questions.27 Soft law may of course be a precursor to hard law. One international example stands out: in 1992, the World Bank and the International Mon22 The Copenhagen Accord signed at the 15th Conference of the Parties to the UN Framework Convention on Climate Change on 18 December 2009, Document FCCC/CP/2009/11/ Add. 1. 23 UN Declaration on the Rights of Indigenous Peoples adopted by General Assembly Resolution 61/295 on 13 September 2007. 24 The EITI is a global governance standard that promotes revenue transparency in natural resources management. It began as a campaign of NGOs. 31 countries have now commenced to implement the EITI. The EITI is supported by 50 of the world’s largest oil, gas and mining companies and 300 non-government organisations (NGOs). The EITI has also been endorsed by the G8, the G20, the European Union and the UN (see General Assembly Resolution 62/274 adopted on 11 September 2008). The EITI publishes a set of EITI Principles and Criteria and a Validation Guide. It established its own international headquarters in Oslo, Norway in 2007. 25 The Equator Principles is a financial industry benchmark for determining, assessing and managing social and environmental risk in project financing. The 67 financial institutions that have so far adopted the Equator Principles have undertaken not to lend to projects where the borrower does not comply with the agreed social and environmental policies. See ‘Equator Principles’, July 2006, downloadable from <www.equator-principles.com>. 26 In 2010, ISO, the Geneva-based International Organisation for Standardisation, published ISO 26000 as a draft Guidance Standard for Social Responsibility. Because ISO 26000 does not include any mandatory requirements, it is not a certification or regulatory standard. It nonetheless encourages organizations to undertake activities that go beyond legal compliance: respecting the rule of law, international norms of behaviour, human rights and stakeholder interests, whilst behaving ethically and being transparent and accountable to parties affected by its decisions and activities. The reference to accountability to affected parties contained in ISO 26000 clause 4.2 is controversial. 27 See, for example, in addition to the discussion of soft law elsewhere in this volume, Barton, B., Chapter 2, ‘The Theoretical Context of Regulation’ and Redgwell, C., Chapter 5, ‘International Soft Law and Globalization’, in Barton, B., et al. (eds), Regulating Energy and Natural Resources, Oxford University Press, Oxford, UK (2006); Nwete, B., ‘Corporate Social Responsibility and Transparency in the Development of Energy and Mining Projects in Emerging Markets: Is Soft Law the Answer?’, German Law Journal, Vol. 8 No. 4, (2007); Gersen, J. and Posner, E., ‘Soft Law’, Public Law and Legal Theory Working Paper No. 213, Law School, University of Chicago, (March 2008) and Shaffer, G., and Pollock, M., ‘Hard vs Soft Law: Alternatives, Complements and Antagonists in International Governance’, Legal Studies Research Paper No. 09–23, Law School, University of Minnesota, (2009).


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etary Fund published the World Bank Guidelines on the Treatment of Foreign Direct Investment. These ‘soft law’ guidelines had no binding legal effect when they were published but they influenced the provisions on investment which subsequently appeared in the North American Free Trade Agreement [NAFTA]28 and the Energy Charter Treaty [ECT].29 Finally in this context, adding to the complexity of investment decisions is the significant ‘other’ role of governments in making decisions about the allocation of resources in society. Governments retain wide and largely unfettered discretion in this area, a prominent example being the discretion over the issue of new oil and gas concessions and production sharing contracts and the financial terms that may apply to them. This topic is beyond the scope of this chapter and it will not be elaborated upon here except to observe that the principles of administrative law are likely to play an evermore important role in checking that governmental decisions are not made in an unfair or arbitrary way to the advantage or detriment of particular investors. III. Energy Security Concerns The ‘Hubbert’s peak’ theory of resource depletion,30 which has often been cited as authority for the proposition that the world will soon run out of oil, seems to have been overshadowed by other events. Although the world may not in the near term be about to run out of oil,31 energy supplies may become less secure and more expensive as economic and environmental regulations and log-jams in delivery systems all combine to constrain the supply of oil. Over the last decade, energy security has emerged as a key political and economic issue for all energy-importing countries.32 Energy security is a

28 The NAFTA is the trilateral treaty that in 1994 brought Canada, Mexico and the US into a North American free trade area. Its Chapter XI—direct investment arbitration—became the model for the similar, but farther reaching, Article 26 of the ECT and for most modern bilateral investment treaties. 29 The ECT is a unique multilateral treaty, limited in scope to the energy sector, that in 1998 established rights relating to both trade and investment within that sector. The ECT broke away from the mould of other treaties by making governments accountable before arbitral tribunals to aggrieved investors for breaches of the Treaty. 30 Hubbert, M.K., ‘Energy Resources (Report to the Committee on Natural Resources)’, National Academy of Sciences, Washington DC, USA (1962). See the discussion in Hall, C. et al., ‘Hydrocarbons and the Evolution of Human Culture’, Nature (20 November 2003). 31 BP has identified that, at the current rate of production, proven reserves of oil will last approximately 46 years, ‘BP Statistical Review of World Energy’ (June 2010), p. 6. 32 In 2000, the Asia-Pacific Economic Cooperation (APEC) Organization commenced work on the APEC Energy Security Initiative. As G8 leaders acknowledged in 2005: “Secure, reliable and affordable energy sources are fundamental to economic stability and development. Rising energy demand poses a challenge to energy security given increased reliance on global

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somewhat ambiguous term but its primary concern is with the vulnerability of an individual country to energy supply disruptions. Energy security in the view of this author does not include security of energy demand, although it must be acknowledged that the very real concerns of oil-exporting nations to protect their export revenues operate to counter-balance much of the risk of arbitrary supply interruptions. What makes particular countries vulnerable to energy supply disruptions? The first, and most important, cause is overdependence on either domestic production or imports of a single form of primary energy—this applies whether the primary energy form is oil, gas, coal, uranium, hydro or any of the new forms of renewable energy. A second cause of vulnerability is overdependence on any particular supply source of primary energy—there is of course no single source of primary energy: there is a mismatch between sources of energy production and points of demand. A third cause of vulnerability is overdependence on a single energy infrastructure facility—this could be a single oil or gas pipeline, a single oil or gas storage facility, a single power station or a single electricity transmission grid. What are the likely causes of energy supply disruptions? The most widely feared, at least in the public mind, are acts of war, civil unrest, terrorism and piracy at sea. Political disputes between supplier and transit countries can interfere with commercial arrangements (such as the disputes between Russia and Ukraine affecting the supply of gas to Western Europe). Natural disasters, such as cyclones and earthquakes, can cause major energy infrastructure damage, although the damage typically occurs at the local or regional level. Accidents and breakdowns of plant are also frequently the cause of local supply disruptions. Another factor can be production limits imposed by major producer groups such as the Organization of the Petroleum Exporting Countries (OPEC). Whenever intervention in any market occurs at the instigation of a government (either at the federal or state level, in a federation), it can distort energy production and pricing outcomes (such as occurred in California). Governments may have confidence in energy markets but this by no means indicates that all governments have permanently adopted a ‘hands-off ’ approach.33 There are many signs that governments are concerned to ensure that markets are properly regulated. In all markets, monopolistic or excessive anticompetitive activity, where it occurs, needs to be controlled by regulators in

energy markets”, The Gleneagles Communiqué on Climate Change, Energy and Sustainable Development, Gleneagles, Scotland (8 July 2005). 33 For example, the European Commission in its second Strategic Energy Review from the end of 2008, said “It is debateable whether the market will make the necessary investments serving public interests without serious public intervention.”


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the interests of optimising the level of intensity (fairness) of competition. At the same time, regulatory activity needs to be free from discrimination and bias and should not be heavy-handed. In this regard, investors expect to be able to have recourse to judicial review of improper regulatory action. In the view of this author, and at the risk of over-simplification, the solution to energy security concerns lies in facilitation of investments of one type or another. As stated at the beginning of this chapter, the IEA sees a global need for energy investment of around $1.1 trillion annually through to 2030. This is the predominant challenge to which policymakers around the world must rise. We will come back to this in Sections V to VII of this chapter. IV. Environmental Concerns A. Environmental Standards Agreement on standards for environmental protection is of paramount importance in establishing a secure framework for investment. In this regard, international standards may offer a more reliable basis for environmental protection than domestic standards.34 At the time of the environmentally disastrous blow-out of the BP Macondo oil well in the Gulf of Mexico in 2010, the world was reminded in the most dramatic way of the criticality of protecting the environment. At the time of writing, the exact outcome of this drilling accident remained unknown but it was already clear that environmental authorities in all countries would be looking to tighten regulatory safeguards to all but eradicate the risk of similar accidents. The Fraser Island case in Australia35 has served for more than 30 years to remind lawyers around the world of the danger of failing to fully appreciate the seriousness of environmental concerns. This 1976 Australian case involved two mining companies, one Australian and the other American, which for many years had been mining rutile from Fraser Island, an island just off the coastline of the Australian State of Queensland. There was no market for rutile in Australia and the two companies depended on shipping the rutile to export markets in order to make any profit. The mining operations were carried on pursuant to a valid mining concession issued by the State of Queensland, in compliance with state environmental protection laws and all other applicable laws, at both state and federal level.

34 In the oil and gas industry, the standards promulgated by the American Petroleum Institute (API) are often used internationally <www.api.org>. 35 Murphyores v. Commonwealth of Australia (1976) 136 CLR 1.

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Community concerns about damage to the fragile environment of Fraser Island caused the Federal Government to become opposed to continuation of the mining operations. It therefore made an administrative decision to withhold further export permits (the control of exports being an exclusive federal power). Although the mining investment was made in a country with a wellestablished legal system, noted for its reputation of certainty and stability, the value of the investment was thus destroyed by an administrative decision. The two companies applied to the court for an order that the withholding of export permits was unlawful. They argued that environmental considerations relating to mining of a commodity could not, as a matter of administrative law, be properly taken into account by the Federal Government in deciding whether to grant export permits. However, the High Court of Australia (Australia’s Supreme Court) unanimously rejected this argument. Nothing had been confiscated or taken away from the two companies: they still owned their mining concession; they could still operate their production facilities; they still owned their mineral resources and they could still carry on mining operations under all applicable laws. However, the government’s decision had blocked their access to export markets and its effect was to destroy the value of their investment. Under Australian law, an act of expropriation would give rise to a legal claim for compensation. However, the court held that this was not a case of expropriation (although ultimately the Federal Government offered compensation to the investors, which they accepted). It was also not a case where an investment treaty was available to safeguard the interests of the investors. The case served to highlight two flaws in the original investment decision: (i) the investors underestimated the risk of future changes in environmental standards; and (ii) the investors did not foresee that there may be a conflict between the state and federal governments in Australia. The history of accidents, thankfully few and far between, in the nuclear power industry also highlights the criticality of effective environmental protection regimes. The Chernobyl accident will serve to remind us of the need for continuing vigilance for many years to come.36 B. Climate Policy Uncertainty Since the UN Conference on Environment and Development [UNCED] in Rio de Janeiro in 1992, the concept of sustainable development has been the most dominant influence in government policy-making and investment

36

International Atomic Energy Agency, Annual Report 2009, Vienna, Austria, pp. 59–76.


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decision-making as it has affected the energy industry.37 For governments, sustainable development in the energy sector has been interpreted according to two main criteria: maintaining their own energy security and responding to climate change concerns.38 Most people have now come to accept that climate change is a global environmental challenge that transcends political boundaries and is a key element of sustainable development. Governments, for their part, now need to align their climate change policies and to make intensive efforts to integrate energy policy and climate policy into a coherent whole in order to give more confidence to investors and underwrite a sustainable future. The guiding principle that the parties to the United Nations Framework Convention on Climate Change [UNFCCC] agreed in Rio de Janeiro in 1992 was sound: the parties would work together to achieve a sustainable future, principally by stabilising greenhouse gas emissions, recognising the principle of common but differentiated responsibilities.39 In 1997, many countries signed on to the Kyoto Protocol, committing them to reduce their greenhouse gas (GHG) emissions by at least 5 per cent below 1990 levels in the period 2008–2012.40 In 2006, a UK Government report claimed that climate change was “the greatest market failure the world has ever seen”, and that it required an effective global policy response.41 The first policy element required was “the pricing of carbon, implemented through tax, trading or regulation.”42 This could in the author’s view also be described as the most over-optimistic statement about an economic theory the world had ever heard; certainly the theory was not an effective response to the global emissions problem. The idea that emissions trading schemes covering less than half of the global market could, efficiently and in a timely fashion, decarbonise the global economy was always fanciful. The idea that you could put a price on carbon by creating markets in GHG emission permits was largely based on Thomas Crocker’s 1960s idea for the pricing of sulphur dioxide emissions in the United States. However, it carried the practical limitations from which all climate theories have tended

37 Carney, P. et al., ‘International Environmental Law and Policy’, Chapter 7 in Pritchard, R., (ed.) Economic Development, Foreign Investment and the Law, International Bar Association and Kluwer Law International, London, UK (1996) 139 at pp. 140–143. 38 ‘Climate Change, Energy and Sustainable Development’, The Gleneagles Communiqué, G8 Gleneagles 2005. 39 UNFCCC Articles 2 and 3 paragraph 1. 40 Kyoto Protocol to the UNFCCC which was adopted on 11 December 1997 and entered into force on 16 February 2005, Article 3 paragraph 1. 41 Stern, N., The Economics of Climate Change: The Stern Review, Cambridge University Press, Cambridge UK (2007), p. xviii. 42 Id., p. xviii.

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to suffer, the lack of global consensus. It is a theory that Crocker himself has declined to embrace.43 The UK Government’s 2006 climate change report acknowledged that an international response was required and that the global nature of climate change meant that you could not take literally “the simple economic theory with one jurisdiction, one decision-maker, and one social welfare function [. . .]”.44 However, in the author’s view, many policymakers in the developed countries took the economic theory far too literally. Building the bridge to a globally sustainable future is not as simple as putting a price on carbon in a limited number of countries. Led by the European Union, many governments proposed creating domestic and regional carbon markets as a primary mechanism for achieving emission reductions. However, the creation of carbon markets involves considerable economic restructuring and takes years to design and implement.45 As well, most countries were not ready for them, lacking the institutional capacity and experience. Many countries, such as the United States, also did not appreciate being pushed at international negotiations into joining them. By the end of 2007, the threat of climate change had begun to seriously alarm many policymakers. The UNFCCC parties had adopted the Bali Action Plan, committing themselves to negotiate a legally-binding agreement at the 2009 Copenhagen Climate Conference.46 The Copenhagen conference resulted, however, in the non-binding Copenhagen Accord,47 a disappointment for all who wished to see a legally-binding agreement. What happened to the shared vision that brought the treaty parties together in 1992? It seems to have been obscured by unproductive negotiations over quantified country emission limits. North-South differences tended to fragment and polarise the climate negotiations from the beginning.48 Parties to the UNFCCC have continued to debate a succession of moral, political and economic arguments over allocation of responsibilities. The Kyoto Protocol sought to reduce emissions mainly by quantifiable commitments at country level, leaving it to domestic governments to take whatever action they liked to meet these country-level commitments. This contributed to policy frag-

43 Hilsenrath, J., ‘Crocker Doubts Idea Can Effectively Limit Carbon Pollution,’ Wall Street Journal (17 August 2009). 44 Stern, N., footnote 41, p. 33. 45 Consilience Energy Advisory Group, Climate Change and Emissions Trading: What Every Business Needs to Know, 3rd edition, London, UK (2009). 46 UNFCCC, ‘The Bali Action Plan’, UNFCCC Secretariat, Bonn, Germany (2007). 47 UNFCCC, ‘The Copenhagen Accord’, UNFCCC Secretariat, Bonn, Germany (2009). 48 See the various publications of The South Centre, Geneva, Switzerland (2009) <www .southcentre.org>.


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mentation as there was no link between the desired goal (the reduction of global emissions), the steps necessary to achieve it, the know-how and tools required for the purpose and the conditions necessary to attract the necessary investments. The biggest obstacle to addressing the challenge of climate change is an ongoing disparity of thinking about appropriate policy responses, particularly about the effectiveness of carbon markets. This has led to uncertainty in climate policies, both internationally and domestically. The IEA has estimated that, since the First Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) was completed in 1990, over 1000 policies have been introduced around the world to combat climate change.49 At the time of writing, climate policy uncertainty has not yet peaked, despite 18 years of international climate negotiations.50 This is particularly problematic for the energy industry because policy uncertainty undoubtedly increases investment risk.51 C. Resolution of the Climate Change Problem The World Energy Council (WEC) has repeatedly emphasized that “energy is central both to the problem and to its resolution.”52 Within the energy supply system itself, the central function is the conversion of primary energy into electric power and the reliable supply of grid-based electricity. This is the backbone of modern industrial society. With a likely future increase in electric-powered transportation, society’s dependence on gridbased electricity is likely to increase. Largely as a result of fossil fuel combustion, energy-related emissions contribute over 80% of worldwide emissions of CO2.53 The major barrier that industry and policymakers must overcome is one of cost: low-emission alternatives are much more expensive than the technologies used in current practice. The solutions to the climate challenge must necessarily therefore

49

IEA, “Climate Policy Uncertainty and Investment Risk,” Paris, France (2007), p. 13. It could be said that the negotiations have actually been going on for 38 years, since the 1972 Stockholm Declaration on Human Environment enunciated the principle that States have “the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other states or of areas beyond the limits of national jurisdiction”. 51 “The principle by which policy uncertainty can be translated into investment risk is straightforward. Policy uncertainty creates an uncertain outcome in the cash flow of a project in which the company is proposing to invest”, IEA, “Climate Policy Uncertainty and Investment Risk”, Paris, France (2007), p. 13. 52 WEC, ‘Energy and Climate Change’, London, UK (June 2007), p. 6. 53 IEA, ‘Launching an Energy Revolution in a Time of Economic Crisis’, Paris, France (2009), p. 3. 50

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involve the energy industry. It is impossible for any individual country acting in isolation (or any group of countries for that matter) to deal effectively with climate change unless there is a global solution. Such a solution must necessarily involve making changes to the way energy is produced and used. In the author’s view, the treaty parties need to refocus on their original purpose, remembering that this is not a domestic problem. At the same time, open energy markets should be maintained.54 The onus is on governments to reduce policy uncertainty, to reduce investment risk and to provide public funding for new low-emission technology demonstrations, and early investments in these technologies. In time, a clear and globally consistent price signal for carbon may significantly reduce investment uncertainty and accelerate private sector investment in low-emission energy technologies. However, it is apparent that a nominal carbon price will be insufficient. High carbon prices, several times higher than currently evident in Europe and higher than projected anywhere in the next decade or two, may be necessary to support the massive capital investment in lowemission energy technologies that are necessary to reduce emissions to a significant extent. This is illustrated by the IEA’s 2008 study on low-emissions energy technologies discussed below. In all countries, the challenge for policymakers, fundamentally expressed, is to reduce global greenhouse gas emissions as fast as their respective countries can afford to do so. This requires two responses: the first is to reduce the amount of energy that is wasted. The second is to reduce the amount of emissions associated with energy use. The latter can be achieved by progressively substituting zero or low-emitting forms of energy and by progressively reducing emissions from the combustion of fossil fuels. It will however require investments of unprecedented magnitude. Investment in a portfolio of zero and low-emission energy technologies, including nuclear, renewables, LNG and carbon capture and storage (CCS), will be needed to achieve this.55 As the IPCC has emphasized, “no single

54 “. . . governments must maintain open energy markets, seek ways to expand international cooperation and apply measures affecting energy trade, investments and movement of persons that are fully consistent with the rules set out in the General Agreement on Tariffs and Trade (GATT) and other parts of the World Trade Organization Agreement”, WEC, ‘Task Force Report on Trade and Investment Rules for Energy,’ London, UK (June 2009), p. 1. 55 The main conclusion of the 19th World Energy Congress in Sydney in 2004 was: “All energy options must be kept open and no technology should be idolised or demonised. These include the conventional options of coal, oil, gas, nuclear and hydro (whether large or small), and the new renewable energy sources, combined of course with increased energy efficiency. Each is subject to uncertainties, we cannot afford to jettison any one of them. Energy source diversity is the bedrock of a robust system, even if the optimum mix will vary according to local circumstances”, WEC, London, UK (2004).


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Table 1: The 17 Technology Roadmaps in the IEA’s 2008 Study Supply Side Technologies (9) • CCS fossil-fuel power generation • Nuclear power plants • Onshore and offshore wind • Biomass integrated-gasification combined-cycle and co-combustion • Photovoltaic systems • Concentrating solar power • Coal: integrated-gasification combined-cycle • Coal: ultra-supercritical • Second-generation biofuels

Demand Side Technologies (8) • Energy efficiency in buildings and appliances • Heat pumps • Solar space and water heating • Energy efficiency in transport • Electric and plug-in vehicles • H2 fuel cell vehicles • CCS in industry, H2 and fuel transformation • Industrial motor systems

mitigation measure will be adequate to achieve a stable concentration of CO2”.56 In 2008, the IEA identified global roadmaps for 17 key technologies that it considered were needed to achieve the global energy technology revolution.57 These are listed in table 1.58 Many low-emissions technology barrows are being pushed by advocates of particular technologies. However, no-one knows at this time exactly where most of the future emission reductions will eventually be made. The IEA has reviewed the technologies that it believes capable of reducing emissions to 450 ppm by 2050 and its projection is depicted in figure 2 below. The deployment of CCS may require a global long-term value of carbon of around US$50 per tonne. In the short-term, the price of carbon would need to be considerably higher than this to induce technology switching.59 In the short-to-medium term, the accelerated deployment of existing lowemissions technologies, such as nuclear, renewables and LNG, could reduce global emissions faster than at present.60 Natural gas already provides the

56 Intergovernmental Panel on Climate Change, ‘IPCC Special Report on Carbon Dioxide Capture and Storage’, Cambridge University Press, Cambridge, UK (2005), p. 352. 57 IEA, ‘Energy Technology Perspectives: Scenarios and Strategies to 2050’, Paris, France (2008), p. 46. 58 Other key existing technologies include geothermal energy and distributed generation. It is also widely believed that some “break-through” technologies will emerge as more R and D is undertaken. 59 IEA, footnote 57, at p. 280. 60 IEA, footnote 57 at p. 251.

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robert pritchard Power generation fuel switching and efficiency 7% Nuclear 6%

End-use fuel switching and efficiency 25%

CCS 19%

End-use electricity efficiency 12% Hydrogen vehicles 4% Renewables 21%

Electrification 6%

Source: IEA, “Energy Technology Perspectives”, Paris, France (2008)

Figure 2: Projected Reduction in CO2 Emissions by Technology 2050

crucial standby capacity that electricity supply systems require in order to make greater use of renewable energy sources (with their greater intermittency).61 It is thus evident that governments need to implement policies that lower the commercial obstacles to low-emission energy technology development and deployment, allowing the private sector to invest on commercially acceptable terms, in addition to pricing carbon emissions which may support such investments in future decades. These policies may need to include public funding of low-emission technology demonstrations in order to balance the risk/return relationship and to attract private investment.

61 According to WWF International, “In the short term, an increase in the use of natural gas as a “transition fuel” can play a significant part in avoiding the locking in of higher emissions from coal, thereby buying more development time for other energy solutions to grow. While this is more applicable in some countries than others, gas should be scaled up in the short term (where it can avoid coal use), without bringing any harmful biodiversity impacts. The even lower carbon emissions for gas used with carbon capture and storage technology are also taken into account. WWF therefore sees natural gas as a bridging fuel with important applications, provided that energy security issues can be resolved. The scenario includes a provision of natural gas displacing coal which peaks in supply at about 52EJ in 2023. It is assumed that this can then become sequestered within the CCS wedge as technology comes on line,” ‘WWF Climate Solutions Report’, WWF International, Gland, Switzerland (2007).


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V. The Global Financial Crisis A. The Pre-GFC Situation In 1995, when no financial crisis was evident or foreseen, questions about global capital constraints adequacy were studied by a WEC task force on which this author served. The WEC task force was concerned with global energy sector financing for the period of 30 years from 1990 to 2020. Its main conclusions were: (i) Demand growth: Over 90% of growth in energy demand would come from developing countries, such as China and India, where rapidly rising incomes, the shift from rural to urban areas, and dramatic increases in industrialisation and mobility, would lead to several decades of energy-intensive growth. In contrast to the industrialised countries, where energy demands and growth were less closely linked, the energy requirements of developing countries would grow more rapidly than national incomes. (ii) Growth in energy intensity: By 2020, many developing countries would have made the transition from energy-intensive growth—driven by the demand for industrialisation, motorised transport, refrigeration, air-conditioning and all the accoutrements of modern life—to patterns of growth more closely resembling the industrialised countries. (iii) Investment needs: Energy sector investment needs would remain at approximately the same levels of GDP as they had in the past. For the period 1990–2020, a cumulative energy supply investment requirement in 1990 dollars of US $30 trillion, or roughly 3–4% of global GDP, was assumed, much in line with historical experience. (iv) Savings rates: Global economic growth would be likely to produce the necessary resources to fund energy investments, this being indicated by the high savings rates in most developing countries. Savings rates in many developing countries were double than those of the US and generally one-third greater than those of Europe or Japan. (v) Environmental issues: Although the need for minimising environmental impacts could add significantly to costs, this was not considered to be an overwhelming impediment. It was thought that most environmental concerns could be accommodated within a 15–20% range of additional capital cost. For new capacity, it could be as low as 10%. Many investors were already taking steps to protect themselves against costly retrofits that would become necessary with “the inevitable tightening of standards”.

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(vi) Capital resources: There would be no global constraint on capital resources as such.62 The WEC task force found that the greatest financing need in both relative and absolute terms was in electric power, larger than all other energy investments combined.63 This is still the case today, as indicated in Figure 1 earlier. With the exception of post-GFC constraints on capital resources, as explained below, much the same conclusions could be drawn about energy investment needs of today. B. The Causes of the GFC The GFC occurred in mid-2008. According to the US Treasury Secretary in March 2009: The imbalances that caused the crisis built up over time. The absence of a serious recession over more than two decades bred complacency. Relatively accommodative monetary policy and high foreign demand for US financial assets pushed down rates and encouraged borrowing. Financial innovation produced products whose complexity escaped the understanding of both our regulators and our most sophisticated institutions. Finally, incentives implicit in financial industry compensation encouraged inordinate risk-taking and short-time horizons.64

In other words, the GFC was caused by a cocktail of regulatory and institutional failures. Or, as an eminent economist later explained: “The current crisis was caused by financiers taking ever more risky gambles with the complicity of the government”.65 C. The Immediate Effects of the GFC The market capitalisation of the global banking industry fell by US $5.5 trillion, or 63% of its pre-crisis peak. According to one commentator, “The investment banking industry as a whole has been devastated [. . .]”.66 The IMF reported a slowdown in credit growth, putting more downward pres-

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WEC, ‘Financing the Global Energy Sector—The Task Ahead’, London, UK (1997). Id. 64 Timothy Geithner, address to the US Council on Foreign Relations, Washington DC (25 March 2009). 65 Lal, D., ‘The Great Crash of 2008: Causes and Consequences,’ Cato Journal, Vol. 30 No. 2 (Spring/Summer 2010) 265, at p. 273. 66 Boston Consulting Group, ‘Living with New Realities’, Boston, MA, USA (February 2009). 63


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sure on economic activity.67 The IMF predicted that the slowdown would be long-lasting.68 The IEA reported that “[e]nergy companies are finding it much harder than in the past to obtain credit for both ongoing operations and to raise fresh capital for new projects, because of paralyzed credit markets”.69 The IEA expressed concerns about the effects on energy security, climate change and energy poverty: Energy investment worldwide is plunging in the face of a tougher financing environment, weakening final demand for energy and falling cash flows—the result, primarily, of the global financial crisis and the worst recession since the Second World War. [. . .] Falling energy investment will have far-reaching and, depending on how governments respond, potentially grave effects on energy security, climate change and energy poverty. [. . .] These concerns justify government action to support investment in energy efficiency and clean energy. [. . .] But much more needs to be done. The investment needed to put the world onto an energy path consistent with limiting the rise in global temperature to around 2°C far exceeds the additional investments that are expected to occur as a result of the stimulus packages so far announced.70

The WEC raised similar concerns about energy investment: The illiquidity of global financial markets has meant that companies find it much more difficult to access capital, even for high-return projects. This particularly affects small companies in the renewables sector. Such funding shortages are hindering the consolidation of the energy sector in certain areas and raising concerns about the short-term feasibility of the capital-intensive investment required in the energy sector.71

In relation to the electric power industry, the Edison Electric Institute raised some particular concerns: Today, the electric utility industry faces the greatest challenge in its history. In order to meet the projected growth in the electricity demand, major investments are needed to expand and modernize most elements of the electric utility business. At the same time, concerns about global climate change and other environmental issues have created a new industry emphasis on more energyefficient products and services and low-emission generation sources. By some

67 International Monetary Fund, ‘Global Financial Stability Report’, Washington DC (April 2009), p. xi. 68 IMF, footnote 67, p. 2. 69 IEA, ‘The Impact of the Financial and Economic Crisis on Global Energy Investment’, Paris, France (May 2009), pp. 3–5. 70 IEA, footnote 69, p. 10. 71 World Energy Council, ‘WEC Statement 2009: Building the New World Energy Order’, London, UK (2009).

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robert pritchard estimates, the industry will need to make a total infrastructure investment of $1.5 trillion to $2.0 trillion between 2010 and 2030, net of projected savings from aggressive energy efficiency and demand response programs.72

The common theme in all these statements was that the task of raising capital for the highly capital-intensive energy industry had become much more difficult, leading the IEA to suggest that “There is little prospect of a return to the days of cheap and easy credit. In general, financing energy investment will certainly be more difficult and costly in the medium term than before the crisis took hold”.73 The IEA foresaw a period of consolidation, a wave of mergers and acquisitions and a scaling back of all types of energy investment in most countries along the supply chain, especially for projects considered to be most risky and funded off the balance sheet.74 The IMF reported that financing markets would in future be characterised by lower levels of leverage, reduced funding mismatches, less counterparty risk and more transparent and simpler financial instruments than in the precrisis period.75 This meant that less reliance could be placed on asset values and more reliance must be placed on the sustainability of revenues to service debt, to pay taxes and to reward profit-seeking private investors. Over the course of 2009 and 2010, many energy investors seeking capital had to resort to asset sales or the issue of corporate equity. Equity raising tended to be open to those companies whose balance sheets were relatively undergeared and where significant discounting of share prices could be offered. Equity was often raised to replace debt rather than to fund growth. D. The Long-Term Significance of the GFC The long-term significance of the GFC has been to precipitate changes beyond the restoration of equilibrium in the financial system; the global pool of capital has shrunk; banks have reduced their risk-taking activities; governments, in bailing out banks and providing stimulus measures, have become more highly indebted and more dependent on the private sector for investment; and the Group of Twenty (G-20) has become the premier forum for international economic cooperation and has assumed the key role in reforming the financial system.76 Private investors are now faced with reduced profit expectations, significantly altered investment risk profiles as the energy mix changes (as will 72 Edison Electric Institute, ‘The Financial Crisis and Its Impact on the Electric Utility Industry’, Washington DC, USA (February 2009). 73 IEA, footnote 69, p. 13. 74 IEA, footnote 69, pp. 10 and 35. 75 IMF, footnote 67, p. xviii. 76 Leaders’ Statement, The Pittsburgh Summit (25 September 2009), (last checked 5 April 2010).


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occur from the mandatory use of renewables), less clear linkages to traditional approaches to investment appraisal, monitoring and performance reporting, particularly in the case of climate-related investments, and intensified global competition for the reduced global capital pool. In the author’s experience, utility rates of return typically do not attract risk-taking private investors. The question now is whether the combination of costs and risks that investors in the energy sector now have to confront have become so high as to potentially jeopardise the security of energy supply and the further development of energy resources. Only time will tell. As Kachikwu perceived it: The prevalent global financial crisis will be seen in history as a major turning point, just as the 1930s Great Depression changed the financial landscape for nearly 80 years. Similarly, the present crisis will stimulate major transformation in economic theory, philosophical perspective and in institutional configuration.77

The GFC has also carried important implications for government policymaking. The clock cannot be turned back to public ownership because, as the IMF recently reported: unprecedented policy support [for the financial system] has come at the cost of a significant increase of risk to sovereign balance sheets and a consequent increase in sovereign debt burdens that raise risks for financial stability in the future.78

More than ever before, in the author’s view, private investment must be guaranteed by stable and conducive policy settings, including conducive tax and environmental policies, to keep the investors coming. It is therefore relevant to review and reconsider the main essential legal safeguards which the boards of most international energy investors, and their international bankers, will consider in making a decision to invest in an energy project. VI. How do Investors Make Energy Investment Decisions? A. No Universal Legal Standards In the author’s experience, the process of making investment decisions is as much idiosyncratic as scientific. There have never been any absolute or universal standards of legal adequacy for investment; it has always been a question of what will satisfy a particular investor in a particular case and whether the project will satisfy the requirements of financiers.

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Kachikwu, M.K., supra footnote 6, at p. 93. IMF, ‘Global Financial Stability Report, Market Update’, Washington, DC (January 2010), p. 2. 78

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Some investors are more capable and willing than others to take risks. Sometimes, international majors may be marginally less risk-averse than their medium-sized competitors, depending on their assessment of host government attitudes towards their investment proposals. Small entrepreneurs may even be quite fearless. However, the vast majority of investors remain risk-averse and, following the GFC, seem to be more risk-averse than ever. In the author’s view, this is a consequence not so much of failed investments as it is of generally decreased profit expectations. Most of this has to do with a wider array of risks, including increased levels of government take, increased concerns over GHG emissions and other environmental concerns and a tendency towards more intrusive industry regulation. Investors tend to carry out their investment decision-making process in three main stages: first, the commercial prospects and potential profitability of the project are evaluated; secondly, the risks are assessed; and thirdly, if the potential rewards outweigh the risks, the investors may opt to proceed, subject to financing requirements. If, however, the risks outweigh the potential rewards, investors face a dilemma: either to decline the investment opportunity or to proceed without adequate legal safeguards. In some cases, as Wälde pointed out, investors may wish to proceed if a particular host government has a good reputation, has good economic policies and is experiencing sustained economic growth.79 In other cases, investors may proceed if they believe they can influence good government policy in their favor.80 This is not to suggest that investors are particularly susceptible to government inducements. In the author’s experience, if a host government does not provide adequate legal security and stability, most investors will refrain from making an investment, no matter how attractive the potential rewards might be or what inducements the government might offer. B. Basic Legal Expectations When contemplating investment in a project in a foreign country, most investors will have certain basic expectations, which they will wish to be legally enforceable. The author’s checklist is set out in the table below:

79 Wälde, T.W., ‘Law, Contract and Reputation in International Business: What Works?’, CEPMLP Internet Journal, Vols. 3–18, (1998), <www.dundee.ac.uk/cepmlp>. 80 Wälde, T.W., ‘Changing Directions for International Investment Law in the Global Economy—An Overview of Selected Issues,’ CEPMLP Internet Journal, Vols. 4–2, (1999) <www.dundee.ac.uk/cepmlp>.


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Table 2: A Checklist of Basic Legal Expectations of Foreign Investors Security of tenure over the project assets with the right to freely pledge and alienate them A stable taxation regime Government approvals, including in particular environmental approvals, to develop and operate the project for its economic life The ability to procure equipment and materials from both local and overseas sources The right of access to all necessary facilities and services for operating purposes Freedom to engage both local and foreign labour and contractors The ability to sell the products into local and export markets The right to obtain payment for goods sold in a freely convertible currency The ability to convert that currency into the currency which was originally invested— and to do this at an adequate conversion rate The ability to service loans and to repatriate profits and capital

If investors cannot be confident of all of these matters, most are unlikely to invest. Investment safeguards, such as investment protection treaties and constitutional and legislative safeguards, are helpful in safeguarding foreign investment but are seldom sufficient by themselves to induce investors to proceed. A country’s adherence to the rule of law, and its reputation as a good place to invest, are also important. The late Ibrahim Shihata, the former General Counsel of the World Bank, was a great advocate of law as the formal instrument of orderly change in society and an advocate of the criticality of applying binding rules without bias or discrimination.81 Shihata played the most significant role of anyone in the promulgation of the World Bank Guidelines on the Treatment of Foreign Investment referred to in section II above. Without the rule of law and a market-oriented legal system, a market economy just does not operate efficiently and this increases the costs and risks of investment, not only in the energy industry but in all economic sectors.82 Carefully constructed investment agreements with host governments can overcome many of the legal problems inherent in the lack of legislation and can establish a legally secure contractual framework under which an investment can be made.83 However, governments are understandably reluctant

81 Shihata, I., ‘The Role of Law in Economic Development’, Oil Gas and Energy Law, OGEL Archive Issue (2004), <www.ogel.org>. 82 Webb, D., ‘Legal System Reform and Private Sector Development in Developing Countries’, chapter 3 in Pritchard, R., (ed.), Economic Development, Foreign Investment and the Law, International Bar Association and Kluwer Law International, London (1996), 45 at p. 52. 83 A recent example is the 2008 agreement between Papua New Guinea and ExxonMobil and its partners for the development of the PNG LNG project.

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to grant special privileges unless they are warranted by the importance of the project. As well, the negotiation of investment agreements can be an expensive and lengthy process and generally it is only the most substantial investors in the most important projects who can afford the cost and time to conclude them. After an ‘in-principle’ decision is made to invest, the challenge remains of designing an investment structure and successfully carrying on business despite any risk of change of law. One way of doing this is through joint ventures, although exactly how to structure a joint venture depends on the type of project and the strategic business objectives and capacity of each of the parties involved.84 C. The Importance of Probity A contract obtained by corrupt practices is not only illegal but unenforceable under most legal systems. In addition, foreign business people run the risk of imprisonment85 or having their exit visas revoked while investigations are undertaken. Even where the host government does not have strict anticorruption laws, foreign business people may still be affected by extraterritorial, anti-corruption laws operating in their domestic jurisdiction, as with the US Foreign Corrupt Practices Act of 1977. Maintaining the utmost probity is therefore a prerequisite of every foreign investment. Corrupt practices, irrespective of how orthodox they are claimed to be, are in the author’s view a guaranteed recipe for investment disaster. The strengthening of the EITI as a global governance standard to promote revenue transparency is a most welcome development.86 Investors need always to be on guard against becoming involved (even indirectly by association with other parties) in corruption and any other activity which might constitute criminal conduct or give rise to illegality in the host country. Criminal conduct in many countries is not limited to corruption. It may include: breach of labor laws; illegal import or export of goods or currency; tax evasion; breach of environmental laws; and breach of consumer protection laws.

84 Pritchard, R., ‘The Use of Joint Ventures in FDI’, chapter 9 in Pritchard, R., (ed.), Economic Development, Foreign Investment and the Law, International Bar Association and Kluwer Law International, London (1996) 175 at p. 176. 85 As reported in The Age, Melbourne, Australia on 29 March 2010, an Australian employee of Rio Tinto, Stern Hu, was sentenced in March 2010 to 10 years jail for stealing commercial secrets and receiving bribes in China. 86 Supra, footnote 24.


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D. The Requirements of Financeability Many energy and natural resource projects are of such large scale that they require project finance and special-purpose financing structures to undertake them. What distinguishes project finance from other types of lending transactions is that the lenders rely primarily on the cash flow of the project itself for repayment, and to a lesser degree on the assets of the project, rather than relying primarily upon the creditworthiness of the investors or project sponsors. Lenders invariably require to study the complete range of projectspecific issues, as well as the creditworthiness, experience and track record of the project sponsors and the investment structure proposed for the project, in order to decide whether a project is financeable or ‘bankable’. This necessary reliance on the cash flow of the project entails a whole series of potential risks to all parties involved. Before the lenders, sponsors and other interested parties commit to the project, it is necessary for all project risks to be realistically allocated to, and accepted by, the various parties according to their capacity, experience and involvement. The emphasis here must be on realism—it is unrealistic for lenders and their lawyers to insist that a particular risk be allocated to a party that is incapable of assuming it. The most obvious example is currency risk, mentioned further below. The degree of risk which should be allocated to a party should be commensurate with its anticipated return from the project and its stake in the completed project. Balancing the competing interests of multiple parties will often lead to a project financing transaction having a very complex legal structure and requiring extensive documentation. Sometimes, the legal complexity can be so extreme as to constitute an investment risk in itself (a risk which is entirely of the parties’ own creation). The real glue that holds successful projects together is mutuality of interest. Putting parties in strait-jackets and holding them hostage to the threat of declaring an event of default under a financing agreement can be self-defeating. Satisfying the requirements of financeability or bankability can seriously complicate the making of investment decisions. Lenders have always been much more risk-averse than equity investors. Following the GFC, this riskaversity is reflected in reduced debt-to-equity ratios. The main issues which typically arise for lenders are the need for credit support, completion risk, currency risk and the risk of change of law. 1. Credit support The lenders in a project financing generally insist on at least some recourse to the project sponsors. Sometimes, the lenders also require part of the credit risk to be borne by interested third parties. Third parties who are likely to

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be willing to accept credit risk and provide credit support are those who will benefit from the construction and/or the completion of the project, such as product offtakers. They can include parties who supply materials, products and services in connection with the construction of the project, and those who supply the project once it is in operation. They can also include governmental entities which have an interest in the project. 2. Completion risk The management of ‘completion risk’ poses the greatest single difficulty for new project financing. In most energy projects, the value of the physical assets of the project prior to commissioning will be only a fraction of the monies advanced. Although the lenders will take security over all of the assets of the project, this is usually done as a means of ensuring compliance with negative pledges against dealing with or encumbering the assets of the project, rather than with the expectation that realising on the security will be a realistic means of recouping the monies advanced. Most lenders will know that, if the project sponsors are unable to construct or operate the project successfully, the lenders will probably experience even more difficulty managing those tasks. Because of this, the lenders, as well as the project sponsors and any third parties against whom the lenders have recourse, all must rely on the success of the project, not just its ability to be completed by a certain deadline but its ability to meet cash flow projections when it commences operations. Whether and when the projected cash flows will commence is therefore invariably the crucial question for the lenders. Actually, with many new projects, completion risk typically represents such a great risk that many conventional lenders are unwilling to accept it. In such cases, project sponsors will need to obtain ‘bridging finance’ from commercial banks or other sources by providing them with recourse to governmental or corporate balance sheets and/or other collateral security (often at more expensive rates) until all of the lenders’ ‘completion tests’ are satisfied. After that, non-recourse or limited-recourse project finance can be substituted. The ability to obtain bridging finance largely depends on the project sponsors being highly creditworthy and technically competent entities (even more so following the GFC). 3. Currency risk Exchange rates of course rarely remain stable for long periods and are frequently volatile. Almost always, a very serious difficulty in financing foreign projects is currency risk. Even if currency convertibility is guaranteed by the host government, the conversion rate will depend on a range of economic considerations that are outside the control of the host government and the project sponsors.


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The use of escrow accounts outside the host country can sometimes overcome or reduce currency risk where the project’s output can be sold on international markets in a hard currency. Third-party currency hedge products can also be utilised but may be unaffordable if they are required (as is usually the case) from highly creditworthy institutions and if they need to be matched against long-term loan repayment schedules. Host governments may be able to utilise to some extent the currency risk mitigation products available from the World Bank; political risk insurance may also be available. However, the management of currency risk depends crucially on prevailing and projected exchange rates and does not readily admit of easy solutions. 4. The risk of change of law The most well-known legal risk for energy investors, is the risk of expropriation. However, contemporary legal risks are by no means confined to that; the most feared legal risk is the risk of adverse change of law. This is the reason for the widespread use of the so-called ‘change of law’ or stabilization clause in financing documents, under which lenders require borrowers to indemnify them against the financial consequences of changes in law and other governmental regulations and requirements. The area of the greatest risk for investors and financiers is change of fiscal regimes.87 Another area of great risk is the imposition of exchange controls (especially if little advance warning is given). Increases in environmental and rehabilitation requirements or in labor requirements are also matters of great risk. Another frequent matter of concern is the potential for conflict between different tiers of government or any doubt about the extent of powers delegated to local governments. In assessing the risk of change of law, the first thing to look for are safeguards which have been proven over time. ‘Soft law’ as outlined in section II above is a barometer for future changes of law that cannot be ignored by legal advisers concerned with the stability and security of energy investments.

87 The risk of change of fiscal regimes is present in all jurisdictions. A recent instance concerned the sudden proposal by the Australian Government in 2010 to introduce an onerous resource rent tax on all onshore mining and oil and gas projects. The proposal aroused great industry and public opposition, so much that it resulted in the removal and replacement of the Prime Minister by his own political party, following which the proposal was considerably watered down in consultation with the resource industry.

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robert pritchard VII. Conclusions: A Heavier Onus on Governments

The landscape of international energy investment has changed enormously over the last few decades. There are now many more ways of upsetting an investor’s apple cart. On the one hand, investors have a wide choice of opportunities to invest in the energy sector and enjoy wide protection under both national and international investment laws and treaties. On the other hand, investors face a much more complicated, unsettled and widening array of risks and uncertainties, some of which are being given greater weight by the proliferation of IGOs and NGOs and by the promulgation of codes of conduct and other manifestations of ‘soft law’. Uncertainty of policies undoubtedly increases investment risk. In the aftermath of the GFC, the supply of capital is not as assured as it was before and climate policy uncertainty remains particularly problematic. The supply of capital may remain constrained for some years, and some governments may remain heavily indebted. The thesis of this chapter is that, in the contemporary era, energy investors will be more risk-averse than ever and satisfying the requirements of financiers will continue to complicate the making of energy investment decisions. This places a heavier onus on every government to maintain attractive policy settings and entrench them in law if they are to attract investment in the energy sector and remain economically competitive.

INVESTOR-STATE MEDIATION: REFLECTIONS ON ITS FEASIBILITY FROM A PROCESS PERSPECTIVE Ximena Bustamante* I. Introduction During a JAMS Foundation Weinstein International Fellowship Workshop, Antonio Piazza, a seasoned and very successful mediator in the United States, shared his experiences with international ADR leaders. Most of the concerns raised had to do with the development of mediation in each of the participants’ countries. Antonio’s advice was simple: “For mediation to develop, you need to demonstrate that mediation works; for that, you need to trust the process.” Important efforts have been made to encourage the development of mediation in the particular context of investor-State Dispute Settlement (ISDS); mediation has been considered an adequate complement of the current dispute resolution mechanism, particularly because it is in line with the general objective of economic development. However, its feasibility has been seriously questioned. The majority of the criticisms raised are related to the actual ability of the process to be successful in conflicts as complex as these, that involve private investors and sovereign States. Those challenges have been addressed from the broad perspective of an adequate system design and the encouragement to host States to enact internal dispute prevention policies, both initiatives of great impact and importance. To contribute to the analysis, this study will address the question whether mediation can be effective in resolving investor-State disputes by incorporating those challenges into the process. Therefore, broad criticisms for the development of mediation in international investment law will be reframed as specific obstacles for settlement in a particular case. The mediation process, as a flexible, adaptable and creative mechanism is designed precisely to overcome most of the challenges to settlement, assuming that the institution * Obtained her law degree at San Francisco de Quito University, been ranked first of her class; served as the Deputy Director of the Arbitration and Mediation Center for the Quito’s Chamber of Commerce; authored the book “El Acta de Mediación”; and completed her LL.M. in Dispute Resolution at the Straus Institute for Dispute Resolution in Pepperdine University as a Weinstein International Fellow for the JAMS Foundation. This Independent Study Paper was written in partial fulfillment of the requirements for the LL.M. Degree in Dispute Resolution (Faculty Advisor: Jack Coe Jr.).

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managing the process, the neutral (and his/her team) and the case manager have a proactive approach. The first part of this study will analyze the current system of investorState dispute settlement, and its importance to international economic development. The second will study mediation and its development, both internationally and in the particular context of international investment law. Finally, this paper will address some of the challenges for the use of mediation and provide some ideas of how those challenges can be incorporated in the mediation process itself. II. Investor State Dispute Settlement The attraction of foreign direct investment (FDI)1 is of particular importance to promote economic development.2 In principle, it constitutes a source of net private capital, but also has the potential to bring to the host State new technologies, management skills, training for workers, marketing links that create access to new markets, new information, and a positive impact on local employment and businesses that provide investors with different goods and services.3 In that sense, the preamble of the World Bank’s Guidelines on the Treatment of Foreign Direct Investment recognized the importance of FDI for developing countries.4 States aim to attract FDI because it often promotes development. However, an attractive investment climate is a complex phenomenon and requires the conjunction of various elements.5 Ibrahim Shihata considers three broad

1

In order to keep consistency with the international framework, this study will maintain the same abbreviations and definitions utilized by the United Nations Conference on Trade and Development (UNCTAD), see UNCTAD, Investor—State Disputes: Prevention and Alternatives to Arbitration, at ix–xxi, UNCTAD/DIAE/IA/2009/11, U.N. Sales No. E.10.II.D.11 (2010). 2 “Early in the first Development Decade, which spanned the 1960’s, it became increasingly clear that if the plans established for the growth in the economies of the developing countries were to be realized, it would be necessary to supplement the resources flowing to these countries from bilateral and multilateral governmental sources by additional investments originating in the private sector” International Centre for Settlement of Investment Disputes. Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Analysis of Documents Concerning the Origin and Formulation of the Convention. Vol. 1, 2 (1970). 3 Ibrahim F.I. Shihata, Legal Treatment of Foreign Investment: The World Bank Guidelines, 11 (1993). 4 “[T]hat a greater flow of foreign direct investment brings substantial benefits to bear on the world economy and on the economies of developing countries in particular, in terms of improving the long term efficiency of the host country through greater competition, transfer of capital, technology and managerial skills and enhancement of market access and in terms of the expansion of international trade.” Id., at 155. 5 Id., at 20.

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categories: 1) economic and financial framework,6 2) political and cultural conditions;7 and 3) legal and regulatory regime.8 This last requirement necessarily implies to “provide investors with reliable protection for property and contractual rights through comprehensive legislation, effective enforcement and the availability of efficient conflict resolution mechanisms.”9 In the same line, Harris Bor writes that “[t]he implementation of laws at protecting foreign investment has been considered one of the principal means for States to promote foreign direct investment.”10 Therefore, the strategy to attract FDI includes entering into Bilateral Investment Treaties (BITs)11 in which host States offer special protections to foreign investors.12 At the moment, there are more than 3000 BITs and various free trade agreements (FTA) that include regulations on investment.13 According to the UNCTAD, international investment law is built over four pillars; the first three being: to grant fair and equitable treatment, provide freedom of transfer and protection against unlawful expropriation.14

6 The economic and financial framework includes things as a liberal exchange and interest rate policies, or a strong financial system. See id. 7 This category includes a perception of political stability and a belief that governmental policies as well as public opinions will remain favorable to FDI. See id., at 22. 8 An adequate legal and regulatory regime will include normative on issues of interest of foreign investors, as a sophisticated financial regulation, appropriate labor laws, among others. See id., at 25–26. 9 Id., at 24, emphasis added. 10 Harris Bor, ADR Possibilities in Investor-State Disputes, 73 The International Journal of Arbitration, Mediation and Dispute Management 90 (February 2007). 11 After World War II, the international community was unable to reach an agreement over the protections owed to foreign investors according to customary international law. There was a general sense of an ‘international minimum standard’ according to which “the alien is protected from unacceptable measures of the host state by rules of international law that are independent of those of the host state”. However, the lack of definition of such standard led to various confrontations between capital-exporting countries on the one side and developing or recently independent States on the other. This last group insisted on the notion of sovereignty and called for economic decolonization. The Hull formula (under which expropriation required “prompt, adequate, and effective compensation”) was ideologically opposed to the Calvo doctrine promoted in Latin America (which allowed “the host state to reduce the protection of alien property when also reducing the guarantees for property held by nationals (. . .) foreigners must assert their rights before domestic courts and (. . .) have no right of diplomatic protection by their home state or access to international tribunals”). However, around 1990, when it became clear that the socialist view of property failed, and that the position for economic independence in Latin America brought a major crisis rather than welfare, Latin American States started to conclude bilateral investment treaties. Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, 13–15 (2008). See also Kenneth J. Vandevelde, A Brief History of International Investment Agreements, 12 U.C. Davis J. Int’l L. & Pol’y 157 (2005). 12 “Governments presumably sign investment treaties to promote investment by providing investors with substantive legal rights.” Susan D. Franck, Integrating Investment Treaty Conflict and Dispute Systems Design, 92, Minn. L. Rev. 161, 182 (2007). 13 UNCTAD supra note 1 at 3. 14 Id., at 2. In the same line, Susan Franck writes that the substantive rights granted by BITs typically “include guarantees of appropriate compensation for expropriation, promises

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Arbitration is the fourth pillar of international investment law15 and it is also considered to promote the flow of FDI.16 “Host States wishing to attract and promote foreign investment often seek to offer predictability to foreign investors by favouring international arbitration as the means for investors to deal with a dispute.”17 In that sense, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) was signed considering “the need for international cooperation for economic development, and the role of private international investment therein.”18 In similar terms, the report of the Executive Directors of the International Bank for Reconstruction and Development on the ICSID Convention established that “adherence to the Convention by a country would provide additional inducement and stimulate a larger flow of private international investment into its territories, which is the primary purpose of the Convention.”19 Thus, the overwhelming majority of BITs and FTAs include a public offer of arbitration under the rules of the International Centre for Settlement of Investment Disputes (ICSID), the United Nations Commission for International Trade Law (UNCITRAL),20 or the International Court of Arbitration of the International Chamber of Commerce (ICC);21 and 144 States are contracting States of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).22 International arbitration provides various benefits for investors. It is a neutral forum designed to settle disputes in which a host State has allegedly of freedom from unreasonable or discriminatory measures, guarantees of national treatment for the investment, assurances of fair and equitable treatment, promises that investments will receive full protection and security, undertakings that a sovereign will honor its obligations, and assurances that foreign direct investment (FDI) will receive treatment no less favorable than that accorded under international law.” Franck, Integrating . . . supra note 12 at 172. 15 Id., at 2. 16 “The drafters of the Washington Convention contemplated that in order to encourage foreign direct investment, an impartial and effective system of dispute settlement was essential. The only way to achieve such a system, it was thought, was to design a system that would effectively avoid the use of domestic courts of both the host state and the investor’s home state.” Eric van Ginkel, Toward Mandatory ICSID Conciliation?—Reflections on Professor Coe’s Article on Investor-State Conciliation, 21 Mealey’s International Arbitration Report #4, p. 1 (April 2006). 17 UNCTAD supra note 1 at 3. 18 Convention on the Settlement of Investment Disputes between States and Nationals of Other States. 19 Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 40, emphasis added. 20 UNCTAD supra note 1 at 3. 21 See Kate M. Supnik, Making Amends: Amending the ICSID Convention to Reconcile Competing Interests in International Investment Law, 59 Duke L.J. 343, 351 (2009). 22 International Centre for Settlement of Investment Disputes, Member States, http://icsid .worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=ShowHome&page Name=MemberStates_Home.


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violated one of its international commitments.23 It is governed by a clear framework of rules, away of any national judicial system,24 and the decision rests on an independent and neutral tribunal.25 Arbitration is considered to de-politicize the dispute since, unlike other international disputes, the investor does not require the intervention of the home State.26 In addition, it provides parties with a definitive binding decision which is internationally enforceable.27 However, the legitimacy of arbitration has been seriously questioned.28 Doubts have been raised as to arbitration’s ability to actually attract and keep FDI. “Several studies have investigated the effect of BITs in attracting foreign investment flows, with inconsistent results.”29 The first study by UNCTAD in 1998 found a weak positive correlation,30 and more recent studies have split results, some concluded that “the association between BITs and foreign direct investment was negative and not significant,”31 and others found a stronger impact of BITs on FDI flow.32 The difference of those results could be due to different statistical approaches,33 but the truth is that costly arbitral awards have the potential to create a perception in respondent States a perception that international investment agreements are not really attracting increased investment flows.34 And if the power of BITs is questioned, so is the public offer to arbitrate contained in those treaties. However, the 23

UNCTAD supra note 1 at 2. Id. 25 Id., at 14. 26 Id., at 13. 27 See Article 53 and 54 of the ICSID Convention. 28 Ecuador and Bolivia have denounced the ICSID Convention, and are taking steps to denounce some BIT’s. Venezuela has limited the access to international arbitration in sensitive sectors of the economy. UNCTAD supra note 1 at 16. The Economic Cooperation Agreement between India and Singapore has omitted key treaty protection. See Asha Kaushal, Revisiting History: How the Past Matters for the Present Backlash Against Foreign Investment Regime, 50 Harv. Int’l L.J. 491, 493 (2009). After being the respondent in several claims brought under chapter XI of NAFTA, the United States changed its investment agreements to limit certain types of claims, and the 2004 FTA between the United States and Australia omit a provision for investor-State arbitration. Vandevelde, supra note 11, at 187–188. 29 Vandevelde, supra note 11, at 185. 30 Id. 31 Id. Equally Asha Kaushal says that “several recent studies suggest that BITs do not affect the flow of investment to signatory countries, calling into question the basis of the bargain: See Kaushal, supra note 28 at 496. 32 Id. 33 See id., at 186. 34 See id. A phenomena present in the context of a conflict is the process of selective perception, which “leads Party to search for and interpret information in ways that confirm the initial negative impression (of the other). Instead of gathering and evaluating data in scientific fashion, Party tends to locate information that supports these preconceptions.” Jeffrey Z. Rubin, Dean G. Pruitt and Sung Hee Kim, Social Conflict: Escalation, Stalemate and Settlement, Vol. 2, 102 (1994). This translated to the world of investment disputes means that once a host State faces an arbitration that imposes an award for a measure that the 24

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problem with arbitration goes beyond this particular doubt. The adversarial nature of the system has the potential to erode long-term relationships,35 which can contribute in the investor’s decision to leave the host State,36 or in the host State’s decision to rebuff a particular investor. Furthermore, the image projected by a country sued under an investment dispute is that of an unattractive environment for investments, creating further prejudices for new investors to come. While the role that IIAs play in the development of a host country has often been discussed and debated, it is unquestionable that a multiplication of investment disputes can only result in a negative impact on a country’s economic development. This is because the occurrence of multiple investment disputes in a country will portray a negative image on this country’s investment climate, potentially reducing the inflow of FDI that the country is seeking to attract in line with its development objectives.37

Other important concerns relate to the fact that the disputes “often involve public policy issues and challenge the ability of the State to regulate in the public interest, even when it may hurt individual interests.”38 Argentina, for example, faced dozens of ICSID claims after the 2001 financial crisis for monetary actions that it argued were necessary provisions.39 Additionally, the complexity of the arbitration presents enormous obstacles for some host States to present adequate and opportune defenses.40 “ICSID’s surge in usage has simultaneously rendered it less popular among host States.41 Some States are once again starting to embrace the Calvo Doctrine, emphasizing soverState felt entitled to take, it will be more likely than not that such State will rely on information discrediting the system than in any other objective information. 35 “[T]he experience of investment treaty arbitration can also lead to a severance of the relationship between the investor and the State, which runs counter to the goal of many host countries to attract and promote foreign investment that provide a meaningful contribution to economic development.” UNCTAD, supra note 1 at 5. 36 Encana’s investment in Ecuador provides a good example of this. 37 UNCTAD, supra note 1 at 101. 38 Id., at 11. “Huge disputes emerged as result of privatization schemes or the offering of concession contracts for public utilities or natural resources exploration and exploitation. This raised political debate inside and outside the State and spurred dissatisfaction with investment arbitration.” UNCTAD, supra note 1 at 4. See also Doug Jones, Alternatives to Arbitration in Investor-State Disputes, in ACICA Conference 1 (18 November 2008). 39 Supnik, supra note 21 at 356. 40 “At present, however, developing host states facing ICSID claims often lack sufficient resources to adequately represent themselves in proceedings. Developing states must pay expensive legal fees to elite Western law firms to obtain representation comparable in caliber to that of private investors.” Supnik, supra note 21 at 366. See also UNCTAD, supra note 1 at 18 (recognizing that Investor-State cases have become increasingly difficult to manage as parties have lost control over the arbitration process). 41 “[T]here is a perception held by some that under the current international investment regime, developing states in general are compelled to offer foreign investors international protections in order to attract capital in the belief that this is vital to attract foreign investment, but that ultimately this may not be to their advantage. Still further, some in developed


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eignty over international cooperation, and have either adopted or contemplated ‘measures to limit investment treaty arbitration and bring [investment disputes] under national control.’ ”42 It is important to note that other common concerns have to do with the “tribunal’s legitimacy, arbitrator accountability, costs, transparency, and award consistency.”43 Despite the criticisms to arbitration, an adequate dispute resolution mechanism is indispensable for the integrity of international investment law. International consensus, made apparent by the signature of International Investment Agreements (IIAs) and the adhesion to the ICSID, proves the faith that the international community has placed in arbitration. Only through the possibility to enforce investor’s guarantees do those guarantees actually offer some safety for investors,44 thus promoting FDI flow.45 Given the importance of international arbitration, proposals have been made to improve and complement the system.46 “[C]riticisms levelled against investor-State arbitration, whether warranted or not, justify efforts to explore alternative ways of resolving investor-State disputes and ways of reforming the model of arbitration as it currently stands.”47 One of the main proposals is the use of ADR48 and particularly mediation.49 If mediation proves to be an adequate complement to the current

states despair at the loss of state power brought about the increase in investment dispute claims.” Bor, supra note 10 at 96, emphasis added. 42 Supnik, supra note 21 at 355. “Where private foreign investment is concerned, the import of the Calvo doctrine, much admired in Latin America, is that arbitration is an unacceptable yielding of sovereignty.” Symour J. Rubin, Avoidance and Settlement of International Investment Disputes: Overview, in International Investment Disputes: Avoidance and Settlement 1, 10 (Seymour J. Rubin and Richard W. Nelson eds., 1985). 43 Supnik, supra note 21 at 355. 44 However, it is important to note that risk cannot be completely eradicated. In that sense Vagts writes “it is beyond the power of investors to do more than modestly diminish the level of political risk. Foreign direct investment is inherently fraught with the danger of drastic government—initiated change. Much of it is triggered by social and political shifts in the host state that bring new groups to power. These are difficult to predict and impossible to prevent. Thus despite the best efforts of lawyers and others, FDI is going to continue to be an exciting way of life.” Detlev V. Vagts, Dispute Avoidance Devices in Foreign Direct Investment, in International Investment Disputes: Avoidance and Settlement, 38 (Seymour J. Rubin and Richard W. Nelson eds., 1985). 45 “[T]he issuance of additional, well-publicized, large arbitral awards in favor of investors may be necessary before potential investors recognize the value of the agreements.” Vandevelde, supra note 11 at 186. 46 See Franck, supra note 12. See also Supnik, supra note 21. See also UNCTAD, supra note 1. 47 Anoosha Boralessa, Reconceptualizing the Mediation of Investor State Disputes, 7 Rutgers Conflict Resolution Law Journal, 2 (2009). 48 In this context, and accordingly to the UNCTAD’s definition, ADR is referred to nonbinding dispute settlement mechanisms that usually involve the intervention of a third party. See UNCTAD, supra note 1 at xii. 49 Thomas W. Wälde, Pro-Active Mediation of International Business & Investment Disputes Involving Long-Term Contracts: From Zero—Sum Litigation to Efficient Dispute

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system,50 it is expected that it will be a factor (among many) to contribute to the flow of FDI into host States. In that line, Mr. Shihata in 1995 “dismissed any conflict between promoting settlement and administering arbitration and observed that the Centre [ICSID] was perhaps fulfilling its broad mandate in the most optimum way when it helped bring about agreed settlements because such settlements invited mutual confidence ‘conducive to increasing the flow of international investment.’ ”51 In similar terms, Harris Bor considers that engaging in ADR “suggests a preparedness to enter into positive diplomacy and might even serve to promote foreign direct investment.”52 Furthermore, the Multilateral Investment Guarantee Agency (MIGA), part of the World Bank, offers dispute resolution services since 1996 to “enhance investor confidence in the safety of investments and encourage the flow of foreign direct investment.”53 MIGA has considered that it is in everyone’s interest to settle disputes that have the potential to scare off investors.54 III. Mediation In the context of international commercial transactions, mediation is a dispute resolution mechanism in which parties seek to reach a settlement with the aid of a neutral third party.55 The UNCTAD considers this to be an informal process of facilitated negotiation.56 The mediator works to bring the parManagement, 1 Transnat’l Disp. Mgmt. #2 (May 2004). Ucheora Onwuamaegbu, The Role of ADR in Investor-State Dispute Settlement: The ICSID Experience, 22 News from ICSID 12 (2005). Jack J. Coe, Jr., Towards a Complimentary Use of Conciliation in Investor-State Disputes— A preliminary Sketch, 12 U.C. Davis J. Int’l L. & Pol’y 7, 38 (2005). Bor, supra note 10. Jeswald Salacuse, Is There a Better Way? Alternative Methods of Treaty—Based, Investor-State Dispute Resolution, 31 Fordham Int’l L.J. 138 (2007). Van Ginkel, supra note 16. Jack J. Coe, Jr., Settlement of Investor-State Disputes through Mediation—Preliminary Remarks on Processes, Problems and Prospects, in R. Doak Bishop (Ed), Enforcement of Arbitral Awards Against Sovereigns 77 (2009). Margrete Stevens and Ben Love, Investor-State Mediation: Observations on the Role of Institutions, Conference on Global Resolution: Cost-effective settlement in International Arbitration, CEDR, London (November 2009) available at http:// www.cedr.com/about_us/arbitration_commission/Investor_State_Mediation_Observations .pdf. Anoosha Boralessa, supra note 47. Jack J. Coe Jr., Should Mediation of Investment Disputes be Encouraged; and, if so, by whom and how, in Arthur W. Rovine (Ed)The Fordham Papers 2009 339 (2010). 50 Mediation “may bring about settlement more quickly, more routinely and, often, more satisfactorily than negotiation alone.” Coe, Settlement of Investor . . . supra note 49 at 107. 51 Stevens and Love, supra note 49 at 21, emphasis added. 52 Bor, supra note 10 at 99. 53 Multilateral Investment Guarantee Agency, Dispute Resolution, available at: http://www .miga.org/guarantees/index_sv.cfm?stid=1549. 54 Id. 55 Michael McIlwrath and John Savage, International Arbitration and Mediation: A Practical Guide, Kluwer Law International 9 (2010). 56 UNCTAD, supra note 1 at xix.


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ties together, assisting them in compromising and reaching a settlement.57 Mediation is essentially a flexible process58 that allows the mediator to take into account the facts, the law, the parties’ interests, the communication dynamics, the conflict’s patterns, the commercial relationship, and any additional challenge or leverage for settlement. “The mediator has to understand often very complex issues (as requires judicial work), but, different from an arbitrator, he/she has to pro-actively burrow deep into the organizations, the personalities, the politics, the sensitivities of all parties—including often involved (but not cooperating) third parties.”59 Its flexibility and the fact that most of the techniques are based on a scientific understanding of conflict, allow the mechanism to be adaptable to different scenarios, having a broad scope of action. Finally, since the mediator is not a decision maker, the parties keep control of both the process60 and the outcome.61 Even though mediation and conciliation have often been used as synonyms,62 in the particular context of investor-State Dispute Settlement, it is appropriate to differentiate them in order to prevent any confusion with ICSID Conciliation. Mediation is not a form of ‘mini-arbitration’ or ‘nonbinding arbitration,’63 whereas ICSID Conciliation has been equated with non-binding arbitration.64 Conciliation is a formal, structured process aided by a third party, who may or may not be neutral, and who is focused on the substantive issues of the disputes.65 In ICSID’s Conciliation, the Commission’s duty is to “clarify the issues in dispute between the parties and to bring about agreement between them.”66 With that objective, it makes recommendations to the parties, and if no agreement is reached, issues a final report. Since the recommendations need to be based on the merits of the case, the parties present and prove their case to the Commission,

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Id. Dough Jones considers flexibility to be the key feature of mediation, allowing the process to be interwoven with different techniques, including expert appraisals. Jones, supra note 38 at 8. 59 Thomas W. Wälde, Mediation/Alternative Dispute Resolution in Oil, Gas and Energy Transactions: Superior to Arbitration/Litigation from a Commercial and Management Perspective, 13 CEPMLP J. 15 (2003) available at http://www.dundee.ac.uk/cepmlp/journal/html/ Vol13/article13–8.pdf. 60 Id., at 26. 61 “The participants need not reach agreement, and the mediator has no power to impose an outcome.” Dwight Golann and Jay Folberg, Mediation: The Roles of Advocate and Neutral 95 (2006). 62 Coe, Towards . . ., supra note 49 at 14. 63 McIlwrath and Savage, supra note 55 at 9. 64 UNCTAD, supra note 1 at xiv. 65 Id., at xiii. 66 See Art. 34 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. 58

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usually in an adversarial frame.67 The existence of a final report limits parties’ willingness to freely discuss the weaknesses of their case, especially if there is no clear agreement with respect to the value given to the parties’ statements in future proceedings.68 A mediator, on the other hand, attempts to bring parties together (even though parties will not agree with the other side’s version they will be able to understand it), to facilitate a negotiation and promote settlement by contending the risks of litigation. The evaluation of the case is only one tool, among many others, that some mediators use. Clearly, ICSID’s Conciliation lacks the principle of confidentiality69 so characteristic in mediation in order to provide parties a safe space to discuss their case. Additionally, the Conciliation rules do not differ much to the arbitration ones.70 In ICSID’s Conciliation, the Commission is, by default, constituted by three members,71 one appointed by each party and a Chair appointed by agreement.72 A mediator, on the other hand, is usually a single neutral (who may or may not be aided by a team). While the Commission has the power to decide over its own jurisdiction and competence,73 the mediator is a person mutually acceptable and trusted by both parties. Only with this trust will the parties freely discuss with the neutral the weaknesses of their case and even consider his/her evaluation, whereas it is hard to imagine that a party who has objected the Commission’s jurisdiction will accept any recommendation coming from it. Finally, to advance the process, the Commission will issue procedural orders74 that differ from the more informal approach a mediator takes to arrange meetings. The conception of Conciliation as a non-binding arbitration has diminished the mechanism’s attractiveness.75 With such complex rules,76 “the process could cost as much time and possibly, involve similar costs as an

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Rule 28 of the Conciliation Rules regulates the presentation of witnesses and evidence. Rule 32 (2) of the Conciliation Rules establish that the report “shall also record any agreement of the parties, pursuant to Article 35 of the Convention, concerning the use in other proceedings of the views expressed or statements or admissions or offers of settlement made in the proceeding before the Commission or of the report or any recommendation made by the Commission.” 69 UNCTAD, supra note 1 at 62. 70 Id., at 61. 71 See Art. 29(2)(b) of the ICSID Convention. 72 Rule 3 of the Conciliation Rules. 73 Art. 32 of the ICSID Convention. 74 Rule 19 of the Conciliation Rules. 75 UNCTAD, supra note 1 at 56. ICSID has received only 6 requests of conciliation. ICSID, available at http://icsid.worldbank.org/ICSID/FrontServlet. Harris Bor further notes than in international commercial disputes, conciliation has fallen in disuse, and even the ICC Conciliation Rules were replaced by the current ADR rules. Bor, supra note 10 at 103. 76 UNCTAD, supra note 1 at 63. 68


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arbitral proceeding which would conclude with a binding award.”77 However, it is interesting to note that according to an ICSID survey, conciliation was “widely viewed as a useful mechanism for the settlement of disputes (. . .) especially by member governments.”78 In fact, 54% of the interviewees considered conciliation useful, and 79% of them were governments.79 Given that in reality conciliation is not that popular, this statement may suggest that the parties are open to alternative, non-binding, cooperative mechanisms that seek settlement. Interestingly enough, and contrary to popular belief, governments are the most enthusiastic. Now, mediation as a complement of the ISDS system is not a revolutionary notion; neither for multinational organizations nor for States. “Mediation is probably pervasive in all cultures, though some cultures, ancient and modern, have a more institutionalized, culturally recognized and recommended method of choosing a respected elder to mediate family, commercial and political disputes. Mediation is also a standard, not as such, described, management technique.”80 Mediation as an alternative dispute resolution mechanism has proved to be successful in commercial disputes with complex legal issues and high interests at stake. In the United States, for example, mediation has been converted from an “exotic field into a standard area of the practice of law,”81 and lawyers who ignore a mechanism in the interest of their clients may face discipline or malpractice liability.82 Mediation is a regular professional activity in common law countries, whereas civil law countries usually recognize mediation through statutes, but are still in the process of developing its practice.83 In the arena of international commercial transactions, ADR and specifically mediation is a young but growing field. Whereas many of

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Id., at 61. Clark Martire & Bartolomeo, Inc. International Centre for Settlement of Investment Disputes: Stakeholder Survey, (October 2004) available at http://icsid.worldbank.org/ICSID/Fro ntServlet?requestType=ICSIDPublicationsRH&actionVal=ViewAnnouncePDF&Announcem entType=archive&AnnounceNo=18_1.pdf. 79 Id. 80 Wälde, Mediation/Alternative . . ., supra note 59 at 6. 81 Christian Bühring-Uhle, Lars Kirchhoff and Gabriele Scherer, Arbitration and Mediation in International Business 171 (2006). 82 Id. 83 Doug Jones, Various Non-binding (ADR) Processes in New Horizons in International Commercial Arbitration and Beyond 405 (Albert Jan van den Berg ed., 2005). According to Hacking, almost every European country has adopted mediation in one way or another. See Lord David Hacking, Can Mediation Become International? 3 IBA Arb & ADR News #2 (2007). The same is true for most of Latin American States that have enacted important statutes in support of mediation. Furthermore, the international institutions have witnessed an increase interest in mediation in NW Europe, Asia (particularly Singapore), Latin America and the Middle East. Timothy Martin, International Mediation: An Evolving Market, adrgovernanceinc 7 (June, 2010) available at http://www.timmartin.ca/fileadmin/user_upload/pdfs/ International_Mediation-An_Evolving_Market.pdf. 78

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these mediations are handled on an ad-hoc basis, the ICC Dispute Resolution Service has witnessed a constant increase of ADR cases (mediation being the outstanding majority).84 Of course, the number of mediations is in no way comparable to that of international arbitrations, thus, it still plays a small role in international dispute resolution.85 In Hacking’s words, international mediation “is having to grow under the great oak tree of international arbitration!”86 In any case, the growth of international mediation is influenced by multinational corporations that have prior experience with such mechanism in their home States.87 The acceptability of mediation is backed by the fact that, in private commercial settings, it is “credited with impressive rates of settlement,”88 both in the national and international spheres. There is, after all, rather compelling literature–some of it empirically supported—suggesting that in the B-to-B world—provided that one can induce the parties to enter the process—mediation is highly successful. More than one study reported settlement rates on the order of 80 percent through the use of mediation. Not surprisingly, companies familiar with mediation express an affinity for it, either as a sole method or as a complement to arbitration.89

Internationally, the ICDR reports a success rate of approximately 85% (70% at the day of the session and 15% shortly thereafter), and the ICC reports a settlement rate of around 80%.90 States, on the other hand, have also demonstrated interest in alternative ways of resolving conflicts. From an international relations perspective, mediation is a usual technique, though it does not have the same objectives as a legal mediation in commercial cases. Empirical studies suggest that some form of non-coercive third-party intervention has taken place in nearly 70 percent of all conflict since 1945. (. . .) Thirdparty mediation has become a common and greatly championed method of international conflict resolution. It is practiced by numerous and diverse actors, ranging from individuals through States to international organizations.91

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Martin, supra note 83. Hacking, supra note 83. 86 Id. 87 Martin, supra note 83 at 12. 88 Coe, Towards . . . supra note 49 at 18. 89 Coe, Should Investment Mediation . . . supra note 49 at 345–346. 90 Martin, supra note 83 at 6. 91 Jacob Bercovitch and Scott Sigmund Gartner, Is there a method in the madness of Mediation? Some lessons from mediators from quantitative studies of mediation, in International Conflict Mediation, New Approaches and Findings 19 (Jacob Bercovitch and Scott Sigmund Gartner eds., 2009). 85


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Equally, Bor acknowledges that “[t]here is a long history of States using what we now refer to as ADR in the settlement of international disputes,”92 being considered a duty of every State to attempt amicable ways of resolving conflicts in order to avoid war between nations.93 Furthermore, legal mediation has been included in international instruments (such as the Permanent Court of Arbitration), and has been often used in international inter-State disputes.94 In addition, the international community has shown its support to commercial mediation by the adoption of the UNCITRAL Model Law on International Commercial Conciliation by the General Assembly of the United Nations.95 Public agencies have also participated in successful mediations in domestic legal disputes. For instance, the author’s home country. Ecuadorian General Attorney’s office, has established a Mediation Center dedicated almost exclusively to the resolution of disputes of public agencies among themselves or with private institutions. Countrywide, it handles more than a thousand mediations per year, with great success.96 In the international context, since the enactment of the ADR rules in 2001,97 about 10% of the ICC Dispute Resolution Services involved States or State entities; which demonstrates the plausibility of States to collaborate in international mediation. In the particular context of investor-State disputes, there is not yet an established practice, though the field is starting to develop. Neither the International Center for Dispute Resolution (ICDR) nor the LCIA (London Court of International Arbitration), nor the ICC Dispute Resolution Services (ICC DRS) have reported mediations based on investment treaties.98 On the other hand, MIGA, by 2008, had mediated at least twenty-two cases with nineteen different respondent countries,99 reporting a great success rate (with only three cases unsettled).100 MIGA’s success is particularly interesting given that this institution only handles certain complex cases in mediation: “Regardless

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Bor, supra note 10 at 90. Id., at 91. 94 Wälde, Mediation/Alternative . . . supra note 49 at 5. (providing as examples the Pope mediating the Chile-Argentina dispute of the Beagle Channel and the two facilitators mediating the Guatemala-Belize boundary dispute in 2002). 95 Jones, Alternatives . . . supra note 38 at 14 (noting that although the Model Law is not directly relevant to investor—State disputes, it is indicative of the approach the international community is taking towards mediation, with various of the issues been applicable to investment disputes). 96 Personal communication with Lissety Espinoza, Director of the Mediation Center for the General Attorney’s Office (January 4, 2010). 97 Martin, supra note 83 at 12. 98 Id., at 12. 99 Stevens and Love, supra note 49 at 18. 100 MIGA, supra note 53. 93

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of whom the claimant is, MIGA satisfies itself that the dispute is of sufficient significance to jeopardize the country’s ability to attract foreign investment. Cases of lesser importance are not taken up by the agency.”101 However, it is important to note that MIGA’s conception as an investment guarantee agency who issues coinsurances and reinsurances against non-commercial risks, and who might have actions against home States, could place the institution in a delicate role, in which it will not always be—or be perceived as—a neutral mediator. It might even be considered an interested party in the negotiation. Regarding ad-hoc mediation of investor-State disputes, confidentiality has prevented the determination of its exact number,102 but its existence at some level is well known. In that sense, Thomas Wälde reported successful experiences mediating investor-State disputes,103 and Stephen Schwebel also made a similar attempt.104 Furthermore, ICSID’s settlement rate indicates that at least direct negotiation occurs among disputant parties, and it is possible that some cases are the result of an ad-hoc mediation process. ICSID cases often end in settlement or through discontinuance. ICSID’s published docket information suggests that approximately 40% of the arbitrations initiated at the Centre have “settled” or have been discontinued. That rate has nevertheless varied from time to time At one juncture in ICSID history, it appeared that—based on the much smaller sample—an ICSID arbitration had a better than “50:50” chance of ending in some form of settlement.105

It is also interesting to note that a few IIAs explicitly mention the possibility of using mediation or conciliation to settle disputes.106 For example, the U.S. Model BIT (2004) explicitly calls the parties attention to the use of mediation: “In the event of an investment dispute, the claimant and the respondent should initially seek to resolve the dispute through consultation and negotiation, which may include the use of non-binding, third-party procedures.” This language signals States’ willingness to participate in the process without

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Id. “Unfortunately, due to the confidentiality usually surrounding such amicable settlements, accurate and comprehensive statistics on negotiated settlement of investor-State disputes are unavailable.” UNCTAD, supra note 1 at 41. 103 See Wälde, supra note 49. 104 Stephen M. Schwebel, Is Mediation of Foreign Investment Disputes Plausible?, 22 (2) ICSID Rev. 237 (2009). 105 Coe, Settlement of Investor . . . supra note 49 at 79–80. Anoosha Boralessa has examined the different procedural stages in which settlement is more likely to occur, being the most significant after the constitution of the tribunal but before the issuance of the award. Boralessa, supra note 47 at 60. 106 UNCTAD, supra note 1 at 43. “More common in IIAs is the simple reference to conciliation next to or as an alternative to arbitration, and consistently mentioned prior to arbitration in various treaty texts.” UNCTAD, supra note 1 at 44. 102


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creating an obligation to mediate, which ultimately rescues mediation’s voluntariness often used as leverage for settlement.107 An even a clearer signal of the openness of mediation is sent by the Dispute Prevention Policies (DPP) taken by some countries:108 “that host States are beginning to go as far as organizing their own internal affairs to facilitate settlement shows that they are serious about avoiding the potential costs and fallout associated with protracted and expensive arbitrations proceedings.”109 Even though there is not yet a broad practice, investor-State arbitration represents an important leverage for the development of mediation within the field. Mediation can only be developed if a binding dispute resolution mechanism exists. “It is misleading to think of these processes as genuine alternatives to litigation and arbitration. They are best used in conjunction with formal, binding processes.”110 Arbitration places foreign investors in a unique position and provides them with a special bargain power to bring home States to the negotiation table. Indeed, foreign investors have benefits that have not been extended to nationals. Investor-State arbitration also encompasses all the characteristics that make mediation highly attractive.111 Features such as its high costs,112 the extended period of time,113 the complexity of the litigation and the increasing uncertainty of

107 A proactive convening of the case can render better results than a mandatory provision for mediation whether for the specific case or through a general norm. If parties are forced into the process it is more likely that it will be unsuccessful, creating dissatisfaction with the “additional step”. 108 See UNCTAD supra note at 65–97 (noting efforts from various Latin American countries including Colombia, Peru, Guatemala, Panama and the Dominican Republic, as well as Asian countries as Korea and African countries as the Kingdom of Morocco). 109 Stevens and Love, supra note 49 at 8. 110 Jones, supra note 38 at 6. See also Jacob Stoehr and Jenna Perkins, Perspectives of Stakeholders, in the Pos-Symposium Rapporteur “International Investment and ADR” 2 available at http://investmentadr.wlu.edu/deptimages/Symposium%202010/FINAL%20Rapparteur%20 Report%20–%20STAKEHOLDERS.pdf. (noting that conference participants agreed that mediation should not replace arbitration, but that it was a useful tool for better dispute management). 111 “Often, it is not so much the prospect of “winning” the litigation, but the risk of losing, or even the prospect of pursuing the litigation, that motivates the parties to settle.” Jones, Alternatives . . ., supra note 38 at 11. 112 See UNCTAD, supra note 16–18 (noting that costs in investor-State arbitration have skyrocketed, and that legal fees only have gone as up as $13.2 million, in addition of which there are arbitrator’s fees, administration fees, costs of experts, witnesses and of course the award). 113 Id., at 18 (noting that the average duration for claims to be finally settled varies from three to four years, and that arbitration has became no different, in length terms, to national courts). See also Wälde, Mediation/Alternative . . ., supra note 49 at 2 (noting that international arbitrators are not available at all times, and that to advance the proceedings requires complex cross-border coordination of the tribunal members’ schedules.)

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the outcome114 make investor-State cases perfect for mediation, which is a much cheaper and more expeditious process in which the outcome relies on the parties.115 In that sense, Thomas Wälde considered mediation to be superior to litigation in terms of cost and time; in his experience, the process “should cost about 15–25% of the total litigation costs,”116 and would resolve in six weeks a dispute that in litigation would have taken at least a year, assessing that mediation’s length will be about 15–25% of “full-fledged arbitration.”117 Doug Jones has additionally considered that mediation can be arranged within days or weeks, and can take just hours or days, as long as the neutral has ensured the parties, will to settle beforehand.118 If the neutral has a broad definition of the dispute,119 mediation offers additional advantages to arbitration, including an outcome that takes into account non-legal factors, non-economical compensations,120 and even the ability to restore a commercial relationship,121 allowing the investor to obtain gains more in the line with its initial investment. In the specific context of investor-State ADR, Stephen Schwebel notes that the Tesoro Petroleum Corp. v. Trinidad and Tobago conciliation had a narrow definition of the problem, where Lord Wilberforce limited his job to clarify the essentially legal issues and evaluate the merits

114 International arbitration does not tend to produce homogeneous decisions, there is not a rule or tradition of precedence, and different legal approaches have to be coordinated in the tribunal’s deliberations, Wälde, Mediation/Alternative . . . supra note 49 at 2. Furthermore, “investment law is still evolving and inherently uncertain, with protection “dazzling abstract” and “maddeningly” imprecise as to the substantive legal standard to be applied by the tribunal.” Bor, supra note 10 at 96–97. 115 Coe, Should mediation . . ., supra note 49 at 347. 116 Wälde, Mediation/Alternative . . . supra note 49 at 8. 117 Id., at 11. 118 Jones, Alternatives . . ., supra note 38 at 9. 119 Neutrals’ styles have been classified in an spectrum that range from mere facilitative to strongly evaluative, and from a narrow definition of the problem (taking into account only facts and law) to a broad definition of the problem (including subjacent interests and the relationship) See Golann and Folberg, supra note 61 at 118–119. 120 “Mediation’s focus on interests instead of rights, moreover, encourages the parties to design a bargain that is not circumscribed by the legal case of each, or an arbitral tribunal’s jurisdiction; exchanges of value that would not be within an arbitral tribunal’s remedial powers thus can readily occur.” Coe, Should mediation . . ., supra note 49 at 346. See also UNCTAD, supra note 1 at 20 (noting that arbitration is focused entirely on the payment of compensation). 121 Much has been written about the mediation’s potential to improve the disputant’s relationship, which promises great benefits in investor-State disputes. However, it is important to note that mediator’s goal may or may not include the improvement of the relationship. Sometimes the mediator’s objective is limited to settle a specific legal dispute. See Dwight Golann and Jay Folberg, supra note 61 at 95. The decision will depend on the kind of dispute, the status of the relationship and even the culture of the parties involved. For instance, commercial mediations in the United States are usually focused on settling the legal case, while commercial cases in Ecuador more often take into account the parties’ relationships and end in a restoration of dying contracts.


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of the case; while Thomas Wälde’s mediation had a broad definition of the problem. The first case ended in settlement, whereas the second led to the reconstruction of the relationship.122 “There have been investor–State cases in which both sides regretted the loss of further possibilities that occurred once the arbitration was launched and public battle joined.”123 Even though outcomes that create value or that restore the commercial relationship are case dependant, and are not usually the main objective of commercial mediations (which have been focused on the settlement of the legal claim to avoid the risks of litigation); one cannot overlook these potential advantages, which are impossible to find in arbitration proceedings.124 Even if mediation does not close with a settlement, much of the work invested will be useful in the future litigation.125 “Some multinationals (. . .) view all mediations as valuable learning experiences and do not consider unsuccessful mediations as wasted opportunities.”126 As Thomas Wälde suggests, with the alternative of arbitration, where risks of litigation outweigh the potential benefits of a large-scale gain,127 mediation becomes a better business decision and a more effective management approach.128 IV. Challenges As in any rising field, mediation of investor-State disputes faces significant challenges; some of them seem so insurmountable that various commentators express skepticism as to the potential effectiveness of mediation. For instance, Timothy Martin considers that it makes sense that international investor-State mediations haven’t spread (although he only analyzes the data from the ICDR, the ICC DRS, and the LCIA) because “there is only downside for politicians and government bureaucrats in many developing nations to engage in mediation with foreign companies. The consequences for making settlements (. . .) in such situations are usually negative. It is much easier for them to have an arbitral tribunal make a binding decision on a dispute between a foreign investor and a government.”129 Additionally, Stephen Schwebel, after recognizing mediation’s potential benefits in 122

See Schwebel, supra note 104 at 239–240. Coe, Should mediation . . ., supra note 49 at 347. 124 “It would be naïve optimism to suggest that such results would occur in the majority of cases. Nevertheless, under the arbitral formats currently available, an integrative solution, almost by definition will not occur.” Coe, Towards . . ., supra note 49 at 24–25. 125 Wälde, Mediation/Alternative . . ., supra note 49 at 20. 126 Martin, supra note 83 at 12. 127 Wälde, Mediation/Alternative . . ., supra note 49 at 8. 128 Id., at 1–2. 129 Martin, supra note 83 at 12. 123

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the field, considers some possible reasons for its lack of use. Some of them are inherent to investor-State disputes, such as the fact that they rely on major issues usually open to the public domain, or the fact that it is not in the nature of bureaucracies to assume responsibility.130 The other potential factors brought up by Schwebel are common to any mediation, and include the non-binding nature of the result, the idea that parties are free to settle before or during the course of the arbitration, the fact that both sides tend to assert their maximum claims and then persuade themselves of the rightfulness of their positions, the normal pattern of assuming an aggressive position and then becoming openly entrenched.131 In fact, these arguments are usually employed against the effectiveness of mediation; however, more often than not, mediation has shown its success. Indeed, most mediation techniques are precisely designed to overcome these issues. Finally, Barton Legum points to additional challenges such as the inclusion of various ministries and decision makers as the dispute escalates, the less flexible requirements for government officials to make decisions, the lack of a statutory authorization to settle (or the mere uncertainty that such authorization exists), the lack of a planned budget for settlements, and the lack of determination as to which agency would assume the burden.132 These are very real obstacles that indeed can prevent mediation from being effective in any particular case. “Mediation and related ADR forms are no panacea. There are situations where these methods are not appropriate and where mediation will not result in settlement.”133 In equal terms the UNCTAD recognizes that ADR is not suitable for all types of investment disputes. “More generally, the possibility to take alternative routes is very case and fact specific.”134 It will depend, among other things, on the issues on dispute and the actual ability of the parties to settle them, the level of escalation of the dispute, the prior relationship between the investor and the State, the parties’ interest to keep it, and the investor’s interest over the investment. Whereas authors have insisted on deriving only adequate cases to mediation,135 ultimately this decision will be best taken by the parties (investors and State officials) advised by their attorneys (who ought to follow the course of action that is in the best interest of their clients). However, a well handled mediation, one that seriously takes into account the 130

Schwebel, supra note 104 at 240–241. Id. 132 Barton Legum, The Difficulties of Conciliation In Investment Treaty Cases: A Comment On Professor Jack C. Coe’s ‘Toward A Complementary Use of Conciliation In Investor-State Disputes—A Preliminary Sketch’, 21 Transnat’l Disp. Mgmt. 1–2 (2006). 133 Wälde, Mediation/Alternative . . ., supra note at 25. 134 UNCTAD, supra note 1 at 36. 135 Coe, Settlement of Investor . . . supra note 49 at 109. 131


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particular challenges, still increases the probability to settle the specific case,136 providing important benefits for the parties. “[W]hile the upside chance [of attempting mediation] is very high—much less costs, much less time, less risk, the downside risk is very limited (more time added to an already very lengthy litigation period; a quite limited (if at all) add –on to the total dispute management cost.”137 A systematic use of mediation will probably increase the general settlement rates of investor-State disputes. “At a minimum, the thesis that conciliation will appreciably increase the number of settlements, or reduce the resources necessary to accomplish mutually agreeable terms, is plausible and ought not to require elaborate marketing.”138 Although important efforts to overcome the challenges to mediate investor-State disputes include an adequate system design,139 the encouragement of DPPs140 and even the strengthening of the IIAs’ language141 or the ICSID’s rules;142 this study considers that for mediation to be effective, the neutrals need to be conscious of the specific obstacles and be prepared to creatively and strategically overcome them. “While litigation tends to focus the parties’ attention on the problem, a successful conciliation will focus the attention of the parties on solutions.”143 That is a well-handled mediation, one that understands the problem and goes beyond to find solutions. Mediation entitles complex serious work, because it deals with hard-to-settle cases (otherwise parties would not need a mediator). Ultimately, the effectiveness of mediation will provide new fuel for home States to continue with more general efforts as DPPs. Investor-State mediation will never be a regular commercial mediation; the nature of the dispute includes two important elements for mediation: its internationality, and the involvement of an essentially political entity

136 In that way Stevens and Love call our attention that whereas around thirty percent of the cases in ICSID arbitration settle, eighty percent of mediated cases reach settlement. Stevens and Love, supra note 49 at 14. 137 Wälde, Mediation/Alternative . . ., supra note 49 at 25. 138 Coe, Towards . . ., supra note 49 at 36. 139 See Coe, Towards . . ., supra note 49 at 40–43. The author has also noted that “[u]ltimately, much will depend upon whether the format of third—party intervention is carefully designed. The system is established by sovereigns for sovereigns, and one cannot expect that constituency to device or submit to heavy-handed, inflexible initiatives.” Coe, Towards . . ., supra note 49 at 36. 140 See UNCTAD, supra note at 65–97. 141 “Alternative dispute resolution mechanisms will probably only be effective if agreements actually provide for them, because without that, the voluntary participation of states in this procedure is unlikely given the accountability problems with resolving these disputes by negotiation behind closed doors.” Jones, Alternatives . . . supra note 38 at 23. 142 See Ginkel, supra note 16 at 2–3 (noting that the Arbitration Rules need to include a provision mandating the Tribunal to order the appointment of the Conciliation commission.) 143 Jones, Alternatives . . . supra note 38 at 9.

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bounded by legal principles. For a better understanding of the specific challenges this study will categorize them in 1) the international character of the dispute, 2) political issues, and 3) legal aspects. A particular case might have some or all of them, or might even present different challenges for the neutral to face. A. The Internationality of the Dispute The most sensitive factor that the neutral needs to face with regards to an international mediation is that the mechanism is not equally developed and/ or equally understood around the world. As it has been said before, mediation is more developed in common law jurisdictions, whereas civil law countries are still in the starting phases. Then civil law attorneys might not have any experience with mediation, or may have a negative one, which ultimately leads to a suspicious look of the mechanism.144 Furthermore, the approach taken to mediation can be very different in diverse legal cultures. “When advising clients, particularly in international disputes, it is important to note that the approach to conciliation taken in say, Australia or the United States, will not be the appropriate approach to take in Germany or France.”145 Even though the UNCITRAL Model Law and the UNCITRAL Conciliation Rules establish general principles, which are internationally accepted, those principles do not offer a hint about what to expect in a mediation process. For example, Ecuadorian commercial mediations follow mainly an integrative approach with a broad definition of the problem, mediators are mainly facilitative, the process is relationship oriented (inside a relationship based culture), and is based on joint sessions. On the contrary, in the United States commercial mediations mostly follow a distributive bargaining, mediators are more evaluative than facilitative, the process is result oriented (avoiding risks of litigation by settlement), and is based in caucuses. The very structure of mediation is completely different, and so are the lawyers’ expectations on the process. This basically means that an investor-State mediator (and his or her team) will need to first understand parties’ expectations on the mediation process, and then mediate those understandings to reach a common idea of how the process will look like for the specific scenario. That common understanding also needs to take into account the particularities of the case, and the mediator’s assessment on what will be the best route to settlement. And this should happen before the mediation conference is even scheduled. Furthermore, a neutral for an international dispute needs to be sensitive to the fact that parties do not come from the same business culture, speak the

144 145

Martin, supra note 83 at 11. Jones, Various . . ., supra note 83 at 405.


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same language, and do not share the same values or cultural background.146 Neutrals usually assess the personalities of the people involved in a case. In an international dispute, the mediator (or part of the team) will need to further research the cultural features of the participants in order to determine better ways to communicate with them. The fact that the decisionmakers, the counselors and the neutral might reside in different locations also complicates the logistics of the conference day,147 requiring an efficient case manager who is able to coordinate everyone’s schedule, and even facilitate procedural disputes. B. Political Challenges Corporations and sovereign States act in almost parallel universes. Whereas the first seeks efficient solutions from a business perspective, the later needs to deal with political issues, the conjunction of various agencies148 and pressure groups.149 David Newsom has considered that domestic conflict resolution techniques cannot be successfully transferred to the international scene where main actors are States since the dynamics are more complex.150 Therefore, a mediation requires a proper adjustment; the neutral not only needs to understand the internal political circumstances and adapt the process accordingly, but also has to be ready to reconcile different side expectations helping the parties to understand each other’s constraints. The ICC ADR Secretariat has concrete examples of cases in which its intervention was able to manage a multinational’s expectation on the time it would require its State counterparty to be ready for a mediation, allowing the ADR to go forward and finally settle.151 Dealing with a political entity, as Thomas Wälde has described, requires the mediator to “penetrate” into the internal dynamics. How to make a mediated result—which is as rule superior to a litigated result— politically attractive and persuasive. (. . .) the same methods used for inter-party mediation described earlier will work for bringing significant outside players into the mediation camp: Analyzing (“penetrating”) the internal politics, culture,

146

Martin, supra note 83 at 12. Id. 148 Legum, supra note 132 at 1. 149 UNCTAD, supra note 1 at 37. 150 David Newsom, Domestic Models of Conflict Resolution: Are They Relevant in the International Context? in International Negotiation 35, 35 (Diane B. Bendahmane and John W. McDonald, Jr. Eds. 1984). “Politics determine not just the issue, but also how the issue will be resolved. (. . .) The United States did not look for an experienced mediator or diplomat skilled in conflict resolution to send to Central America. It chose a former senator to whom the administration owed a favor. Admittedly, he has knowledge of Central America and perhaps he will be successful. But the point is that in international disputes, the deal will more often than not give way to the reality of political requirement.” Id., at 36. 151 Hannah Tüempel, The Role of dispute resolution institutions for ADR proceedings involving State parties, UNCTAD (forthcoming 2011). 147

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ximena bustamante values, interests and (mis-) perceptions of the main players in the ratification process and fitting a mediated solution (both in substance and in presentation) to the requirements of the internal forces of the key actors. By explaining this, one would help a governmental bureaucracy, political parties, a nationalist press, independent regulators and government agencies to convert the result of a mediation into a symbol of its own achievement—and to declare this success in public as their success.”152

Barton Legum has pointed out what could be the most complex challenge for an investor-State mediation: the intervention of various ministries153 and government agencies, and the lack of internal coordination between them. This is already an obstacle for the State’s capacity to respond to an arbitration,154 and is definitively a challenge within any ADR procedure. The author then proposes that a mediation should be attempted before the dispute escalates to the level of an international claim involving other agencies.155 Then, the investor should take the initiative to start a mediation process (which could follow the internal State’s procedures and regulations) before it decides to file an international arbitration. This proposal promises effectiveness in some cases, since the agency involved will probably know the particularities of the case, and does not necessarily need the additional complication of adding international elements to the issues on dispute. However, in other cases, the dispute will definitively become international, and the involvement of additional ministries will be unavoidable. In that case, as Professor Jack Coe has noted, an early mediation will probably be unsuccessful, since the State has not had the opportunity to study the dispute and assess its risks.156 In this case, the ADR institution, the case manager and the neutral need to proactively prepare the process, discussing with the State the internal dynamics and making sure that the appropriate representatives and key people assist to the conference. Furthermore, if the mediator is trusted as a neutral who seeks the best outcome for both sides, and has access to the State official, he/she could even coach the internal negotiations within agencies. “[T]he bureaucratic complications of an international negotiation, particularly one involving the United States, are far more complex than in domestic negotia-

152

Wälde, Pro-Active Mediation . . ., supra note 49 at 7. Legum, supra note 132 at 1. 154 UNCTAD, supra note at xv. 155 Legum, supra note 132 at 1. 156 “The problem with confining mediation to the cooling off segment is that the host state may lack sufficient information at that early juncture to meaningfully participate. After all, the request for registration may be the first indication that the host state’s central government has received concerning the disputed measure. In such circumstances, it is unrealistic to expect a state to mediate for purposes other than fact-finding. Even when the claim can be foreseen, it may be that a formal response to it only begins to be formulated once the claim is initiated.” Coe, supra note 49 at 95. 153


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tions. A great deal of negotiation goes on within the U.S. government and within a delegation before we enter an international conference. (. . .) Teamwork becomes extremely important.”157 The tension between transparency and confidentiality also presents interesting obstacles. As a matter of principle, a democratic State is responsible of its actions to its constituencies, being subject to public scrutiny. InvestorState disputes have proved to deal with issues of enormous public interest, with arbitrations deciding over public policies.158 This is at the source of a paradigm shift in arbitration, from an innate private process to a more transparent mechanism in the context of investor-State disputes,159 which includes allowing the participation of interested third parties in the form of amicus briefs. On the other hand, mediation is essentially confidential. “[T]he prevailing model of conciliation assumes privacy of both joint sessions and caucuses, and the non-publication of the resulting agreement.”160 In that sense the UNCITRAL Model Law has established the confidentiality of the process,161 a principle generally accepted in most legislations and mediation rules. According to Professor Coe, if this model is to prevail, mediation might be seen as a suspicious mechanism that offers States an avenue to reduce accountability.162 As difficult as it seems to conciliate mediation’s confidentiality with the public nature of the State’s actions and with the public interest of the issues on dispute,163 the two principles can be managed. Mediation’s main objective is to reach settlement, and the purpose of confidentiality is to provide parties a safe space to freely exchange information, and make settlement offers without fear of those being used against them in a future procedure. Mediation’s confidentiality is not designed to shield responsibility, nor should it do so. Then, if the public nature of the dispute and the public opinion on the subject become an obstacle for govern-

157

Newsom, supra note 150 at 36. UNCTAD, supra note 1 at 11. See also Jones, Alternatives . . . supra note 38 at 2 (noting that under the NAFTA arbitration fears were raised about the Constitution being circumvented and the tribunals making decisions over the expenditure of considerable amounts of taxpayer’s money). 159 “One of the more remarkable trends evident in recent years has been the appreciable increase in process transparency and public scrutiny associated with investor-state arbitration, notably that authorized under NAFTA, Chapter Eleven. (. . .) indicating a lasting commitment to measures calculated to subdue criticism.” Coe, Towards . . ., supra note 49 at 26–27. 160 Coe, Towards . . ., supra note 49 at 27. 161 Article 9 UNCITRAL Model Law on International Commercial Conciliation. 162 Id. 163 “An academic also explained that mediation functions best behind closed doors, but that a State’s transparency requirements mandate an open process that could undercut the effectiveness of mediation. In response, an African commentator explained the feasibility of modifying mediation to be more transparent in the investor-State context.” Stoehr and Perkins, supra note 110 at 2. 158

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ment officials to reach settlement,164 or for the settlement to be regarded as legitimate and be honored in the future, the mediator, as an agent of reality, needs to address it. In principle, the mediation process has to be kept confidential to provide parties a safe space conducive to settlement. However, the process might include the participation of stakeholders if their presence would be conducive to settlement or to the honor of the agreement in the future. The result, on the other side, being a State’s decision, has to be framed by the State’s internal regulation, which might include being open to public scrutiny (an issue that will be addressed under the legal challenges). Then, for the time being let us focus on third party participation. When the public opinion is involved, the cases become particularly hard to settle. “For the host State there is a high political risk at seeking a negotiated settlement and abiding by it without being forced to do so.”165 Then, let us restate that not all cases are suitable for mediation and that mediation will not be able to resolve every dispute. However, depending on the circumstances of the case, the participation of third parties might facilitate the government’s decision, and thus be in the interest of settlement.166 The process has to be specifically designed for the case and its particularities. Then, some third party representatives or influential people within a group might be invited to participate in all or, more likely, part of the mediation process. The mediator might have private meetings with them (in a caucus), or with them and the government officials, or the investor, or both (in a joint session). The mediator does not need to resolve the issues with these third parties; he/she just needs to facilitate the decision for the host State. In that sense, the neutral’s action might be limited to the mere de-escalation of positions, facilitation of communication and understanding between the State and the third party, or might even be as broad as obtaining some concessions. If the third party participation is well-managed some of the political risk of the decision might be managed. The ultimate decision on how to handle the process will be taken by the neutral and the parties, considering which path will be the best to conduce the process to settlement. 164 See Noah Rubins, Comments to Jack C. Coe Jr’s Article on Conciliation, 21 Transnat’l Disp. Mgmt., 2 (April 2006). (noting that when public opinion has turned against the foreign investors, it will be hard for State functionaries to compromise without that action being looked as a betrayal of national interests). See also UNCTAD, supra note at 39 (noting that lack of transparency will raise criticisms. 165 UNCTAD supra note 1 at 38. 166 “The limited role being afforded amici in arbitration—a rules based system—might well be less meaningful than the consideration such activists might receive in informing a government, or indeed the conciliator, during a conciliation. While the activists might not be given a literal place at the table, the host state might well be informed in part by (24) direct discussions with responsible representatives of various constituencies including, in the hypothetical under consideration, environmental NGOs” Coe, Towards . . ., supra 49 note at 24–25.


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I suspect that the reason mediation is so far not used in the many investment disputes going to litigation is that governmental bureaucracies and politicians need a far-away third-party to take the political responsibility—and scape-goat role—for a result. (. . .) But some international mediation (. . .) show that mediation with considerable transparency, particularly when the results are being explained, and with at least informal listening to all relevant players, can let politicians benefit from mediation.167

Another way to handle the political risk faced by bureaucrats is to frame the results as a political success. This is easier when the process follows an integrative approach, because the result is usually better than the situation confronted,168 and instead of determining responsibilities it can produce outcomes in the best interest of investors, States and the public:169 . . . one would help a governmental bureaucracy, political parties, a nationalist press, independent regulators and government agencies to convert the result of a mediation into a symbol of its own achievement—and to declare this success in public as their success. The need to look for a negative scapegoat can therefore be replaced if a positive political and emotional credit for the success can be established.170

C. Legal Challenges Any decision from a State is usually bound by internal regulations. In the United States, “negotiators on international disputes operate under very serious constraints. They are not “decision-makers.” Even when a President goes into a negotiation, he carries a degree of restraint and baggage because of our constitutional system.”171 In civil law countries, the public administration is tied by the “principle of legality”, according to which every singular act of the power has to be justified in a previous law.172 Under this same principle, any decision from the public administration needs to follow internal procedures before it is reached (which usually include reports from technical or legal departments.)173 “[I]t should be noted that government officials have generally less authority and flexibility to engage in settlement discussions and to agree to a settlement than executives from the private sector.”174 Whereas the UNCTAD is encouraging States to empower public officials to

167

Wälde, Pro-Active . . ., supra note 49 at 7. Id. 169 Coe, Towards . . ., supra note 49 at 20–30. 170 Wälde, Pro-Active . . ., supra note 49 at 7. 171 Newsom, supra note 150 at 36. 172 Eduardo García de Enterría and Tomás-Ramón Fernández, Curso de Derecho Administrativo, 414 (2008). 173 Roberto Dromi, Derecho Administrativo, 264 (2001). 174 UNCTAD, supra note 1 at 83. 168

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reach decisions,175 where such empowerment is missing, the mediation needs to be conscious of its restrains. Sometimes the decision reached at the table will need to go back to the public administration before it becomes definitive. Consequently, sometimes the negotiations will need to be resumed on a later period. However, a mediated settlement agreement that has followed internal regulations and procedures liberates bureaucrats from the fear of assuming responsibility, which has been considered the main challenge for investorState ADR. A decision that has been internally tested is also subject to the principles of transparency and public scrutiny of the State’s acts. Finally, it is interesting to note that even commercial mediations might result in agreements that need the approval of the principals later on, and that successful domestic mediations with States usually respect State’s regulations. An issue of particular interest is that Latin American States usually conceive mediation for subject matters in which the parties are free to dispose of their rights.176 On the other hand, investor-State disputes usually include issues of enormous sensitivity to the public, including the involvement of natural resources considered part of the inalienable patrimony of the host State.177 In principle, this conception of mediation should not prevent the process to go on, but will seriously limit the ability of the parties to enter into a mediated settlement agreement that includes the renouncement of any inalienable right.178 For Dr. Álvaro Galindo Cardona, a settlement framed exclusively in terms of international law would surmount this obstacle,179 especially if such a matter is considered arbitrable, because then it could also be subject to mediation. Finally, it is also possible that the result of the mediation might be the establishment of a new policy, which doesn’t need to be expressed in an agreement by the parties. Another challenge for mediation usually mentioned is the lack of budgetary authorization and the uncertainty of which agency would assume the costs.180 The UNCTAD again encourages States to issue regulations on those matters in order to facilitate settlement.181 For the time being however, the mediator needs to be conscious that some cases will require a level of internal

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Id. Dispositions in that sense have been enacted in Bolivia, Colombia, Ecuador, Peru and Venezuela. 177 Seymor Rubin, supra note 42 at 4–5. 178 Ximena Bustamante, El Acta de Mediación 136–140 (2009) (noting that the ability of the parties to settle over matters that are of free disposition is an element of the essence of a mediated settlement agreement, without which the agreement will be void). 179 Álvaro Galindo Cardona, Director of International Affairs of the Attorney General Office, Republic of Ecuador, Personal communication November 17, 2010. 180 Legum, supra note 132 at 2. 181 UNCTAD, supra note 1 at 84. 176


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negotiation to decide the agency or agencies that will assume the burden of payment. Equally, the neutral will need to lead the parties to creative solutions, one of which could be that the payment be made in future years after the budget is planned accordingly. It has been argued that the lack of an internationally recognized mechanism for the enforcement of mediated settlement agreements also limits the interest on the process.182 At present, international mediation does not result in any specific binding decision; however, the process is flexible enough to allow the parties to give that character to the settlement. They can convert it into an enforceable legal instrument that allows for a rapid execution in a determined legal system or even an award by consent.183 In the ICSID case, if the mediation starts after the initiation of arbitration procedures, in application of Arbitration Rule 43, the settlement agreement can become a binding award on agreed terms with the benefits of enforceability of awards under the ICSID Convention.184 Finally, a settlement voluntarily accepted by the home State might provide additional advantages during its execution: Although ICSID awards must be recognized in all conventions States are not subject to appeal in national courts, States are not taken to have waived immunity in relation to the execution of an award simply by consenting to ICSID’s jurisdiction. Obtaining a state’s commitment that an agreement will be adhered to is a further advantage of ADR.185

A specific case might present all of the prior noted obstacles, or neither of them; it can further include obstacles that have not been treated in this study. In any case, the mediation process, as a flexible, adaptable and creative mechanism, will need to identify and work to overcome them, keeping a clear vision of the objective, which is the settlement of the specific case. “ADR does not offer a single ‘magic formula’ to settle a dispute.”186 Instead, it is the result of serious hard work. V. Conclusion It is important to consider the development of mediation under the current circumstances of international investment law. Mediation promises to be an adequate complement, which might allow parties to resolve their disputes in a more cooperative frame, with the potential of creating an appropriate

182 183 184 185 186

Stevens and Love, supra note 49 at 14. Wälde, Mediation/Alternative . . ., supra note 49 at 20. Van Ginkel, supra note 16 at 2. Bor, supra note 10 at 101. UNCTAD, supra note 1 at 28.

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environment for the encouragement of FDI flow. Mediation is not a novel or revolutionary notion; it has proved successful in various settings, including domestic and international conflicts with and without the participation of States. It has further been successful in the specific context of investor-State disputes. However, various arguments have been raised against the feasibility of mediation; most of them have to do with characteristics usually common to investor-State disputes. Therefore, a mediation process needs to seriously take into account those characteristics and include them as specific challenges for settlement. The neutral needs to design the process in order to proactively address any specific concern in a case by case basis.

PART THREE

INTERNATIONAL ECONOMIC LAW IN A WIDER CONTEXT

INTRODUCTION R. Daniel Vock I retired from my post as Assistant General Counsel, Exploration and Production, Mobil Oil Corporation at the end of 1989. I was “burnt out” through and through but at 56 years of age I was eager to make my mark outside the “cocoon” of corporate America. Then I met Thomas Wälde who occupied a senior legal post at the United Nations Department of Technical Cooperation and Development [UNDTCD]. This was a branch of the organization that carried out development missions financed by other branches like UNDP [United Nations Development Plan]. A sub-branch of UNDTCD dealt with mineral development. Its mission was to help the poorest of countries— those that derived only small amounts or nothing from the exploitation of mineral resources—develop and market these resources. My first contact with Thomas gave me a moral lift I badly needed—professionally speaking he pulled me out of a hole. After Thomas left UNDTCD I replaced him on an interim basis and recruited a permanent successor. Thomas and I became friends and the friendship endured all his life. He later appointed me a Honorary Fellow and Associate, at Centre for Energy, Petroleum and Mineral Law and Policy in Dundee. I remember my wife and I hosting a luncheon in our Connecticut home in the summer of 1990. Thomas and his first wife Christa, Beatrice Labonne (later head of the minerals section of UNDTCD), Phyllis Brochstein (a tax lawyer, colleague and friend) and Claudia X a young Colombian lawyer in training at UNDTCD were the principal guests. My wife did not know any of them. Thomas ate with good appetite, took hold of the proceedings, dominated the debates and at times monopolized them, belittling the contributions of others and mocking young Claudia (“Colombia is a land of nothing but drug lords and criminals”). It did not surprise or bother the insiders: they knew Thomas did not believe a word of what he said: a provocateur but no bigot. Just the same Christa was embarrassed and the lady of the house was not amused. She read me the riot act after the guests had departed: a guest does not insult another guest under her roof! This was the paradox of Thomas Wälde: larger than life, overflowing with vitality, full of optimism and of himself but ready to deliver his help, skills and immense knowledge and talent to serve the cause he believed in. He could be overbearing and boorish with women and men, but he would go all the way

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to advance and promote the careers of his wards and mentor them for years. Thomas showed his love and respect for young people by helping them where it matters: not by being a role model of good manners, but by pointing them in the best career direction, helping them and caring for them, as long as they responded, that is. When Thomas was approached for the Dundee post, some of the most prominent among the Centre’s trustees expressed serious reservations on the selection: Thomas’ idea of combining teaching with consulting raised serious doubts about whether his appointment would serve the best interests of students. Would not teaching play second fiddle to consulting? Within a couple of years the skeptics became converts and enthusiastic supporters. Thomas had enough vital energy to cater dual objectives and live with conflicts. My own experience with assistance to development is concentrated in the nineties and limited to minerals exploration and development. This makes my recount somewhat dated, if only because the ubiquitous involvement of NGOs in development assistance is a more recent phenomenon. I carried out eighteen assistance missions for the UN, about three for the World Bank, one for USAID, three directly for developing countries and half a dozen for consulting firms, themselves hired by institutions. My specialty was writing petroleum and minerals legislation and regulations, teaching seminars, and evaluating assistance programs at mid-term and after completion. I also critically observed the work of other aid organizations in the field of minerals and petroleum. Often I did it from the vantage point of the “opposition”: oil and mining companies. Here are some of my biased conclusions, some of them supported only by instinct not evidence. Securing financing is the first step. There are trillions available for war and armaments, one billion dollars at hand for G20 security in Toronto, but only hundred of millions to spare annually for aid to development. Finding the funds for development is a challenge, but spending the money wisely and effectively is an even superior challenge. Andrew Carnegie and Henry Clayton Frick are famous, not because they built wealth but because they spent it well! The success stories I have observed mostly through evaluation missions sprang from good field work, continuity in personnel and devotion of the development actors over and beyond the call of duty. The UN may be dysfunctional at Headquarters level but many of its representatives in the field including Station Chiefs did excellent work in the nineties, extending support and assistance to the consultants on mission. The discovery, evaluation and development of the Doha field in Chad is an example. The consultant working under the mantel of UNDTCD worked tirelessly for seventeen years from 1980, keeping the oil companies in the country despite two civil wars

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and on a small budget. The UN and its consultant stepped out after the cash started flowing in. Four years later, as it was explained to me, the Americans prevented the UN from assisting developing countries with natural resources other than air and water. Furthermore, only a fraction of development aid finds its mark: large organizations pay lip service to reform but love to bury it. When pressed, they create new layers, tiers and subsidiaries while leaving the old ones in place. In the nineties the UN had seven agencies engaged in assisting development. When the US reformed the intelligence services it created new layers to fight things out with the old ones. The UN is (or was) even worse, because every job is protected by one or other national delegation. Aid development organizations, including charitable ones and NGOs of all types, are bureaucracies engaged in survival and, to survive, they compete with one another. Projects are started with funding only sufficient to cover the first phase. When funding is exhausted the project is suspended with subsequent phases postponed. The project goes back to square one with new actors, sometimes several times. The majority of projects are not completed. A change in national government can mean loss of interest and continuity. Out of a dozen projects to write minerals or petroleum development legislation and regulations, I completed only two, where I had continuity of support all along. In the major one I invested 2000 hours of work on a 700 hour contract, with my partners dropping out along the way. Competition from other groups and loss of funding are the principal factors in discontinuing development projects, as well as loss of continuity in the sponsor or client personnel, and destructive lobbying by oil and mining companies designed to undermine the consultant’s work. Corrupting influence usually bears directly at the top, making it difficult for honest civil servants to counteract. For the lonely consultant the challenge is to gain and retain the respect of the sponsor and of the country client. It is not a given, it has to be earned. A minority of country officials are disrespectful out of principle. They have a sense of entitlement and push it to the hilt. The picture with the sponsor is better and while working with Thomas Wälde and UNDTCD, I rapidly felt like part of the family. Working at Headquarters of a large institution produces much frustration. I observed that in the field of assistance to development at the East River headquarters of the UN, eighty five percent of the working time was expanded on process and turf fights, leaving only fifteen percent to advance the project. International organizations, which today comprise hordes of NGOs, local and international, have become a force to be reckoned with. Success comes down to good field work, individual devotion and competence as well as honest and steady support from the sponsorship.

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One step could be taken to advance Thomas Wälde’s interrupted career path: create an organization of persons engaged in some fields of development assistance. Care must be taken to cast the net neither too wide, nor too narrow. The body can become unmanageable if the interests grouped together are too diverse to meet on common ground. For a model in the genre I suggest the very successful, thirty years old, Association of International Petroleum Negotiators [AIPN] of Houston Texas (http://www.aipn .org/). Its activities are numerous and include conferences, publications, model contracts and an employment service. Such an organization would raise and enhance the profile of assistance to development, serve the professional career and status of its members, facilitate contacts, advance ethical standards and transparency and help deliver better services. The new trade organization could be called: “International Association of Providers of (Renewable and Non-Renewable) Resource Development Assistance” [IAPRDA]. I know Thomas would have approved: he would have become its first President!

INTERNATIONAL INVESTMENT LAW REGIME AND THE RULE OF LAW AS A PRE-CONDITION FOR INTERNATIONAL DEVELOPMENT Nicholas J. Birch, Borzu Sabahi, Ian Laird* I. Introduction The initial objective for the authors of this chapter was to provide a summary of Professor Thomas Wälde’s views about international investment law and rule of law, and in particular his view that international investment law promoted good governance.1 This was a challenging task both in terms of the volume of the material that needed to be reviewed, because Professor Wälde was a prolific writer,2 and in terms of the complexity of the topics that were covered. Accordingly, after a preliminary review of Professor Wälde’ writings, we decided to limit ourselves to a selective review of his works related to rule of law as found in the field of international investment law in order to provide a short summary of his main doctrinal approaches and identify whether and to what extent they have remained valid.

* Nicholas J. Birch (JD, MBA (Georgetown University)) is a recent graduate focused on international economic law and international investment arbitration. He has been involved in the publication of a number of books and articles on international investment law and is a contributing author to Oxford University Press’ Investment Claims website; Borzu Sabahi (SJD, LLM, (Georgetown University Law Center); MA, LL.B. (University of Tehran) is a counsel at the Washington, D.C. office of Fulbright & Jaworski L.L.P. He is also an Adjunct Professor at Georgetown University Law Center where he co–teaches a seminar on investor State dispute resolution; Ian A. Laird (LL.B. (Windsor), LL.M. (Cantab)) is a Special Legal Consultant in the Washington, D.C. office of Crowell & Moring LLP. Mr. Laird has been extensively involved in international investor-state arbitration, and is the Editor-in-Chief and co-founder of Oxford University Press’ Investment Claims website; He can be contacted at: [email protected] and www.ianlaird.com. The views expressed in this chapter are not those of Fulbright & Jaworski LLP, Crowell & Moring LLP, or their clients. 1 Two of the authors have contributed chapters to Professor Thomas Wälde’s Festschrift and made presentations in his memorial conference in St. Andrews, Scotland, which informed us in preparing this paper. Ian Laird, Interpretation in International Investment Arbitration— Through the Looking Glass, in A Liber Amicorum: Thomas Wälde—Law Beyond Conventional Thought (Jacques Werner & Arif Hyder Ali, eds., Cameron May 2009); Borzu Sabahi, Moral Damages in International Investment Law: Some Preliminary Thoughts in the Aftermath of Desert Line v. Yemen, in A Liber Amicorum: Thomas Wälde—Law Beyond Conventional Thought. 2 A select list of Professor Wälde’s writings on international investment law can be viewed at www.transnational-dispute-management.com.

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With this objective in mind, we chose six areas to review: first, Professor Wälde’ main doctrinal view whereby he deemed investment arbitration as a vehicle that promoted good governance; second, the interaction between international investment law and domestic law; third, the system of investment arbitration, including a review of Professor Wälde’ views about certain substantive protections under investment treaties and remedies; fourth, soft law and the rule of law; fifth, non-governmental organizations; and sixth, sustainable development. II. Investment Arbitration, an External Discipline that Promotes Good Governance Professor Wälde wrote a number of papers commenting on the relationship between the international investment law regime, rule of law, and development. Professor Wälde’s chief doctrinal approach towards this relationship is encapsulated in the title of his article called: “Investment Arbitration as a Discipline for Good Governance.”3 Investment arbitration, in his words, was an “external discipline,” because it had its roots in international law rather than in the domestic laws of the host State of an investment. It was a “discipline,” because it forced governments to change their conduct, particularly towards foreign investors, in a way which was more in line with the modern, and perhaps Western capitalist, notions of good governance. And good governance, in turn, could “help [. . .] to attract and mobilise investment— both foreign, but in the end also domestic.”4 These steps lead to the premier achievement of international investment law: “creating a ‘rule of law’, anchored in international, enforceable disciplines within which initiative and competition can flourish and thus create prosperity.”5 Not only does the type of good governance, buttressed by international arbitration, sustain development; such governance was, in his view, essential to development. Professor Wälde wrote that the “essence of capitalist investment” is the ability of investors to reliably plan ahead.6 To do so, investors must be able to rely on both property and contractual rights, what Professor 3 Thomas Wälde, Investment Arbitration as a Discipline for Good Governance: Overview and Epilogue, OGEL 2 (2004). 4 Thomas Wälde, CME/Lauder v. Czech Republic, Case Comment & Introductory Note, 42 ILM 811 (2003). 5 Thomas Wälde, The Specific Nature of Investment Arbitration, in New Aspects of International Investment Law 43, 76 (Phillip Khan & Thomas Wälde, eds., Martinus Nijhoff Publishers 2007) (“Specific Nature”). 6 See Thomas Wälde & James Gunderson, Legislative Reform in Transitions Economies: Western Transplants—A Short-Cut to Social Market Economy Status?, 43 Int’l & Comp LQ 347, 351 (1994) (“Western Transplants”).

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Wälde called “the two fundamental building blocks of capitalist law.”7 In order for these rights to be reasonably relied on, they must be supported in a framework which includes the “legal, fiscal, institutional and regulatory environment;” all of which must be “predictable and stable as possible.”8 The role of international arbitration in stabilizing this framework is to support such institutions in keeping commitments made to investors through regulatory and contractual means. International agreements, enforceable through international arbitration, offset domestic “populist pressure for using political state power to escape from [such commitments] when inconvenient.”9 Today, it is difficult to gauge the full impact of investment arbitration in stabilizing legal frameworks governing foreign investment. The frameworks, as discussed above and in the next section, have many elements, such as various domestic and international laws. More important, however, is how these elements are interpreted and applied by government officials behind closed doors. One problem is that there is limited or no access to such internal decision making processes of governments. To be sure, most countries, particularly those that have been involved in investment arbitrations, take the possibility of such an international claim into account when making decisions that may affect foreign investors.10 A review of arbitral decisions and recent investment arbitrations, however, seems to suggest that governments are reluctant to change their policy choices even in the face of arbitration when those choices involve various issues of public interest. For example, Ecuador, which is a respondent in a number of arbitration cases, has decided to terminate a number of its investment treaties,11 possibly to shield itself from additional cases. But numerous pending claims amounting to billions of dollars have not changed its economic policy in regulating the field of hydrocarbons.12 In the recent NAFTA

7

Id., at 353. Id., at 351. 9 Thomas Wälde, The “Umbrella” (or Sanctity of Contract/Pact sunt Servanda) Clause in Investment Arbitration, 1(4) TDM 1, 6 (2004) (The “Umbrella”). 10 See, e.g., John Ruggie, Draft Guiding Principles for the Implementation of the United Nations ‘Protect, Respect and Remedy’ Framework, 22 November 2010, art. 4, Commentary (advising States to take into account that investment treaty claims may limit the manner in which States are able to change domestic laws, and advising States to not enter investment treaties they may later find overly binding), available at http://www.reports-and-materials .org/Ruggie-UN-draft-Guiding-Principles-22–Nov-2010.pdf. 11 See Luke Peterson, Ecuadorian President Reportedly Asks Congress to Terminate 13 BITs; Move Comes on Heels of Earlier Termination of Multiple BITs, 2(17) IA Reporter 1 (30 October 2009). 12 See, e.g., Damon Vis-Dunbar, Ecuador Defies Provisional Measures in Dispute with French Oil Company, June 2009 Investment Treaty News 2 (reporting Ecuador chose to continue to pursue contested windfall tax payments from forign oil companies despite multiple arbitration claims). 8

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case of AbitibiBowater v. Canada,13 Canada decided to pay a large settlement sum (US$130 million), rather than restore the claimant’s plainly expropriated assets in the province of Newfoundland.14 In light of the intransigence of the Newfoundland Premier, who felt he was protecting the patrimony of his fellow Newfoundlanders,15 Canada’s national government clearly felt compelled to compensate the U.S. investor rather than fight with the popular Newfoundland Premier. Most recently, the government of Uruguay passed a law that substantially limited the advertising space on cigarette packages in that country and also prohibited distribution of certain brands of cigarettes for public health purposes. Philip Morris International brought an ICSID claim against Uruguay in February 2010 under Switzerland-Uruguay BIT, alleging inter alia expropriation of its investments in that country.16 The Uruguayan government, faced with a multi-million dollar lawsuit, initially seemed to backtrack. But, in October 2010 it declared that it will fight the case to the end, and will not change its law.17 III. Domestic Rule of Law and International Investment Law Regime Embedded in Professor Wälde’s notion of the causal relationship between investment arbitration as an external discipline and good governance is a notion of what a domestic “rule of law” system consists. Rule of law, in this sense,18 is not limited to having a competent legislature that enacts laws as the need arises; it also must include an effective machinery to implement the laws, which presumably is the executive; and an independent judiciary. Professor Wälde saw a role for international tribunals in supporting the independence of domestic judiciary.19 Additionally, he saw international arbitration as an external discipline that promoted rule of law within the system by putting a “straightjacket on [. . .] the potential for regulatory

13

AbitibiBowater v. Canada, Ad hoc—UNCITRAL Arbitration Rules. Kathryn Leger, AbitibiBowater wins NAFTA case vs. Ottawa, 27 August 2010 Montreal Gazette, available at http://www.montrealgazette.com/business/AbitibiBowater+wins+NAFT A+case+Ottawa/3448690/story.html. 15 Id. 16 FTR Holding, Philip Morris Products, & Abal Hermanos v. Uruguay, ICSID Case No. ARB/10/7. 17 Luke Peterson, Uruguay Hires Law Firm and Secures Outside Funding to Defend against Philip Morris Claim, 3(16) IA Reporter 1 (20 October 2010). 18 For a philosophical discussion of the various meanings of the rule of law see Brian Z. Tamanaha, On the Rule of Law—History, Politics, Theory (Cambridge 2004). 19 The “Umbrella”, supra note 9, at 7. 14


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excess triggered by domestic agitation.”20 Regulatory bureaucracies are, in his view, especially prone to such excess due to their tendencies “toward nontransparency, unfettered discretion and economically inefficient collusion with domestic pressure groups.”21 Professor Wälde’s notion of good governance centered on a rule of law system contrary to such tendencies. In a joint paper with Todd Weiler, he described the elements of a modern good governance regime as: transparency, protecting legitimate expectations, procedural fairness, proportionality, and non-discrimination.22 Such elements were to Professor Wälde all expressions of the “over-arching ‘good-faith’ principle of international law”, and key to rule of law and good governance.23 IV. System of Investment Arbitration A. Investment Arbitration as a Species of Administrative Law or Comparative Public Law? Professor Wälde perceived the investment arbitration system as a species of administrative law.24 Because it involved a State and a private party (i.e., the foreign investor), investment arbitration, he posited, more resembled the situation in the public law systems of various countries than private law.25 Therefore, one is justified to draw upon what he called the “common principles of the principal administrative law systems” to inform the investment arbitration jurisprudence, at least where the investment arbitration system is not yet fully developed.26

20 Thomas Wälde & Todd Weiler, Investment Arbitration under the Energy Charter Treaty in the light of New NAFTA Precedents: Towards a Global Code of Conduct for Economic Regulation, 1(1) TDM 1, 12 (February 2004) (“Global Code”). 21 Id., at 21. 22 Thomas Wälde & Todd Weiler, Energy Charter Treaty Arbitration, 6 Arbitration and ADR, Newsletter of Arbitration and ADR committee 80–83 (June 2001); see also Global Code, supra note 20, at 39–40. 23 Thomas Wälde & Abba Kolo, Coverage of Taxation under Modern Investment Treaties, in Peter Muchlinski, Federico Ortino, & Christoph Schreuer, The Oxford Handbook of International Investment Law 1049, 1056 (Oxford, 2008) (“Taxation”). 24 “investment arbitration (in our eyes, a form of international administrative law),” Thomas Wälde & Borzu Sabahi, Compensation, Damages, and Valuation in International Investment Law, 4(6) TDM 1, 5 (November 2007) (“Compensation, Damages, and Valuation”). 25 International Thunderbird Gaming Corporation v. Mexico, Award, Ad hoc—UNCITRAL Arbitration Rules, IIC 136 (2006) Separate Opinion, para. 27. (“But contract law—presuming the existence of two equal parties in a commercial contract—is less relevant than comparative public law with respect to the judicial review of governmental conduct.”) (“Thunderbird ”). 26 Id., para. 28.

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Professor Wälde’s view of what was included in administrative law, or the rich public law source of analogy, however, went beyond the domestic administrative/public law. It encompassed any “system” of law which was developed to deal with the relationship between a State and a private person. Thus, in his dissenting opinion in the Thunderbird case,27 for example, in order to determine the contours of the concept of legitimate expectations in the context of fair and equitable treatment, he relied on a variety of sources, including WTO jurisprudence, international human rights, European Union administrative decisions, and so forth.28 He was not alone in resorting to public law analogies, though. In 2006, when his dissenting opinion in Thunderbird was published, Gus van Harten also published a book called Investment Treaty Arbitration and Public Law;29 and van Harten essentially argued that the system of investment treaty arbitration was similar to a public law system in which arbitrators had very broad jurisdiction to determine, inter alia, the legality of governmental regulations and order governments to use public funds to remedy injuries cased thereby.30 Van Harten, however, criticized the system of investor State arbitration for the potential lack of accountability of arbitrators and suggested that the system should be replaced by an international investment court.31 While his views were not fully in congruence with those of Professor Wälde, his assimilation of the system of investment arbitration to a public law system was.

27 Thunderbird, a NAFTA Chapter 11 case, involved a dispute between Thunderbird, a Canadian company, and the Mexican government over closure of Thunderbird’s gaming facilities in Mexico. Thunderbird argued that it had a protected legitimate expectation to continue its operations in Mexico, because the Mexican government, before closing down the facilities, in response to a Thunderbird’s written inquiry had indicated inter alia that Thunderbird’s gaming machines were legal and were not prohibited gambling machines, because they did not involve any luck or handling of money. The tribunal ultimately dismissed claimant’s assertions, noting that in their inquiry they had not accurately described the machines, which were similar to gambling machines like slot machines, and therefore government’s action in closing down once it learned about the true nature of the machines was justified. Professor Wälde, however, disagreed with the majority and argued that the majority should have assessed the facts differently and the claimants had indeed some legitimate expectation to continue their operations. For a concise commentary on this case see Borzu Sabahi, Thunderbird v. Mexico and the Principle of Legitimate Expectations, 72(2) J Chartered Institute of Arbitrators 161 (2006). 28 Professor Wälde cited to, e.g., United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WTO Appellate Body Decision, WT/DS285/AB/R (7 April 2005); Gambelli and Others, ECJ Case C-243/01 (6 November 2003); Pine Valley Developments Ltd. and Others, Judgment of 29 November 1991, ECHR, Series A No. 222. 29 Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press 2007). 30 See, e.g., id., at 143 et seq. 31 Id., at 180 et seq.


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Stephan Schill’s 2010 book, which was originally commissioned jointly with Professor Wälde,32 entitled International Investment Law and Comparative Public Law,33 further expands on this line of thinking. In practice, however, arbitral tribunals have made references mainly to WTO jurisprudence34 and international human rights cases,35 and, at most, infrequent references to comparative administrative law proper. B. Development of the International Investment Law and Case Law 1. Role of arbitral tribunals Professor Wälde was of the view that modern system of international investment law will grow more out of the case law and not the treaties. In his preliminary report by the research group who worked under his supervision at the Center for Studies of The Hague Academy of International Law36 he noted that: Treaties may provide a jurisdictional basis, a structure of argument and major concept to start and categorize the required more detailed line of inquiry, but the way treaty language develops into operative law—i.e., specific principles and rules governing the way tribunals decide—is now mainly a matter of emerging case law.37

Santiago Montt, in a recent book,38 endorses this view and assimilates the BIT system to “concise economic constitutions” that apply to foreign investors.

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Wälde was a co-editor of the book. He passed away, however, and Schill completed the work. 33 International Investment Law and Comparative Public Law (Stephan W. Schill, ed., Oxford University Press 2010). 34 See, e.g., early NAFTA cases such as Pope & Talbot v. Canada, Award on the Merits of Phase 2, Ad hoc—UNCITRAL Arbitration Rules, IIC 193 paras. 46-63 (2001). 35 See, e.g., Técnicas Medioambientales Tecmed SA v. Mexico, Award, ARB(AF)/00/2; IIC 247 para. 122 (2003) (citing James and ors v. United Kingdom, European Court of Human Rights, Judgment, Merits, App No. 8793/79, [1986] ECHR 2); ADC Affiliate Ltd. and ADC & ADMC Management Ltd. v. Hungary, Final award on jurisdiction, merits and damages, ICSID Case No. ARB/03/16, IIC 1 para. 497 (2006) (citing Papamichalopoulos and ors v. Greece, European Court of Human Rights, Judgment, Just Satisfaction, App No. 14556/89 (A/330–B), [1995] ECHR 45, (1996) 21 EHRR 439). 36 Professor Wälde was the co-director of the Academy’s annual seminar in 2004 with Professor Philippe Kahn. The program was called New Aspects of International Investment Law. The papers prepared in the program were later published in New Aspects of International Investment Law/Les Aspects Nouveaux du Droit des Investissements Internationaux (Philippe Kahn & Thomas Wälde, eds., Martinus Nijhoff 2004). 37 Thomas Wälde, The Present State of Research Carried Out By the English-Speaking Section of the Centre for Studies and Research, in New Aspects of International Investment Law 63, supra note 36, at 66. 38 Santiago Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing 2009).

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He further notes that “[a]s with domestic constitutions, which are essentially linked to present and future judicial interpretation, BIT provisions are more likely to have network value than inherent value.39 It is becoming generally accepted that arbitral tribunals are playing an increasingly pivotal role in development of the system of international investment law. The recent active debate by commentators and tribunals about the role of precedent in investment arbitration (as discussed below) is good evidence of this development.40 Broad and imprecise standards of protection such as fair and equitable treatment have caused counsel, arbitrators, and scholars to spend substantial amounts of time to give content to these concepts.41 Schill argues this phenomenon creates a de facto delegated law-making function for arbitral tribunals.42 This imprecision has caused arbitrators to issue dissenting opinions.43 Or perhaps more commonly, arbitral tribunals interpreting similar provisions 39 Id., at 109 (“BITs are, in a sense, concise economic constitutions that apply to foreign investors. Because the resolution of cases depends on jurisprudential developments among international arbitral tribunals, the ultimate payoff from BITs depends not so much on the text of treaties already concluded, but on the interpretations adopted among the collection of awards that we are just beginning to see. As with domestic constitutions, which are essentially linked to present and future judicial interpretation, BIT provisions are more likely to have network value than inherent value.”) (emphasis in the original). 40 See, e.g., the discussion by contributing authors in Emerging Jurisprudence in International Investment Law, III Investment Treaty Law: Current Issues 87 (Andrea Bjorklund, Ian A. Laird, Sergey Ripinsky, eds., BIICL 2009). 41 See, e.g., Ian Laird, Fair and Equitable Treatment: Emergency Exception/State of Necessity, in II Investment Treaty Law: Current Issues (Federico Ortino et al., eds., BIICL 2007); Don Wallace, Jr., Fair and Equitable Treatment and Denial of Justice: From Chattin v. Mexico and Loewen v. USA, in International Investment Law and Arbitration: Leading Cases From the ICSID, NAFTA, Bilateral Treaties, and Customary International Law 669 (Todd Weiler, ed., Cameron May 2005); Rudolf Dolzer, Fair and Equitable Treatment: A Key Standard in Investment Treaties, 39 Int’l Lawyer 87 (2005); Christoph H. Schreuer, Fair & Equitable Treatment, 2(5) TDM 1 (November 2005); Ioana Tudor, The Fair and Equitable Treatment Standard in International Foreign Investment Law (Oxford University Press 2008). 42 Stephan W Schill, Umbrella Clauses as Public Law Concepts in Comparative Perspective, in International Investment Law and Comparative Public Law 317, supra note 33, at 332. 43 Even seemingly more precise BIT provisions such as the emergency provisions and their application have created debate. See Tarcisio Gazzini, Foreign Investment and Measures Adopted on Grounds of Necessity: Towards a Common Understanding, 7(1) TDM 1 (April 2010) (discussing the varied outcomes of the Argentina cases and annulments on the issue of emergency provisions). See also CMS Gas Transmission Company v. Argentina, Award, ICSID Case No. ARB/01/8, IIC 65 (2005) (rejecting Argentina’s plea of emergency); CMS Gas Transmission Company v. Argentina, Decision on Application for Annulment, ICSID Case No. ARB/01/8; IIC 303 paras. 129–34 (2007) (criticizing the arbitral tribunal’s application of emergency provisions as a “manifest error of law”, but not annulling the award); Sempra Energy International v. Argentina, Award, ICSID Case No. ARB/02/16; IIC 304 (2007) (rejecting Argentina’s plea of emergency); Sempra Energy International v. Argentina, Decision on


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have rendered contradictory interpretations.44 Recently, almost two decades after the ICSID annulment crises involving Amco and Klöckner,45 each of which went through two sets of annulment proceedings, we witness a new surge of ICSID annulment proceedings involving cases filed against the Argentine government followed by re-submitted arbitrations: Enron and Sempra. Also, we are of course all familiar with Free Trade Commission of NAFTA’s interpretative note of 200146 whereby it “interpreted” that fair and equitable treatment provides no more protection than what is available under minimum standard of protection in customary international law.47 Similar formulations which allow governments to superimpose their desired interpretations to those of the arbitrators through mandatory notes of interpretation have recently been included in treaties of some other countries.48 Further, we have also seen major changes in the text of investment treaties in an effort to make them more precise. For example, the U.S. government has

Argentina’s Application for Annulment of the Award, ICSID Case No. ARB/02/16; IIC 438 (2010) (holding the arbitral tribunal’s rejection of emergency provisions to be a manifest excess of powers and annulling the award); Enron Corporation and Ponderosa Assets, LP v. Argentina, Award, ICSID Case No. ARB/01/3; IIC 292 (2007) (rejecting Argentina’s plea of emergency); Enron Corporation and Ponderosa Assets LP v. Argentina, Decision on Application for Annulment, ICSID Case No. ARB/01/3; IIC 441 (2010) (holding the arbitral tribunal’s rejection of emergency provisions to be a manifest excess of powers and annulling the award); LG & E Energy Corp and ors v. Argentina, Decision on Liability, ICSID Case No. ARB 02/1; IIC 152 (2006); (2007) 46 ILM 36 (accepting Argentina’s claim of necessary due to emergency, but for only part of the period claimed). 44 See, e.g., SGS Société Générale de Surveillance SA v. Pakistan, Decision on Objections to Jurisdiction, ICSID Case No. ARB/01/13; IIC 223 (2003) (holding an umbrella clause in the investment treaty did not raise contractual claims to the level of investment claims); SGS Société Générale de Surveillance SA v. Philippines, Decision on Objections to Jurisdiction and Separate Declaration, ICSID Case No. ARB/02/6, IIC 224 (2004) (holding that an umbrella clause did raise the contractual claims to the level of investment arbitration). See also Maffezini v. Spain, Decision on Objections to Jurisdiction, ICSID Case No. ARB/97/7, IIC 85 (2000) (holding MFN treatment extends to procedural rights); Plama Consortium Limited v. Bulgaria, Decision on Jurisdiction, ICSID Case No. ARB/03/24, IIC 189 (2005) (limiting MFN treatment to substantive rights only). 45 Amco Asia Corp v. Republic of Indonesia, Ad hoc Committee Decision on the Application for Annulment, ICSID Case No. ARB/81/1, 25 ILM 1439 (1986); Klöckner IndustrieAnlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais, Ad hoc Committee Decision on Annulment, ICSID Case No. ARB/81/2, 2 ICSID Rep. 95 (1994); 114 ILR 243 (1999). 46 NAFTA Free Trade Commission (FTC) Notes of Interpretation (July 31, 2001), available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/disp-diff/NAFTAInterpr.aspx?lang=en. 47 Id., art. 2.2 (“The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.”). 48 See, e.g., US-Singapore Free Trade Agreement (2003) art. 15.21 (a Joint Committee declaration of interpretation is binding on a tribunal); China-New Zealand FTA (2008) art. 155 (a state party to an arbitration may request a binding interpretation from the treaty parties).

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effectively taken out the old umbrella clause language and replaced it with a new provision in its model BIT of 2004.49 In light of such examples, some scholars have expressed concern about fragmentation of international investment law50 and have raised questions about the functioning of the system and the fact that critical issues of public interest are decided by private arbitrators and not the governments themselves. Whether or the extent to which these concerns are justified or not, it seems too late to back away from what some have called a “delegated lawmaking function” by arbitral tribunals, to use Schill’s words.51 At present, major changes with a potential to shake the status quo include the entry into force of the Lisbon Treaty52 in the European Union, which has triggered major efforts to rethink the European policy towards flow of capital and how it would affect investment treaties of the members States.53 Professor Wälde’ observation, that international investment law will grow more out of the case law rather than from treaties, remains valid, at least for the time being. 2. Role of precedent Central to an arbitral tribunal’s exercise of its function in contributing to the development of the law is the weight that other tribunals should give to prior arbitral awards. This issue has been subject of much debate. The climax of the debate was perhaps in 2007, when several conferences were organized with the general theme of “role of precedent in investment treaty 49 US 2004 Model BIT, art 24(1) (limiting the protection to only investment agreements). See also id., art. 5(2) and annex A (limiting fair and equitable treatment to the “customary international law minimum standard of treatment of aliens”); cf. Stephen Schwebel, The United States 2004 Model Bilateral Investment Treaty: an Exercise in the Regressive Development of International Law, 3(2) TDM 1, 4–5 (April 2006) (arguing the 2004 Model BIT is a step backward in FET protection). 50 Susan Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions, 73 Fordham L. Rev 1521 (2005); but see Schill, who even in dissenting opinions sees an cohesive element. Stephan W. Schill, The Multilateralization of International Investment Law 340, 347–48 (Cambridge 2009). 51 Only a small minority of recent international investment agreements have opted out, such as those of Australia, which has excluded direct investor State arbitration. See USAustralia Free Trade Agreement (2005), art. 11.16 (allowing only State-to-State settlement of investment disputes or investor use of domestic systems). 52 Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, Dec. 13, 2007, 2007 O.J. (C 306) 1, available at http://eur-lex .europa.eu/JOHtml.do?uri=OJ:C:2007:306:SOM:en:HTML. 53 See, e.g., John Gaffney, Intra-EU Bilateral Investment Treaties: An OGEMID Discussion, 7(1) TDM 1 (April 2010); José Guimón, It’s Time for an EU Investment Promotion Agency, Columbia FDI Perspectives No. 20 (4 March 2010); Damon Vis-Dunbar, The Lisbon Treaty— Implications for Europe’s International Investment Agreements, 8(9) Trade Negotiations Insights 1 (November 2009).


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arbitration”.54 Professor Wälde expressed his views in this respect in his dissent in the Thunderbird case: In international and international economic law—to which investment arbitration properly belongs—there may not be a formal ‘stare decisis’ rule as in common law countries, but precedent plays an important role. Tribunals and courts may disagree and are at full liberty to deviate from specific awards, but it is hard to maintain that they can and should not respect well-established jurisprudence. WTO, ICJ and in particular investment treaty jurisprudence shows the importance to tribunals of not ‘confronting’ established case law by divergent opinion—except if it is possible to clearly distinguish and justify indepth such divergence. The role of precedent has been recognised de facto in the reasoning style of tribunals, but can also be formally inferred from Art. 1131 (1) of the NAFTA—which calls for application of the ‘applicable rules of international law’ [. . .]55

The tribunal in Glamis Gold quoted this statement with approval.56 A number of other arbitral tribunals have adopted similar approaches.57 C. Substantive Protections in Investment Treaties and Rule of Law Investment treaties contain a number of protections and standards of treatment, such as protection against expropriation without compensation, and the standards of fair and equitable treatment, full protection and security, national treatment, as well as umbrella clauses and most favored nation treatment. In his various writings, Professor Wälde commented on each of these protections. Underlying all these, he saw “something close to a general internationally sanctioned form of abuse of regulatory powers against foreign investors;”58 which abuse was usually caused by “local competitors in cahoots with the political-administrative machinery.”59

54 British Institute of International and Comparative Law (BIICL), The Emerging Jurisprudence of International Investment Law, BIICL 9th Investment Treaty Forum (Sept. 14, 2007); International Arbitration Institute (IAI), The Precedent in International Arbitration Seminar (Dec. 14, 2007). 55 Thunderbird, supra note 25, Separate Opinion, para. 129. 56 Glamis Gold Ltd. v. United States, Award, Ad hoc—UNCITRAL Arbitration Rules; IIC 380 para. 8 (2009). 57 See, e.g., Duke Energy Electroquil Partners and Electroquil SA v. Ecuador, Award, ICSID Case No. ARB/04/19; IIC 333 paras. 116–17 (2008) (Kaufmann-Kohler (Chair), Gómez Pinzón, and van den Berg); Saipem SpA v. Bangladesh, Decision on jurisdiction and recommendation on provisional measures, ICSID Case No. ARB/05/07; IIC 280 paras. 66–67 (2007) (Kaufmann-Kohler (Chair), Schreuer, and Otton); Noble Energy Inc and MachalaPower Cia Ltd. v. Ecuador and Consejo Nacional de Electricidad, Decision on jurisdiction, ICSID Case No. ARB/05/12; IIC 320 paras. 49–50 (2008) (Kaufmann-Kohler (Chair), Cremades, and H. Alvarez). 58 Specific Nature, supra note 5, at 78. 59 Id.

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These substantive protections and standards are a treaty-based attempt to impose good governance and rule of law on economic regulation sometimes hijacked by local interests. He saw protection against uncompensated expropriation filling such a good governance role.60 Such treaty-based protection helped to remove property rights from local “socio-political objectives;” Professor Wälde felt conditioning property rights on such objectives would lead only to “abuse of political powers and to political and legal fiction,” as it was not based on rule of law.61 On the subject of fair and equitable treatment, he wrote that the breadth of this protection had grown far beyond that of the international minimum standard of treatment.62 The obligation to treat foreign investors fairly and equitably went hand in hand with an “overarching principle of international law”: good faith and the principle of protection of legitimate expectations,63 or estoppels in common law, or venire contra factum proprium.64 As such, Professor Wälde maintained that central to fair and equitable treatment was the concept of legitimate expectations.65 In his dissenting opinion in Thunderbird, Professor Wälde found “wide acceptance” for inclusion of protection of legitimate expectations as an aspect of fair and equitable treatment.66 This protection was linked to the transparency and rule of law necessary for good governance.67 In a similar vein, he believed that the role of most favored nation treatment was to promote good governance, preventing a government from abusing its power in how it treated varied investors under other international treaties.68 Today, there are numerous references by tribunals to protection of investor’s legitimate or reasonable expectations.69 It is, indeed, perceived as an

60

Global Code, supra note 29, at 103. Specific Nature, supra note 5, at 74. 62 Glamis, supra note 56, para. IV 30–31. 63 See also Opel Austria GmbH v. Council of the European Union, T-115/94 ECR 1997 II-00039 para. 93 (1997) (“The principle of good faith is the corollary in public international law of the principle of protection of legitimate expectations which, according to the case-law, forms part of the Community legal order [. . .] Any economic operator to whom an institution has given justified hopes may rely on the principle of protection of legitimate expectations [. . .].”). 64 Glamis, supra note 56, para. IV-29; see also Thunderbird, supra note 25, para. 25. 65 See Glamis, supra note 56, para. IV-29; Thunderbird, supra note 25, para. 25. 66 Thunderbird, supra note 25, para. 30. 67 Glamis, supra note 56, para. 52. See also Schill, supra note 50, at 79–80, where he explains that FET “can be understood as embodying the concept of the rule of law [. . .] as it is widely recognized as an administrative or constitutional law concept in most liberal legal systems.” 68 See Taxation, supra note 23, at 47. 69 See e.g., Suez and ors v. Argentina, and joined case, Decision on Liability, ICSID Case No. ARB/03/19; IIC 443 paras. 222–230 (2010) (“Numerous [. . .] tribunals have also linked the concept of fair and equitable treatment to the host state’s respect of the legitimate expectations 61


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overarching principle and its application is not limited to fair and equitable treatment. Rather it seems to play a role in assessing whether other substantive international investment law standards, such as expropriation, have been violated too.70 After Professor Wälde’s dissent in Thunderbird, parties, arbitral tribunals, and scholars71 have increasingly examined the concept of legitimate expectations. In Biwater v. Tanzania,72 for example, the tribunal outlined components of the fair and equitable treatment: Specific Components of the Standard: The general standard of “fair and equitable treatment” as set out above comprises a number of different components, which have been elaborated and developed in previous arbitrations in response to specific fact situations. These have been the subject of detailed consideration in the parties’ submissions. In so far as they are relevant to the dispute here, these separate components may be distilled as follows: Protection of legitimate expectations: the purpose of fair and equitable treatment standard is to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment, as long as these expectations are reasonable and legitimate and have been relied upon by the investor to make the investment [. . .].

Walter Bau AG v. Thailand adopted this same statement of standard.73 Professor Wälde’s thinking on umbrella clauses highlights his views of the relation between international investment law and the domestic rule of law insofar as protection of contractual rights is concerned. As he believed in the basic principles of capitalism, with respect for contractual and property rights being necessary for good governance and development,74 umbrella

which the investor had at the time of the investment.”); Duke, supra note 57, para. 340 (“The stability of the legal and business environment is directly linked to the investor’s justified expectations. The Tribunal acknowledges that such expectations are an important element of fair and equitable treatment.”); Saluka Investments BV v. Czech Republic, Partial Award, PCA—UNCITRAL Arbitration Rules; IIC 210 para. 302 (2006) (“The standard of “fair and equitable treatment” is therefore closely tied to the notion of legitimate expectations which is the dominant element of that standard.”). 70 See L. Yves Fortier & Stephen L. Drymer, Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor, 19 ICSID Review—FILJ 293, 306–08 (2005). 71 See Christopher Dugan, Don Wallace, Jr, Noah Rubins, & Borzu Sabahi, InvestorState Arbitration 441 & 510–19 (Oxford University Press 2008); Elizabeth Snodgrass, Protecting Investors’ Legitimate Expectations—Recognizing and Delimiting a General Principle, 21 ICSID Review—FILJ 1 (2006). 72 Biwater Gauff (Tanzania) Ltd. v. Tanzania, Award and Separate Opinion, ICSID Case No. ARB/05/22; IIC 330 para. 602 (2008). 73 Award, Ad hoc—UNCITRAL Arbitration Rules; IIC 429 paras. 11.5 & 12.1 (2009); see also cases in note ____, supra. 74 See Western Transplants, supra note 6, at 351.

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clauses represented an external constraint on the violation of such respect. Such a provision’s objective is to prevent governments from using sovereign authority to refuse to honor commitments contractually made to individual investors.75 Professor Wälde viewed the inclusion of the clauses in investment protection treaties as clarifying customary international law in this area “against abusive interference relying on government powers and privileges.”76 He envisaged a limited role for these clauses, however, as international law should have only been injected into a contractual dispute when some abuse of governmental power, such as denial of justice or lack of due process, had occurred.77 Therefore, despite his relatively pro-investor views, he only considered violation of investment treaties through umbrella clauses possible when governmental acts jure imperii as opposed to jure gestionis were the cause of an alleged violation.78 In the wide spectrum of doctrinal views about the operation of umbrella clauses, this view is better characterized as a Statist one and would very much limit the number of cases where an umbrella clause could have an outcome determinative effect. It is also in line with the decision of the tribunals in El Paso v. Argentina79 where the tribunal held that umbrella clauses only capture State’s sovereign acts and not those acts in which the State has acted as a merchant.80 The umbrella clause debate still continues, and various permutations of the main approaches appear in the more recent awards. The general trend, however, at least on the part of treaty negotiators, seems to be narrowing the scope of the application of the clause. The U.S. Model BIT of 2004, as noted, and other instruments that are broadly modeled after it, all take similar approaches and have done this by removing the clause from the substantive protection section of the treaty and inserting a new provision in the investor-State dispute resolution section, which only allows arbitration of claims relating to major investment contracts.81 75

See Global Code, supra note 20, at 97 The “Umbrella”, supra note 9, at 21. 77 See id., at 22. 78 Id. 79 El Paso Energy International Co v. Argentina, Decision on Jurisdiction, ICSID Case No. ARB/03/15; IIC 83 (2006); see also the almost identical but perhaps more refined Pan American Energy LLC and BP Argentina Exploration Co v. Argentina, and joined case, Decision, Preliminary Objections, ICSID Case No. ARB/03/13, ARB/04/8; IIC 183 paras. 109–110 (2006). 80 El Paso, supra note 79, paras. 79–80. 81 US Model BIT art. 24.1: (a) the claimant [. . .] may submit to arbitration under this Section a claim (i) that the respondent has breached [. . .] (C) an investment agreement; [. . .] provided that a claimant may submit [. . .] a claim for breach of an investment agreement only if the subject matter of the claim and the claimed damages directly relate to the covered investment that was established or acquired, or sought to be established or acquired, in reliance on the relevant investment agreement [. . .] 76


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D. Remedies and Compensation Professor Wälde did not perceive monetary compensation as the only solution for resolving a dispute between a State and a foreign investor. Instead, he thought, in line with the solutions adopted in a number of administrative law systems and the WTO system, non-monetary solutions should be included to allow a respondent government to correct the measures at issue in an investment claim. In this spirit, he championed the case of Antoine Goetz v. Burundi,82 where the tribunal, rather than instantly awarding damages, gave the parties time to re-think their relationship and possibly settle. Professor Wälde praised this approach as “flexible and effective”;83 and encouraged the consideration of such remedies, as far as allowed under the relevant treaties,84 with the standard monetary damages being reserved as “the remedy of last recourse.”85 This was basically a step towards better governance and prevalence of respect for the rule of law: respecting the domestic institutions ability to provide good governance as far as possible, before an international tribunal need step in to compel correction. More recently, the claimants in Piero Foresti, Laura de Carli and others v. South Africa86 applied to discontinue their claim over a post-apartheid legislation, which required the investor/claimants to transfer 26 percent of their mining rights to “historically disadvantaged South Africans.”87 The discontinuance request was filed after the government granted a 21 per cent “beneficiation offset” to the claimants, based on their continued commitment to work in South Africa rather than abroad.88 Although South Africa

Section A, art. 1 of the Model defines an investment agreement as: a written agreement between a national authority of a Party and a covered investment or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor: (a) with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution, or sale; (b) to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or (c) to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government. 82 Goetz and ors v. Burundi, Award, ICSID Case No. ARB/95/3, 6 ICSID Rep. 3 (1999). After finding the Respondent to liable, the Tribunal postponed the decision on damages for four months to allow the parties to seek an amicable agreement on the amount of compensation, which the Tribunal than incorporated into the award issued. See, Compensation, Damages, and Valuation, supra note 24, at 9–10. 83 Compensation, Damages, and Valuation, supra note 24, at 9. 84 Id. 85 Id., at 53. 86 Foresti and ors v. South Africa, Award, ICSID Case No. ARB(AF)/07/1; IIC 445 (2010). 87 Id., para. 56. 88 Id., para. 79.

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accepted the discontinuance request, it did so on the basis that it would not contribute to the legal costs of the arbitration. It asked for the recovery all of its costs, amounting to €5.3 million. The tribunal, chaired by Professor Vaughan Lowe, ordered the investors to pay a nominal sum of €400,000 towards South Africa’s costs, plus their own costs.89 This type of quid pro quo between the investors and the government is an example of what Professor Wälde may have perceived as desirable. A further example is the case of ATA v. Jordan,90 in which ATA, a Turkish construction company, entered into a contract to build a dike on the Dead Sea for Arab Potash Company (APC), a company controlled by government of Jordan. Later, the dike collapsed and a dispute arose between the parties as to who was responsible for the incident.91 APC commenced arbitration under article 67 of the FIDIC contract pursuant to the laws of Jordan. ATA replied and also brought a counterclaim to recover certain amounts due. Ultimately, ATA prevailed and was awarded US$6 million dollars on account of its counterclaims.92 The Jordanian courts, however, annulled the award and also quashed the arbitration agreement in the parties’ contract.93 In the meantime, APC commenced proceedings in Jordan courts against the claimant and sought to recover damages for the incident.94 In 2008, ATA commenced ICSID arbitration against Jordan under the Jordan-Turkey BIT.95 The claimant argued that Jordan had expropriated its investment by annulling the arbitral award, which automatically extinguished the arbitration agreement in the contract.96 The tribunal held that the extinguishment of the arbitration agreement violated the BIT. Further, the tribunal ordered that the ongoing Jordanian court proceedings “be immediately and unconditionally terminated, with no possibility to engage further judicial proceedings in Jordan or elsewhere on the substance of the dispute.”97 Finally, the tribunal held that the claimant was “entitled to proceed to arbi-

89 Id., para. 133; South Africa would have probably recovered more, if one of its counsels had not requested bribes in exchange for dropping the entire cost claims of the government. South Africa had to withdraw €430,000 of its original costs claim that was attributable to the work of that counsel. Id., paras. 96, 120. 90 ATA Construction, Industrial and Trading Company v. The Hashemite Kingdom of Jordan, Award, ICSID Case No. ARB/08/2, IIC 430 (2010). 91 Id., para. 30. 92 Id., para. 44. 93 Id., para. 47. 94 Id., para. 48. 95 Id., para. 37. 96 Id., para. 82. 97 Id., para. 133.


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tration in relation to the [dike dispute] in accordance with the terms of the Arbitration Agreement” set forth in the parties’ 1998 contract.98 However, examples like these of non-monetary resolution of investment claims are rare. Monetary compensation still is the dominant remedy for international investment claims. V. Soft Law and Rule of Law Beyond the investor protections formalized in treaties, Professor Wälde saw an increasing role for soft law in this area. He wrote: “there are also now a large and constantly growing number of ‘soft law’ instruments which can, and at times unpredictably, acquire practical relevance.”99 This “soft law” is not only growing more important in investment arbitration than it has been in the past, but it also appears to be having a more substantial role to play in international investment law in comparison with its role in conventional public international law.100 Soft law is particularly relevant to investment arbitration due largely to the somewhat limited acceptance of this forum in world opinion. In his paper on international standards,101 Professor Wälde outlined various conduits through which soft law exerted this particular influence on investment arbitration. He recognized that soft law sources, such as standards promulgated by various international institutions, provided anchor points in setting awards, making them more palatable to the parties involved.102 Similarly, reference to and some level of conformity with such generally accepted norms, though not specially binding, would provide increased legitimacy to investment arbitration decisions, especially in the eyes of some of the critics of the investment arbitration system, such as NGOs.103 Professor Wälde saw soft law in investment arbitration growing into what he called the “modern ‘minimum standards of treatment’ for foreign business.”104 This minimum standard consisted of a “short list of international torts,” for which states could be held responsible in their treatment of investors and investments. This list included: disappointment of legitimate

98 Id. Currently a request for interpretation and one for annulment of the case is pending before ICSD. 99 Thomas Wälde, International Standards in Transnational Investment & Commercial Disputes, 1(4) TDM 1,4 (October 2004) (“International Standards”). 100 Specific Nature, supra note 5, at 97. 101 International Standards, supra note 99. 102 Id., at 6. 103 Id., at 5. 104 Global Code, supra note 20, at 119.

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expectations, transparency, procedural fairness, proportionality, and substantive and procedural non-discrimination.105 The growth of soft law into providing specific protections would not be without its costs however. Professor Wälde recognized that such costs would be particularly onerous to developing nations. These nations would struggle to meet the high governance standard demanded by international standards with their limited resources.106 The development of specific soft law protections would “only cement the inherent handicap of the most poor developing countries.”107 As discussed, the principle of legitimate expectations is generally regarded as being part of the corpus of international investment law.108 Transparency has also emerged as one of the central themes in investment arbitration cases. Civil society and NGOs have been pushing for more transparency in investment arbitration. Transparency as a result has emerged at two levels: first, some arbitral tribunals, starting with Metalclad v. Mexico,109 have considered it to be subsumed under the fair and equitable treatment standard;110 and, second, more recently, the US Model BIT 2004 and some other recent FTAs such as the China-New Zealand FTA’s investment chapter contain provisions on transparency.111 Procedural fairness has been also viewed as an element of the fair and equitable treatment standard.112 Proportionality has been imported into the analysis of arbitral tribunals by reference to inter-

105

Id. International Standards, supra note 99, at 15–16. 107 Id., at 16. 108 Pp. 320–1, supra. 109 Metalclad Corp v. Mexico, Award, Ad hoc—ICSID Additional Facility Rules; ICSID Case No. ARB(AF)/97/1; IIC 161 (2000). 110 Id., paras. 74–76 (but see id., Review by the supreme court of British Columbia, ICSID Case IIC 162 paras. 68–76 (2001) (holding that transparency was not included in the fair and equitable standard of NAFTA and that the Metalclad tribunal had gone beyond the scope of the submission to arbitration by including it. The court partially set aside the award.)); see also Merrill & Ring Forestry LP v. Canada, Award, Ad hoc—UNCITRAL Arbitration Rules; IIC 427 para. 231 (2010); Waste Management Inc v. Mexico, Award, ICSID Case No. ARB(AF)/00/3; IIC 270 para. 98 (2004), Tecmed, supra note 35, para. 154; See also Christoph Schreuer, Fair and Equitable Treatment, Zürich, 7 March 2008, at 2 (including transparency among the “most important” FET principles), available at http://www.univie.ac.at/intlaw/ pdf/99_fair_equit_treatm_zuerich.pdf; Dugan et al., supra note 71, at 519 et seq; UNCTAD, Fair and Equitable Treatment, in 3 UNCTAD Series on Issues in International Investment Agreements, 17, 51 (1999). 111 See US 2004 Model BIT, art. 11; China-New Zealand FTA, arts. 167–72; These transparency provisions in the treaties require publication of awards among others, whereas the transparency in the context of fair and equitable treatment requires open handed handling of relationship with investors. Dugan et al., supra note 71, at 519 et seq. 112 See, e.g., Bayindir Insaat Turizm Ticaret ve Sanayi A Ş v. Pakistan, Award, ICSID Case No. ARB/03/29; IIC 387 para. 344 (2009) (see also references cited in n.94); Thunderbird, supra note 25, para. 200. 106


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national human rights jurisprudence. In Tecmed v. Mexico,113 for example, in assessing whether the Mexican authorities’ non-renewal of a license to operate a hazardous waste disposal landfill amounted to expropriation, the tribunal relied on James and ors v. UK,114 in which the proportionality principle was applied.115 Protection against substantive and procedural non-discrimination has been included in investment treaties in the form of both national treatment and arbitrary/impairment provisions.116 However, these provisions, like fair and equitable treatment, have been less than clear. Therefore, the early NAFTA case of SD Myers v. Canada117 used OECD’s definition of national treatment in the 1976 OECD Declaration on International and Multinational Enterprises and the 1993 Clarifications of it118 to determine whether Canadian companies in the business of disposing PCB waste were “in like circumstances” with the U.S. companies in the same business which had invested in Canada. The tribunal relied on the OECD declaration and noted that the “in like circumstances” concept within Article 1102 must be interpreted within the “overall legal context” of the case, which inter alia includes a 1976 OECD Declaration and its clarifications;119 “in like circumstances” accordingly means “within the same sector”, therefore the two types of companies were indeed in like circumstances. In addition to the above, during the past several years we have observed increasing reference to various instruments that can be best described as soft law instruments. For example, in World Duty Free v. Kenya,120 the central

113

Tecmed, supra note 35, para. 122. James and ors v. United Kingdom, Judgment, Merits, App No. 8793/79, [1986] ECHR 2, IHRL 55 (ECHR 1986). 115 See also EDF (Services) Ltd. v. Romania, Award, ICSID Case No. ARB/05/13; IIC 392 para. 293 (2009); Azurix Corp v. Argentina, Award, ICSID Case No. ARB/01/12; IIC 24 paras. 311–12 (2006); Fireman’s Fund Insurance Company v. Mexico, Award, ICSID Case No. ARB(AF)/02/01; IIC 291 para. 176 (2006); Yves L. Fortier and Stephen L. Drymer, Indirect Expropriation in the Law of International Investment, 19 ICSID Review—FILJ 293 (2004); Dugan et al., supra note 71, at 464–65 Sarah Vasani, Bowing to the Queen: Rejecting the Margin of Appreciation Doctrine in International Investment Arbitration, in III Investment Treaty Arbitration and International Law, (Ian Laird and Todd Weiler, eds., Juris 2010); Xiuli Ha, The Application of the Principle of Proportionality in Tecmed v. Mexico, 6 Chinese J Int’l L 635 (2007). 116 See, e.g., US Model BIT, art. 3; China-New Zealand FTA, art. 138; Slovenia-Egypt BIT, art. 2 (1998); Netherlands-Costa Rica BIT, art. 3 (1999). 117 SD Myers Inc v. Canada, First Partial Award and Separate Opinion, Ad hoc— UNCITRAL Arbitration Rules, IIC 249 (2000). 118 Id., para. 248. 119 1976 OECD Declaration on International and Multinational Enterprises and 1993 Clarifications. SD Myers, supra note 117, para. 248. 120 World Duty Free Company Ltd. v. Kenya, Award, ICSID Case No. ARB/00/7; IIC 277 (2006). 114

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issue in the case was bribery and corruption going to the highest levels of the government. The dispute arose out of a 1989 Agreement between Kenya and a company called House of Perfume, which was later assigned to World Duty Free Company Ltd. (“World Duty Free”), a company incorporated in the Isle of Man. Under the contract, World Duty Free was supposed to construct, maintain, and operate a duty-free shop complex at the Nairobi and Mombassa airports. In 1995 World Duty Free and Kenya entered into a lease contract relating to performance of the Agreement. The arrangements did not work, however, and World Duty Free initiated arbitration at ICSID against Kenya pursuant to the arbitration clause in the Agreement. Kenya, however, argued that the tribunal lacked jurisdiction because World Duty Free had secured the Agreement through bribes paid to the then President of Kenya, Daniel Arap Moi.121 The tribunal ultimately determined that the payments made to the president were bribes and then it had to determine what legal implications this finding would have under international law. In this context, it not only examined relevant Kenyan laws; but also delved into a variety of international conventions for anti-bribery122 to reach the conclusion that bribery violated international public policy and dismissed the case for lack of jurisdiction.123 The tribunal’s reliance on the bribery conventions was a clear example of application of soft law principles. A further example is that of the tribunal in Rumeli Telekom v. Kazakhstan,124 which openly adopted the definition of fair market value in the 1992 World Bank Guidelines.125 The dispute arose out of Kazakhstan’s expropriation of a GSM network license for mobile phones owned by a Turkish company. The tribunal held that Kazakhstan had violated the expropriation provision of the Turkish-Kazakh BIT and had to pay the fair market value of the license.126 In determining the fair market value, the tribunal adopted the definitions of going-concern, liquidation value, and discounted cash flow in Section 6 of the World Bank Guidelines on the Treatment of Foreign Direct Investment, 1992, Guideline IV.127 It also noted that the Guidelines are a

121

Id., para. 105. Among the conventions that the tribunal relied upon were: Inter-American Convention against Corruption, March 29, 1996, 35 ILM 724 (1996); Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, November 21, 1997, 37 ILM 4 (1998); Criminal Law Convention on Corruption, January 27, 1999, 38 ILM 505 (1999). See generally World Duty Free, supra note 120, paras. 143–146. 123 World Duty Free, supra note 120, paras. 157, 188. 124 Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan, Award, ICSID Case No. ARB/05/16; IIC 344 (2008). 125 World Bank Group, Guidelines on the Treatment of Foreign Direct Investment (1992), 31 ILM 1379 (1992). 126 Rumeli Telekom, supra note 124, para. 785. 127 Id., para. 803. 122


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“valuable starting point for assessing compensation in the present case [. . .] [but] (a) that they do not imply the exclusive validity of a single standard, (b) that the guidelines are described as ‘an illustration’ [. . .]”128 The World Bank Guidelines embody “a desirable overall framework” for making foreign investment.129 They were prepared after a comprehensive research by the Bank staff of the existing legal frameworks at the time. The chapeau of the guidelines clarifies this fact,130 which makes the guidelines an example of emerging soft law principles. Notwithstanding this caveat, the Rumeli tribunal’s choice is remarkable and puts the Guidelines on a more solid footing than in the past131 and is a good example of recourse by arbitral tribunals to soft law. VI. Non-Governmental Organizations and Investment Arbitration Professor Wälde had conflicting views concerning the role of nongovernmental organizations (“NGOs”) in international investment arbitration. On the one hand, he criticized some NGOs for their not-fully-thoughtout attacks on the investment arbitration regime; and challenged them to present a “well-thought out and realistically designed alternative that can be tested [. . .],” rather than only criticizing investment arbitration for “not measuring up to a high level of perfection it does neither pretend to nor can achieve.”132 NGOs that advocate political rather than rule of law solutions to investment disputes were, in Professor Wälde’s view, “objective allies (‘fellow travelers’) of brute politics and corruption and thus in the camp opposite to the notions of sustainable development.”133 On the other hand, while generally critical of such politically minded NGOs,134 he did find that NGOs serve the important function of focusing public opinion on specific issues. “They are among the few organized

128

Id., para. 804. World Bank Group, supra note 125, at 1 (“The Development Committee [. . .] prepared a set of guidelines representing a desirable overall framework which embodies essential principles meant to promote foreign direct investment in the common interest of all members;”). 130 Id. 131 Ian A. Laird, Borzu Sabahi, Frederic G. Sourgens & Sobia Haque, International Investment Law and Arbitration: 2008/2009 in Review, in Yearbook on International Investment Law & Policy 2009–2010 (Karl P Sauvant, ed., 2010). 132 Thomas Wälde, Investment Arbitration and Sustainable Development: Good Intentions— Or Effective Results?, in International Environmental Agreements 459, 460 ( J. Gupta, ed., 2006) (“Good Intentions”). 133 Id., 464. 134 International Standards, supra note 99, at 11. 129

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networks that are relatively unimpeded by considerations of consensus politics, and of bureaucratic restraint.”135 NGOs have been one of the main driving forces underlying the movement for transparency and accountability in investment arbitration. The 2006 changes in the ICSID Rules were arguably a part response to pressures applied by various NGOs who wanted to have a more clear access to the process.136 Similarly, UNCITRAL Working Group II on International Arbitration and Conciliation met in October of 2010 to discuss possible methods to promote transparency in arbitration under the UNCITRAL rules.137 VII. Investment Arbitration and Sustainable Development Modern investment treaties sometimes pronounce the desirability of sustainable development objectives; but, they do not impose any obligation on the parties or investors to ensure that these objectives are achieved.138 For example, the preamble of the US Model BIT of 2004 states the desire that “to achieve these objectives in a manner consistent with the protection of health, safety, and the environment, and the protection of internationally recognized labor rights.”139 Professor Wälde’s main prescription for achieving sustainable development was twofold: firstly, encouraging long term investment, not the short-term, politically expedient interest;140 and secondly, creating domestic democratic systems of governance, which align the interests of foreign investors with the community in which they invest.141

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Id., 12. Id. 137 See Report of Working Group II (Arbitration and Conciliation) on the work of its fifty-third session (Vienna, 4–8 October 2010), UN Doc A/CN.9/712 (20 October 2010). The Working Group ultimately decided that all the suggested methods “would require further legal analysis,” and it would discuss them further at future session. See id., paras. 94, 100. 138 To remedy these shortcomings, in 2005 IISD designed a model BIT which fully took sustainable development goals into account. See International Institute for Sustainable Development, Model International Agreement on Investment for Sustainable Development (2005), available at http://www.iisd.org/publications/pub.aspx?pno=686. 139 See also Mehmet Toral & Thomas Schultz, The State, a Perpetual Respondent in Investment Arbitration, in The Backlash against Investment Arbitration : Perceptions and Reality 577, 586–87 (Michael Waibel et al., eds., Wolters Kluwer 2010). 140 Thomas explained that sustainable development requires a “long[ ]-term stewardship interest.” Good Intentions, supra note 132, at 461. 141 He also envisioned investment arbitration as a tool to support and perhaps encourage the domestic protections for investment. He noted that as an external discipline, it could not create needed domestic frameworks on its own. It could, however, both add its own protections and encourage the strengthening of domestic protections to develop the type of stewardship interests bridging private and public needs. Good Intentions, supra note 132, at 466. 136


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A survey of investment treaties may suggest that only a few treaties specify certain duration as a characteristic of investment. Some of the more recent ones, however, require investment to be more permanent. For example, the China-Germany BIT of 2003 in Ad Article 1 provides that: “investments as defined [. . .] are those made for the purpose of establishing lasting economic relations in connection with an enterprise.” Further, CAFTA-DR in Article 10.28 note 9 provides that: “For purposes of this Agreement, claims to payment that are immediately due and result from the sale of goods or services are not investments.”142 The present legal regime governing international investment law, however, does not seem to provide support for more than that. Apart from a loosely applied rule of thumb of two years143 to signify a minimum duration for an investment, there is no other guideline. With respect to more collaboration between foreign investors and the communities in which they invest, there are major developments in the general legal framework governing issues such as labor, human rights, and environmental law as part of a move towards increased Corporate Social Responsibility, or “CSR”. Some treaty provisions, while principally protect foreign investors and investments, contains carve outs for safeguarding governmental measures that aim at protecting public health, safety, and environment.144 The emerging CSR system, as Peter Muchlinski notes, however, can be best described as a “work in progress”;145 the current generation of investment treaties is still far from balanced at this time. Finally, whether investment arbitration has strengthened domestic protections for investment, investment arbitration on some occasions seems to have helped improve domestic legal systems or provided protections in areas that may relate to human rights and freedom of speech. For example, in Pey Casado v. Chile, at issue was expropriation by armed forces of two Chilean publishing houses, which had engaged in publishing newspapers in Chile, during the Pinochet regime’s military coup in 1973. Mr. Casado, a Spanish national, was forced to take refuge in the Venezuelan Embassy and ultimately flee Chile.146 The decrees expropriating the publishing houses were 142 Requirement of long term also have been read to the meaning of “investment” under the ICSID Convention. See, e.g., Bayindir Insaat Turizm Ticaret ve Sanayi A Ş v. Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/03/29; IIC 27 para. 132 (2005) (“The element of duration is the paramount factor which distinguishes investments within the scope of the ICSID Convention and ordinary commercial transactions.”). 143 Dugan et al., supra note 71, at 266–69. 144 See, e.g., Article 1106(2) of NAFTA. 145 Peter Muchlinski, Corporate Social Responsibility, in Peter Muchlinski, Federico Ortino, & Christoph Schreuer, The Oxford Handbook of International Investment Law 681 (Oxford, 2008). 146 Pey Casado and President Allende Foundation v. Chile, Award, ICSID Case No. ARB/ 98/2, IIC 324 (2008)

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declared null and void once the Pinochet regime lost power in the 1990s.147 In 1995, Mr. Casado brought claims before the Chilean courts for compensation under new Chilean laws; and though the taking was recognized as illegal, Mr. Casado was not granted compensation for seven years, leading to the submission to arbitration.148 The tribunal, citing inter alia to the European Court of Human Rights,149 held that while the original expropriation was prior to the entry into force of the BIT,150 the seven year procrastination of the Chilean courts amounted to a denial of justice;151 and thus the tribunal awarded what it considered to be the amount of compensation the Chilean courts should have awarded.152 In this manner, an investment arbitration provided a remedy in a case in which a domestic court system had failed to protect the “fundamental right” to justice.153 VIII. Conclusion Among Professor Wälde’s various views on international investment and the rule of law, some, such as his views on soft law and the role of precedent in investment arbitration, have been directly adopted or reflected in the decisions of international investment tribunals. Other of his views, such as Professor Wälde’s stance on international investment law as a species of administrative law, have found academic acceptance, if not as widely by tribunals in practice. For some of his views, particularly his belief in the disciplinary effect of international investment law, it is difficult to make a firm assessment of how well Professor Wälde’s doctrinal approach reflects reality. But it is this view, the good governance effect of international investment law, that underlies and informs many of his other views on the subject.

147

Id., para. 76. See id., para. 624. 149 Id., para. 662 (citing ECHR, Ruiz-Mateos v. Spain, Judgment of the Court en banc of 26 June 1993, Application No. 1295/87, Series A No. 262; and European Convention of Human Rights, 4 November 19950, 213 UNTS 221, art. 6–1, which lists the right to justice in a reasonable time as a fundamental human right). 150 Pey Casado, supra note 146, para. 612 (the BIT in question, the Spain-Chile BIT, entered into force 29 March, 1994). 151 Pey Casado, supra note 146, para. 659 (which the tribunal held was an element in the fair and equitable treatment protection provided by the BIT). 152 Id. para. 693. The compensation amounted to US$10 million, plus interest. 153 See id., 662. Other investment arbitrations have also provided compensation for violations of similar rights. See, e.g., Desert Line Projects LLC v. Yemen, Award, ICSID Case No. ARB05/17; IIC 319 (2008) (where compensation was awarded for moral damages arising from the intimidation and detention of claimant’s executives by respondent); Bernardus Henricus Funnekotter and ors v. Zimbabwe, Award, ICSID Case No. ARB/05/6, IIC 370 (2009) (where the tribunal stated that the compensation awarded was in part for the forced relocation of claimants and their families to another country). 148


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Professor Wälde strongly believed in international investment law’s role in strengthening good governance. This was the method by which he saw investment law and arbitration contributing to the goal of development, particularly sustainable development. He was highly critical of those critics, particularly NGOs, whom he saw as undermining international investment law’s ability to advance good governance. Further, Professor Wälde saw international investment law growing in ways that would strengthen its ties to good governance; especially in the development of a code of substantive protections, but also in the use of soft law sources and through the law-developing ability of arbitral tribunals. His favorable views on the use of remedies alternative to traditional compensation reflected his view that such remedies could allow a State to govern well. Professor Wälde viewed international investment law as part of a larger family of administrative law that dealt with the relationship between the State and the individual. One of the major goals of such a body of law is to prevent the abuse of this relationship by those in power. This is how Professor Wälde saw international investment law functioning: in areas such as umbrella clauses, discrimination and fair and equitable treatment. Professor Wälde saw international law as triggered only where there is some abuse of governmental power in the State’s relationship with the individual. By intervening when such abuses occur, international law can strengthen the function, and limit the excesses, of both domestic legislatures and judiciaries. It can instill discipline in governance, which in turn can encourage lasting investment and growth. Contributing to the rule of law in States’ treatment of investment was, to Professor Wälde, the “premier achievement” and ultimate goal of international investment law.

AN HISTORICAL ANALYSIS OF THE FUNCTION OF THE MINIMUM STANDARD OF TREATMENT IN INTERNATIONAL INVESTMENT LAW Todd Weiler I. Introduction This chapter is about the evolution of international investment law and arbitration. Applying an historical analysis, it focuses on three key developments: (1) development of the investor-State arbitration method for dispute settlement; (2) the international law minimum standard of treatment; and (3) the question of whether transnational corporations are entitled to enjoy it. One of the fundamental facets of international investment law is that it has always been, first and foremost, based upon promises made between sovereigns by way of treaty. While customary international law and the general principles of international law are certainly not irrelevant, neither has played the central role. Having been sufficiently articulated by publicists and adjudicators over a period of many years, either general principles or custom could be applied to condition the regulation of foreign investment, but only through agreement of the States involved.1 Of course the interpretation of treaty provisions is governed by custom and can also be guided by consideration of applicable principles of international law, but both grant of standing and the existence of substantive rights (related to the treatment of foreigners and their investments) have first fallen within the purview of a treaty, before ever appearing in the form of a customary rule of international law. From a doctrinal perspective, this historical analysis will reveal that there are—and have always been—two elementary functions of international investment law, thus conceived. First, it concerns conditioning the exercise of sovereign discretion, the initial act of which must always a decision by the sovereign to submit itself to a binding treaty regime. Second, international investment law concerns the selective elimination of discrimination through exercise of sovereign authority. These two functions operate within a context where the State is presumed to have theoretically absolute authority, subject only to the principle of good faith, which serves as the means by which 1 Even when such agreement was obtained by force, it was nonetheless formalized through a peace treaty, capitulation treaty or similar instrument.

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sovereign authority is conditioned—whether by reference to implicit norms of conduct (such as the pacta sunt servanda rule or the abuse of rights doctrine) or explicit rules as agreed by treaty. In objection to the argument that international investment law is, first and foremost, treaty law, one might point to the customary international law minimum standard of treatment of aliens, and centuries of State practice in securing diplomatic protection under it. The fact remains, however, that but for the centuries of treaty practice that preceded its articulation by scholars in the 18th and 19th centuries, the minimum standard would not exist. Moreover, with the days of violent military reprisal at least less accepted in contemporary times, the only practical means of obtaining some form of lawful redress—for an alleged breach of customary international law minimum standards—will be by way of an agreement to submit the matter to pacific dispute settlement. Even in the field of human rights, which can be applied to the treatment of foreign investors, substantive content is primarily based upon treaty practice, and most human rights treaties will have a lex specialis redress mechanism already built-in. Moreover, as explained further below, the roots of contemporary, convention, international human rights law lay in practice found in the field of State responsibility for the treatment of consular officials, aliens and alien property. In other words, many of the basic norms of contemporary international human rights law are reflected in the customary international law minimum standard of treatment of aliens. While it is therefore fair to argue that contemporary international human rights law, which is primary treaty-based, owes its existence to customary international law, the fact remains that the custom in question was itself borne out through centuries of commercial treaty practice.2 As explored in more detail below, practitioners of statecraft have long understood that treaty practice can contribute to the formation of new or refined rules of customary international law. For example, throughout the 20th century many States undertook considerable efforts to have the obligation to pay prompt, adequate and effective compensation elevated to the status of custom. And, at least until the final decade of the century, most traditional net capital exporting States were engaged in steadfast efforts to expand the scope of the international minimum standard to include an obligation to afford “fair and equitable treatment” to the investments of foreign investors. As the 20th century began, neither of these propositions formed 2 Since its emergence, through the crucible of atrocities committed during WWII, international human rights law has had the recognition of individual human dignity as its keystone value. It diverges from international investment law on this point because the latter remains premised upon the albeit-related principles of economic liberalism.

an historical analysis of the function

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part of the customary international law Minimum Standard of Treatment. However, as set out below, compelling arguments can now be made that both are reflected in customary international law. One final aspect of the function international investment law needs to be remembered. International investment law is essentially quasi-constitutional in function, although not necessarily in nature. It exists as a means of ‘regulating the ‘regulator’—by requiring compliance binding legal rules. It should not be confused with constitutional, however, because investment law does not purport to provide a foundational, or primary, Grundnorm for the operations of any municipal legal order. Others have characterised to international economic law, generally, and international investment law in particular, as a form of international administrative law. From a functional standpoint, either analogy would suffice. II. Early History The history of international investment law begins with commercial treaties first entered into by sovereigns in the 12th century. These instruments have typically been referred to as “Friendship, Commerce and Navigation (FCN)” treaties, because they typically involved provisions granting reciprocal rights of navigation and because they were often concluded as a prelude to military alliance or as a consequence of military conflict. Over the subsequent eight hundred years, however, they have always been about conditioning the domestic regulation of commerce as it pertains to foreigners. Hence, in this book FCNs will hereafter be referred to simply as “commercial treaties.” In his survey of the history of investment protection, Lillich drew a distinction between the practice of diplomatic protection and what he referred to as the “treaty system” for protection of foreigners abroad.3 He observed that the forces of history proved kinder to the treaty system than to diplomatic protection because “protection of aliens by treaty could prove to be mutually satisfactory and, therefore, relatively uncontroversial.”4 Since the twelfth century, it has been the practice of sovereigns to enter into agreements concerning the treatment each would reciprocally accord to another’s subjects within its territorial jurisdiction. Some agreements were reached as a result of capitulation following war, but many of the earliest examples suggest that early commercial treaties were oftentimes made between relative

3 Richard B. Lillich, The Human Rights of Aliens in Contemporary International Law (Manchester University Press, 1984), at 19. 4 Id., at 19.

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equals.5 They indicate that it was common practice for trading partners to exchange reciprocal guarantees concerning the treatment to be afforded to traders who were subjects of the other party, providing them with a number of basic protections in order to facilitate commerce with a minimum of disruption. Given that the mediaeval conception of just war was essentially that of a law enforcement operation, as opposed to total war, these agreements could remain in place even in the event of hostilities between the parties.6 The first known progenitor of this type of treaty7 is believed to have been concluded between the King Henry II and the Merchants of Cologne in 1154. It is said to have placed reasonable limits on reprisals against alien traders; required some measure of protection and security for themselves and their property; and even provided for freedom of conscience in respect of religious practices.8 The agreement additionally accorded more specific benefits to “the men of Cologne,” such as permission to trade freely throughout the country, exemptions “from the London tolls, and to pay but two schillings annual rent for their guild-hall in London.”9 Other historians trace the birth of England’s commercial treaty practice to three agreements executed during the reign of Henry IV between 1403 to 1407. These agreements were undertaken with Henry III of Castile, Henry IV’s brother-in-law, with John II, the Duke of Burgundy, and with the Hanseatic League of city states.10 For the balance of the 15th Century, the English-Burgundian commercial relationship also encompassed trade with the Low Countries (today: Belgium, Luxembourg and the Netherlands), culminating with the 1496 Intercursus Magnus treaty, which resolved a few years of growing trade disputes between the English and Burgundian monarchs, and which was subsequently expanded to include Cities of the Hanseatic League, the Republic of Venice and the new Republic of Florence, in response to the ambitions of the French king towards acquiring control of trade and productive estates in Italy. The

5

See, e.g.: Esther Pascua, Peace Among Equals (Philip de Souza & John France eds., Cambridge University Press 2008). 6 Stephen C. Neff, Peace and Prosperity: Commercial Aspects of Peacemaking (Randall Lesaffer ed., Cambridge University Press 2004), at 366. 7 Another author has selected the 1217 Agreement between the King of the English and Norway as the first example of such a commercial treaty. See: E.I. Nwogugu, The Legal Problems of Foreign investment in Developing Countries (Oceana, 1965), at 121. 8 Georg Schwarzenberger, The Protection of Human Rights in British State Practice, 10 Review of Politics 174(1948), at 176–177. 9 Geoffrey Butler & Simon Maccoby, The Development of International Law (Longmans, 1928), at 211. 10 Id., at. at 211–213. This is perhaps because Henry IV was born in, and actually reigned from, England, unlike his ancestors (the first four Plantagenet monarchs reigned from Aquitaine in France). Butler and Maccoby also indicated that the first known commercial treaties undertaken by French monarchs, were those executed during the reign of Louis IX, between 1461 and 1483.


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Intercursus Magnus treaty, which remained in force for over five decades, reciprocally granted permission for the parties’ traders to enter into; reside in; to buy and sell goods in; and to depart each another’s territory. Freedom of navigation and safe conduct were also promised, in addition to rights of access to municipal courts for the resolution of commercial disputes. In addition, reprisals were not to be taken as against either party’s nationals; ‘good weight’ was to be accorded to foreign merchants; and customs officials were not only prohibited from damaging the goods and packaging of foreign traders but also from demanding exactions or compelling sales.11 Of course, treaties such as the Intercursus Magnus were negotiated in an era which predated the dominance of liberalism in international economic relations. Indeed, during the 15th and 16th centuries, international commerce was dominated by state trading enterprises, acting under a grant of authority from a particular sovereign. It was in the 17th and 18th centuries that the number of commercial treaties began to become commonplace,12 along with some loosening of European and colonial trade regimes. But for “the force of mutual jealousy” which governed during the perpetual tumult of European politics during the Renaissance and Enlightenment era, international economic growth could have been hastened by the good faith observance of increasingly ubiquitous commercial treaty obligations.13 Nevertheless, two general observations can be made about the commercial treaty practice of the day: (1) that it was conducted on the basis of legal equality, as between sovereigns; and (2) that its primary function was to impose constraints on the otherwise (theoretically) boundless right of a sovereign to regulate international and municipal commerce. Both observations reflect the profound influence of Grotian philosophy about the nature of international law, which rejected the Machiavellian postulate that raisons d’état govern international discourse in favour of a doctrine of the supremacy of good faith in the exercise of sovereign authority.14 Another precept of the Grotian tradition, involving the notion of culpa or fault, can be seen in commercial treaty practice from its inception. The sovereign (and later, the State) could

11

Id., at 213–214. Neff, at 368–369. The author suggests that it became common practice to follow an initial truce or peace treaty with a more detailed agreement, addressing navigation and commerce, during this century. 13 Butler & Maccoby, at 218–225. 14 Hersch Lauterpacht, The Grotian Tradition in International Law, 23 British Yearbook of International Law 1 (1946), at 35. See, also: Haim H. Cohn, Grotian Concept of Good Faith, 7 Tel Aviv University Studies in Law 9 (1985–1986), at 13–14. 12

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be held responsible, by another sovereign, for all international wrongs committed within its territory, whether by its own agents or by anyone else.15 III. Development of Specific Standards of Treatment The doctrine of good faith provided a cohesive underpinning for international relations because European statesmen participated in a shared and singular discourse in which all nations were regarded as being part of a larger moral community, united in their shared Christian tradition. Although this moral consensus on international law was eventually loosened as a result of the Enlightenment, it merely gave way to a new consensus discourse on the idea of an international community: economic liberalism.16 The general principle of good faith was seamlessly maintained as a building block for this new economic paradigm of international relations, because it remained necessary as a means of holding members of the international community to the bargains they would strike in the name of economic growth. This is not to say that the moral underpinnings for international law evaporated in the 18th century. To be sure, they persisted, particularly in respect of responsibility for denials of justice and other ill-treatment of aliens for a host State. Moreover, as described below, the concept of universal moral law would re-emerge from the charnel house of World War II, in the form of the contemporary international law of human rights. As noted above, it was in the 17th century that the practice of concluding of commerce and navigation treaties became ubiquitous amongst major European maritime states, such that they began to reflect a standard format.17 The seriousness of the obligations contained within commercial treaties is reflected in the roots of the Fourth Anglo-Dutch War (1780 to 1784), where negotiations between the Netherlands and the United States of America on a commercial treaty were ostensibly relied upon by the British as grounds for the conflict. What the British actually sought was a colourable cause for abrogation of the 1694 Treaty between Great Britain and the Netherlands, which had been preventing British ships from interdicting suspected trade between the Dutch and Great Britain’s rebellious American colonies.18 Dutch military power had waned by the end of the 18th century. However, it had been on the strength of its aggressive pursuit of treaties to entrench “the

15 S.N. Guha Roy, Is the Law of Responsibility of States for Injuries to Aliens a Part of Universal International Law?, 55 American Journal of International Law 863 (1961), at 864. 16 Neff, at 370–372. 17 Id., at 367. 18 Id., at 365.


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‘natural’ right to innocent intercourse, commercial and otherwise”19 that the Netherlands had originally established itself as a European power.20 One such example was the 1641 Treaty of Truce and Commerce between the Portuguese Crown and the Republic of the United Netherlands, whose provisions reflected the nascent customary standard of protection and security, which would emerge over the next two centuries: . . . and since a great number of Dutchmen, by purchase of estates, commonly called ingenhos, and of other immovable goods, have fixed their residence there, a regard for the [actual] status of property there acquired will nowise permit any goods should be demanded back or restored under right or quasi-right of postiminy; nor that the subjects of the Lords States General should exact from the Portuguese, nor the Portuguese from the subjects of these provinces, any debts or other charges, much less may it be proper for them to press for such things by means of judicial prosecution; but each shall remain secure in the possession of that which he has at the time of the said notification.21

The two elements of what would come to be known as the customary international law minimum standard in later centuries—protection and security for persons and property and equal access to justice before municipal courts of the host State—can be seen commonly in treaties of the 17th century. Acknowledgement, by treaty parties, of how the duty of good faith regulates their exercise of sovereign discretion was present in these treaties of the 17th century as well. The following are examples typical provisions, which also appeared the larger number of 18th century treaties which followed: [The] people and subjects of both nations shall be able to remain safely and freely in the ports and roadsteads, and travel through the cities, just as they please, without incurring any harm or injury, but on the contrary they shall be

19

Butler & Maccoby, at 218. Id., at 504. The Dutch had been during the seventeenth century the foremost negotiators of such treaties, and early therefore set the fashion of separating their political relations with other states from relations more fitly to be controlled in agreements specially commercial. The earlier treaties between states contained a medley of clauses—those of alliance, those governing war were peace conditions, clauses of guarantee, customs clauses, clauses relating to private trade and merchants, commercial clauses, and those dealing with the rights of neutrals or with the protection of foreign merchants. All such clauses the Dutch then gathered into their special treaties of commerce and the leading maritime nations soon imitated. 21 Treaty of Truce and Commerce between Portugal and the United Netherlands, concluded at the Hague, June 12, 1641. Ratification by the King of Portugal, November 18, 1641. [Ratification by the States General, February 10, 1642]; in: F.D. Davenport, ed., vol. I, European Treaties Bearing on the History of the United States and Its Dependencies, vol. II (Carnegie Institution: Washington, 1917) 329 at 344. 20

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todd weiler favoured everywhere, and every kind of justice shall be rendered them, and the judges and officers of those places shall take care that this is done.22 That the people belonging to the Dominions of either Party shall not be abused with ill-language or otherwise ill-treated, but that the parties so offending, shall be punished severely, according to their deserts.23 That the officers of neither king shall molest the subjects of the other in establishing their respective colonies or carrying on commerce and navigation.24 That there be a free use of navigation and commerce between the subjects of both the said Kings, as was formerly in the time of peace, and before the declaration of the late war, so that everyone of them may freely come into the Kingdom’s, marts, ports and reverse if either of the said kings, with their merchandizes, and may there continue and trade without any molestation, and shall use and enjoy all liberties, immunities and privileges granted by solemn treaties, and ancient custom.25 That the ordinary administration of justice shall be restored and set open, throughout the kingdoms and dominions of both Kings, so that it shall be free for all the subjects of either, to claim and obtain their rights, pretensions and actions, according to the laws, constitutions and statutes, of each Kingdom.26 It is likewise agreed and concluded, that the said Most Serene Kings of Great Britain and Spain shall sincerely and faithfully observe, and cause to be observed and kept by their subjects and inhabitants respectively, all and singular the articles agreed on and established by this present Treaty; nor will they contravene the same directly or indirectly.27

By the time economic liberalism came to the fore in international relations, in the 19th century, European sovereigns had been habitually negotiating and honouring commercial treaties amongst themselves, legally and oftentimes practically as equals, for the better part of half a millennium. Thus it had become customary, at least amongst European States, to regard the

22 Article I, Treaty of Peace between France and Great Britain, concluded at Westminster, November 3/13, 1655. Ratification by Cromwell at Westminster, November 7/17, 1655. [Ratification by Louis XIV, at Compiègne, November 16, 1655; in: F.D. Davenport, ed., European Treaties Bearing on the History of the United States and Its Dependencies, vol. II (Carnegie Institution: Washington, 1929) 40 at 46. 23 Article VII, Treaty between Great Britain and Tunis, 5 October 1662; renewed by Article X of the Treaty of 1751, 1 (1840) Hertslet’s Commercial Treaties 157. 24 Article 11, Treaty of Neutrality in America between Great Britain and France, concluded at Whitehall, November 6/16, 1686. Ratification by France, November 29, 1686. [Ratification by Great Britain, November 30/December 10, 1686]; in: F.D. Davenport, ed., European Treaties Bearing on the History of the United States and Its Dependencies, vol. II (Carnegie Institution: Washington, 1929) 309 at 321. 25 Article V, Treaty of Ryswick, (Great Britain—France), concluded 10 September 1697 Great-Britain, A collection of all the treaties of peace, alliance, and commerce, between Great Britain and other powers, from the revolution in 1688, to the present time § 1 (J. Almon, 1772). 26 Article VI, Treaty of Ryswick, (Great Britain—France), concluded 10 September 1697 id., at. 27 Article XL, Treaty of Peace Between Great Britain and Spain, concluded in 1772; id., at.


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obligation to provide protection and security to aliens, including providing them with access to municipal courts on a national treatment basis, as mandatory even in absence of a specific treaty provision requiring it. It was perhaps inevitable, therefore, that commercial treaties would begin to evolve in a fashion that contemplated the establishment of an arbitral institution to resolve disputes between the parties arising under a treaty. The first such agreement was the 1794 Jay Treaty.28 Just as customary law began absorbing substantive norms previously only found in treaties, such as the minimum standard of protection and security, the treaties became more complex with the addition of both substantive refinements and the addition of a formal dispute settlement mechanism. IV. Development of Dispute Resolution Mechanisms With increased trade, technological development and an ever-growing web of international commercial agreements, it was also evident that commercial activities conducted by foreigners would increase and that with such increased intercourse would come a rise in the number of disputes.29 With a rise in the number of disputes came an opportunity for the development of arbitral doctrine on the meaning of the promises contained within commercial treaties. As Dunn observed in 1933: The practice of watching over the welfare of citizens abroad is as old as the practice of diplomacy itself. Grotius asserted that war might rightfully be undertaken on behalf of a subject unjustly injured in a foreign country, citing Cicero and the Holy Scriptures in support of his view. At a later date Vattel supplied a plausible theoretical basis for the practice in his thesis that an injury to a subject was an injury to his state. It was not until the nineteenth century, however, that the practice of diplomatic protection of citizens abroad became of major importance in the routine work of foreign officers. The tremendous growth of commerce and industry in that century and the vast improvement in the means of transportation and communication enormously stimulated international trade and intercourse between nations and increased correspondingly the number of situations in which questions of protection might arise. There gradually grew up a large body of custom governing the field of protection, and this body of custom became recognized as part of the corpus of international law. The practice is now well-established of regarding questions of diplomatic

28 Treaty of Amity, Commerce and Navigation between His Britanic Majesty and the United States of America (52 CTS 243 ed., 1794), Articles VI–VII. 29 Frederick Sherwood Dunn, The Protection of Nationals: A Study in the Application of International Law (Johns Hopkins Press. 1932), at 53.

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todd weiler protection as legal matters, i.e. as claims of legal right, governed by a recognized body of legal rules and principles.30

It is apparent that, when Dunn made these observations, he was not differentiating amongst the means at one State’s disposal to ensure conformity with international standards by another. In other words, he does not differentiate between arbitration, diplomacy and military intervention, even though by the date of his writing, 1933, the latter of these options was increasingly no longer permitted under international law.31 Moreover, he also seems to have conflated the means of enforcement with the substantive rules to be enforced.32 What Dunn did identify was the fact that the “practical conditions” required for the emergence of diplomatic protection—as a means of enforcing obligations between States for the benefit of individuals—“did not appear in full force until the nineteenth century.”33 By that point there was arguably universal recognition of a host State’s responsibility to provide protection and security to an alien and her property, and there had been a technologically-inspired expansion of both commerce and military might which had enabled European powers and the growing United States of America to enforce such responsibility. The perspective of such States at the time was summarized well by Prof. Schwarzenberger in 1969: The law embodied in the minimum standard rested on three metalegal assumptions which, until 1914, were substantially correct: (1) The State whose jurisdiction foreigners were meant to accept was the liberal State of the 19th century, the guardian of a capitalist economy and free enterprise. It could be trusted to exercise sparingly its indirect powers of interfering with private property such as, for instance, in the field of taxation or, at least, to limit excessive favoritism of its executive organs in favour of its own nationals. (2) By common consent, the public purposes for which property might be lawfully expropriated were restrictively construed. If expropriation was unavoidable, liberal compensation was granted and this was freely convertible and transferable.

30 Frederick Sherwood Dunn, The Diplomatic Protection of Americans in Mexico (Columbia University Press, 1933), at 3–4. 31 For example, through the Inter-American convention process, the USA had repeatedly disavowed the rights of military intervention which it had pursued with great vigour during the 19th century against other States in the Western Hemisphere. 32 For his part, Illich did make this latter distinction, going so far as to write of “pre-twentieth century treaty law” and “pre-twentieth century diplomatic protection.” See: Lillich, at 21. 33 Dunn, The Protection of Nationals: A Study in the Application of International Law, at 46.


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(3) The British Navy maintained Pax Britanica and insured the representations made by Petition on foreigners abroad to receive speedy and proper attention . . .34

However, whereas “[the] fundamental doctrines of the juristic system had been worked out against the background of a more or less static world of the localized and isolated communities ruled over by personal sovereigns . . . [by] the 19th century, that background changed radically, and along with it the practical needs to be served by a legal system.”35 Applying a system of State responsibility premised on formal legal equality to a world composed of radically unequal States (economically, developmentally and militarily) was a recipe for discord. “Claims for pecuniary redress for injuries to foreigners were constantly accumulating against certain Latin American states and provided a source of financial embarrassment to those states.”36 In the course of presenting these claims, powerful States habitually viewed issues of responsibility as legal in nature, which justified interposition by appeal to principles of international law and the writings of authorities. In other words, the adjustment of disputes of this character was gradually becoming institutionalized.37 Moreover, many outstanding claims “provided the immediate justification for armed intervention in various instances; notably the French interventions in Mexico in 1838 and 1861, intervention of Germany, Great Britain and easily in Venezuela in 1902–03, and American interventions in Santo Domingo in 1904 and in Haiti in 1915.”38 Indeed, one contemporary writer counted no fewer than one hundred instances of “protection by force” between 1813 and 1927 by the United States alone, including two dozen in the 20th century.39 It should have not come as a surprise, accordingly, that the substantive laws being enforced by such coercive means might come to be identified with them. This branch of international law grew up to its present maturity in the nineteenth century and the first half of the twentieth, in the midst of a contest among a number of important members of the contemporary international community for the mastery of the politically and economically undeveloped regions of the globe. The history of its development thus became “an aspect of

34 Georg Schwarzenberger, Foreign Investments and International Law (Stevens & Sons, 1969), at 23. 35 Dunn, The Protection of Nationals: A Study in the Application of International Law, at 46. 36 Id., at 56–57. 37 Id., at 55. 38 Id., at 57. 39 Milton Offutt, The Protection of Citizens Abroad by the Armed Forces of the United States (Johns Hopkins Press, 1928).

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todd weiler the history of ‘imperialism’ or ‘dollar diplomacy.’ In the world in which it drew its maximum nourishment from conflicting needs and pressures, the cult that might is right found the sole limitation of its field of operations in the risks of war among rivals, though early enough in the history of this struggle a modus vivendi seems to have been worked out, urging each contestant to confine itself more or less to its own select zone of the pastures. Such a world cannot be particularly conducive to the growth of just law.40

Nineteenth century colonialism and imperial ambitions were not limited to South and Central America, however. They also gave rise to a century of inequitable treaties of capitulation, foisted upon Asian countries, particularly China and Japan, styled as commercial agreements. One particular facet of these “unequal treaties”41 was provision for foreigners to avoid receiving ‘local justice’ in favour of inquiries and/or adjudication held by diplomatic consuls acting under the laws of the alien’s more powerful home State, such as the United States, the United Kingdom or Germany.42 Frequent use of this minimum standard as justification for military intervention,43 followed by the imposition of obligations for the maintenance of privileged treatment under capitulation treaties cannot have helped the cause of full protection and security maintain its universal status, even as power shifted and such treaties were replaced by the middle of the 20th century. On the other hand, rejecting the premise that there should be a universal minimum standard of protection and security, for both foreigners and their investments in a host State, on the basis that such standard was sometimes grievously abused in a previous century, seems akin to condemning all religion on the basis of the acts of a sect’s fanatical fringe. V. Shifting the Focus from ‘Old’ Europe to the United States By the 19th century, commercial navigation policy amongst European States, in addition to the USA, became increasingly focused on tariff–bargaining, as “[the] grant of ordinary sailing, establishment, mercantile, and legal rights to foreign merchants, which the Dutch negotiators had been so concerned to have registered in their 17th century commercial treaties, had now become axiomatic not merely for the metropolitan countries but even for the colonial domain.”44 In addition, it was during the 19th century that States began to

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Guha Roy, at 865. Dong Wang, China’s Unequal Treaties: Narrating National History (Rowman & Littlefield, 2008). 42 Butler & Maccoby, at 508–509. 43 Ibrahim F.I. Shihata, Legal Treatment of Foreign Investment: World Bank Guidelines (Martinus Nijhoff, 1993), at 78. 44 Butler & Maccoby, at 507. 41


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negotiate separate agreements on consular relations,45 a trend that American publicist, Robert R. Wilson, noted would eventually remove consular assistance completely from these instruments by the middle of the 20th century.46 United States treaty practice, in particular, provides an excellent exposition of the development in commercial treaty practice between 1800 and 1950, as it grew into the world’s foremost economic, and later military, power. For example, from 1794 to 1845, US commercial treaties consistently included provisions requiring some form of “full and perfect protection” for aliens.47 Whereas the earliest US treaties were focused upon the reciprocal protection of property rights, starting in 1815, their scope was also expanded to include matters of trade regulation, such as duties and charges upon foreign vessels landing in one another’s ports. Next, in 1825 an agreement with “Central America” resulted in reciprocal permitted being granted for foreign ships to carry the goods of the other party’s nationals. Then, in a 1868 agreement with Russia, a separate commercial treaty was struck for the reciprocal protection of trademarks, while in 1904 an agreement with Russia introduced the reciprocal right of foreign corporations to appear before each other’s courts. Starting in 1919, a reciprocal right of sojourn of alien “salesmen” was added to the US model, and in 1921, exceptions were included for the elimination of double taxation (a topic which would quickly become the subject of separate treaties, although oftentimes with reference to the corresponding commercial treaty’s provisions and potential MFN commitments.48 Finally, with the passage of the 1934 Reciprocal Trade Agreements Act, which authorized President to issue omnibus proclamations cutting tariffs by as much as 50%, the bifurcation of trade and investment policy began. While the commercial treaty program would continue, already shorn of consular and tax provisions, and in a world where navigation norms had became so entrenched as to not require bilateral agreements for their enforcement, a total of twenty three reciprocal trade agreements were negotiated by the United States by 1941 and before its entry into World War II temporarily suspended both “reciprocal trade” and commercial treaty programmes.49

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Id., at 504–505. {Wilson, 1953 #1322} at 92. 47 William Marion Gibson, Aliens and the Law: Some Legal Aspects of the National Treatment of Aliens in the United States (University of North Carolina Press, 1940), at 27–29. For the balance of the 18th century, at pages 32–33, Gibson reports on how a standard of national treatment was combined with the USA’s protection and security provisions, starting with its agreements with Belgium and Sicily. 48 {Foster, 1946 #860} at 647–648. 49 {Foster, 1946 #860} at 649. 46

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In his recent treatise on the bilateral treaty practice of the United States of America, Kenneth Vandevelde takes the position that the protection of persons and property was much less important, as a policy goal of at least the USA, as were trade and navigation.50 While there is no doubt that the regulation of both trade and navigation remained an essential element of any commercial treaty until the middle of the 20th century, and that these instruments evolved over time, Kenneth Vandevelde appears to have overstated his case. In fact, protection and security, for both persons and property in the host State, has always been a sine qua non element of commercial treaties. While it is fair to observe that the role of what we today refer to as transnational investment has continued to increase with economic development over the centuries, it nonetheless remains that the protection of persons and property, and the promise of non-discriminatory access to municipal justice, could only have evolved into a customary MST on the basis of the habitual inclusion of these obligations in commercial treaties from the very start. This position reflected a consensus, at least on the part of Western powers that once an alien had been permitted to become a landowner by the host State, seizure or impairment of her property would be proscribed except for cases of (1) non-discriminatory taxation, or (2) by general expropriation for reasons of public welfare.51 As Wilson explained, US treaty practice in the 19th century was most certainly directed towards establishing a rule of law framework for the protection and security of US citizens and their property abroad. Wilson likened the “most constant protection and security” provisions of the 1920 USA-Siam Treaty and the 1894 USA-Japan Treaty to the “public purposes” and “public utility” language which he saw as constraining the expropriate prerogative in other US commercial treaties such as the 1871 USA-Orange Free State Treaty, the 1867 USA-Nicaragua Treaty and the 1870 USA-San Salvador Treaty. In building his case for full, prompt and effective compensation to be paid for any expropriation, to eventually be included as part of the customary international law MST, Wilson drew the same comparisons between the explicit expropriation standards in the aforementioned three treaties with property protection provisions in the 1844 USA-China Treaty, 1831 USA-Mexico Treaty, the 1882 USA-Korea Treaty and the 1887 USAPeru Treaty.52

50 Kenneth J. Vandevelde, US International Investment Agreements (Oxford University Press, 2009), at 20–21. 51 John W. Cutler, The Treatment of Foreigners: In Relation to the Draft Convention and Conference of 1929, American Journal of International Law 225 (1933), at 240. 52 Robert Renbert Wilson, Property-Protection Provisions in United States Commercial Treaties, 45 see id., at 83 (1951), at 96–98.


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As reported by Wilson, US commercial treaty policy took a decisive turn towards stressing that full protection and security, including suitable compensation for expropriation, would always be available to US investors, with the Treaty it negotiated with Germany in 1923. Sixteen out of the next seventeen commercial treaties negotiated by the USA would include the same or similar provisions as follows: The nationals of each High Contracting Party shall receive within the territories of the other, upon submitting to conditions imposed upon its nationals, the most constant protection for their persons and property, and shall enjoy in this respect that degree of protection that is required by international law. Their property shall not be taken without due process of law and without payment of just compensation.53

Along with its abandonment of a century-old theory that MFN treatment should be granted only on a conditional basis, this renewed emphasis on property protection signalled a shift in US commercial policy which reflected its transition from capital importer to capital exporter, and into the largest consumer market for goods in the world.54 Perhaps the most crucial element of the emphasis on property protection was the concerted effort of US negotiators to relate these treaty protection standards with customary international law, which would continue after the country’s commercial treaty programme was resumed, following World War II.55 Language similar to the US commercial treaty protection for persons and property could also be found in many 19th and 20th century commercial treaties involving other parties, such as the Japan—Great Britain Agreement of 1894, which required “full protection and perfect security”56 or the Sweden— China Agreement of 1909, which required “full and entire protection of their persons and property” in addition to granting rights of establishment on

53

Id., at 98; and {Wilson, 1953 #1322} at 20. Robert Renbert Wilson, A Decade of New Commercial Treaties, 50 see id., at 927 (1956), at 928. 55 Id., at 931. Speaking about the USA’s post-war practice, this learned publicist observed: Each of the new treaties makes mention of the “most constant protection and security” for both persons and property of treaty aliens, but only the first two that were signed (with Nationalist China and Italy, respectively) refer specifically to international law in connection with protection and security of both persons and property. Six other treaties (with Ireland, Japan, Israel, Denmark, Haiti and Nicaragua, respectively) use the language—“in no case less than that required by international law”—with respect to protection and security of persons, but not property. The remaining ones do not refer specifically to the law. This omission, unless something to the contrary could be shown from the context (e.g., one in which national treatment was made a “ceiling”) or from the record of negotiations, would not appear to make international law any the less applicable to protection of both persons and property. 56 Article I.H.H. Almond, The Anglo- Japanese Commercial Treaty of 1963, 13 International and Comparative Law Quarterly 925 (1964), at 943 54

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an MFN basis.57 For its part, the Netherlands—Norway Agreement of 1914 did not explicitly require protection and security for aliens, but it contained both establishment rights and a broad MFN clause concerning any form of “treatment” provided by the parties to other foreigners in their territory.58 Unsurprisingly, similar language could also be found in published decisions of the day: Territorial sovereignty . . . involves the exclusive right to display the activities of a State. This right has a corollary duty: the obligation to protect within the territory the rights of other states, in particular their right to integrity and inviolability in peace and in war, together with the rights which each State may claim for its nationals in foreign territory.59

Jessup counted approximately sixty mixed claims commissions having been established to hear disputes under commercial treaties and/or general international law in the century before World War II.60 Both he and Dunn agreed that the result was a large body of judicial precedents “which eventually found their way into the legal treatises.”61 The same conclusions were made by Schwarzenberger in his 1969 treatise on foreign investment in international law.62 He only added the caveats that the issue of just compensation for

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Articles I & IV, Treaty of Amity, Commerce and Navigation between Sweden and China, 4 (1909) AJIL Supp., 337. 58 Treaty of Commerce and Navigation Between the Netherlands and Norway, 8 (1914) AJIL Supp., 236. 59 H.E. Jiménez de Aréchaga, International Responsibility (Max Sorensen ed., St. Martin’s Press 1968), at 561; citing. Huber J. in the Island of Palmas arbitration case (1928): “The duty of due diligence in preventing, investigating and/or punishing such acts is the counterpart of the exclusive exercise by each State, the police and judicial function in its own territory. The foundation of this responsibility lies, therefore, in the exclusive control which a State exerts over its territory. 60 Philip C. Jessup, Responsibility of States for Injuries to Individuals, 46 Columbia Law Review 903 (1946), at 905. 61 Dunn, The Protection of Nationals: A Study in the Application of International Law, at 58. Notable examples of this practice have been the arbitration of outstanding claims of the United States and Mexico under the conventions of 1839, 1848, 1868 and 1923; Venezuelan arbitrations of 1903, in which the claims of 10 countries against Venezuela were settled by arbitration; there were traces of United States with Great Britain under the conventions of 1853, 1871 and 1908, with Spain in 1871, with France in 1880, with Columbia in 1864 and 1874, which Chile in 1892, with Costa Rica in 1860, with Ecuador in 1862, with Peru in 1963 and 1868, and with them as well in 1888. In the great majority of cases, his arbitrations are conducted as judicial proceedings, the commissioners acting as judges of supporting their decisions by reference to rules and principles of international law. 62 Schwarzenberger, Foreign Investments and International Law, at 22. Initially, foreigners had to rely on such precarious protection as was granted to them in their property under safe-conducts or the municipal Law of the State of residence. Gradually and pragmatically, international law in this field was elaborated in multitude of treaties of commerce, navigation and establishment. These treaties apart, international law lacked any settled principles the protection of private property abroad. During the


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expropriation remained somewhat unsettled; that exhaustion of local remedies would be required before a dispute could be elevated to the international plain; and that the minimum standard “must correspond to a reasonably defined to minimum requirements of the Rule of Law in the Anglo–Saxon sense or in the meaning of the Continental Rechtsstaat. In more recent times, publicists writing about the doctrinal foundations of international human rights law have maintained a similar refrain.63 Such conclusions were no doubt based upon the customary international law trope that States “may perhaps be regarded as revealing what [they] supposed to be the requirements of international law, rather than special concessions or undertakings involving commitments which the law did not call for” when negotiating commercial treaties.64 Nevertheless it would appear that a general consensus existed, in the first two decades of the 20th century, that international law could perform a regulatory function vis-à-vis the exercise of sovereign authority, and that some level of protection and security was expected of a host State with respect to its treatment of aliens and their property. To be sure, there was insufficient evidence—at that time—to support a seminal proposition such as the need to provide prompt, adequate and effective compensation as part of any expropriation, but there was certainly enough evidence to conclude that more fundamental propositions, such as the prohibition against discrimination, were indeed in effect. VI. The Emergence of International Organisations The existence of such apparent consensus, coupled with a recognition of the importance of trade and investment in fostering peace and development, appears to have served as a persistent inducement for like-minded professionals, academics and diplomats to agree upon a formula and mechanism for the multilateral codification of norms concerning the treatment of aliens and foreign investment.65 It began with the September 22, 1924 assembly

19th century, some of these optional treaty standards hardened into rules of international customary law or came to be considered as general principles of law recognized by civilized nations. 63 Thomas E. Carbonneau, The Convergence of the Law of State Responsibility for Injury to Aliens and International Human Rights Norms in the Revised Restatement, 25 Virginia Journal of International Law 99 (1984–1985), at 106; citing Richard B. Lillich, The Current Status of the Law of State Responsibility for Injuries to Aliens (Richard B. Lillich ed., University Press of Virginia 1983), at 2–3. 64 Nwogugu, at 135; citing: Charles H. Hyde, International Law, Chiefly as Interpreted and Applied by the United States § 1 (Little Brown 2 ed., 1947), at 714. 65 The following accounts of these events were relied upon in assembling the attempts to achieve multilateral consensus set out below: Nwogugu; Earl Snyder, Protection of Private Foreign Investment: Examination and Appraisal, 10 International and Comparative Law

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meeting of the League of Nations, in which a resolution was adopted asking the League of Nations Counsel to convene a Committee of Experts with a view toward the “progressive codification” of international law. A Committee was appointed and, after much deliberation, it prepared reports on seven subjects which it considered to be “ripe for codification.” One of the subjects was styled: “The Responsibility of States for Damage Caused in their Territory to the Person or Property of Foreigners.” The 1927 Committee Report would be written by Salvadoran lawyer, M. Guerrero, who had been appointed Rapporteur, and it reflected a perspective on the issue grounded almost exclusively on the sovereign equality principle, which was arguably reflected in Article 23(e) of the League of Nations Covenant, requiring “equitable treatment for the commerce of all members.”66 With the Guerrero Report in hand, the Economic Committee decided to commission the production of a draft convention for consideration at its 1929 conference. In the meantime, a group of scholars from Harvard University, led by celebrated publicist Edwin Borchard, was persuaded to prepare a draft code, which came to be known as the 1929 Harvard Draft. The first conference for the codification of international law met at The Hague on March 13, 1930. Although it sat for almost one month, it adjourned without achieving any significant progress towards the goal of codification. Committee discussions were characterized by sharp conflicts between two extreme points of view, reflected in the contrasting positions of Guerrero and Borchard—one based upon an Anglo-Saxon view of universally applicable law and another which represented a variegated approach to international stan dards, conditioned by the principle of sovereign equality.67 While, in 1931, the International Chamber of Commerce passed a resolution strongly urging national governments “to frame at the earliest possible moment international legal Conventions expressly guaranteeing the protection of private property belonging to nationals of contracting States on the territory of other contracting States,” no further governmental action towards a multilateral accord would take place until after the Second World War had been fought. One issue arising from the League of Nations codification process did appear to gain considerable subsequent traction, however, with respect to the regulation of international trade. After representatives from Estonia, France, Quarterly 469 (1961), at 473–475 & 479–486; Stanley D. Metzger, Multilateral Conventions for the Protection of Private Foreign Investment, 9 Journal of Public Law 133 (1960), at 133–134; M. Brandon, Recent Measures to Improve the International Investment Climate, Journal of Public Law 125 (1960); Shihata; and Arthur S. Miller, Protection of Private Foreign Investment by Multilateral Convention, 53 The American Journal of International Law 371 (1959). 66 Cutler, at 233. 67 Donald R. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (University of Minnesoate Press, 1955), at 56–57.


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Great Britain, India and Italy expressed similar reservations; a decision was taken to refrain from attempting to regulate measures affecting trade in goods, as opposed to foreign traders themselves. As one observer presciently noted at the time: “a guaranty of equal treatment of the alien importer in a country is purely theoretical without a specific safeguard for his goods. Otherwise he could still be subjected to subtle internal regulations concerning sale, distribution, and consumption. Nevertheless, the protective point of view led many important governments to insist that goods were outside the scope of the draft convention.”68 In other words, the substantive focus of the League of Nations process appears to have been strongly conditioned by representatives’ understanding of the status of the international minimum standard at that time. The MST concerned protection and security for aliens and their property— i.e. only the minimum safeguards necessary to sustain transnational commerce on a reasonably predictable basis. Given the relative level of economic and technological development at that time, and the representatives’ expectations that negotiations would not be easy at any rate, it may not have been wholly unreasonable for trade in goods measures to be taken off the table— even if, from a macro-economic perspective—it may have been lacking. In hindsight, this may well have been the fateful decision that would lead to today’s uncomfortable division of international economic law into rules governing measures affecting trade and rules governing measures affecting investment. In the wake of the failure of the League of Nations process to generate consensus on a multilateral code for the protection of foreign investment, major capital exporters, such as the United States, returned to their bilateral treaty programmes. In 1934 the United States also launched its reciprocal trade agreements program, which was theoretically supposed to operate in tandem with its existing commercial treaty programme. During the 1930’s, two other specialised treaty programmes were launched by the United States as well, concerning the avoidance of double taxation and concerning consular rights and duties. In retrospect it appears that the reciprocal trade agreement programme received the lion’s share of attention from US officials. While the last two commercial treaties were concluded with Siam in 1938 and Liberia in 1939,69 even during WWII reciprocal agreements for the reduction of tariffs and commodity taxes were concluded with Peru (I942), Iceland (1943), Mexico (1943), Uruguay (1943) and Iran (1944).70 And in the immediate wake of World War II, with the commercial treaty programme 68

Cutler, at 237. Austin T. Foster, Some Aspects of the Commercial Treaty Program of the United States: Past and Present, 11 Law and Contemporary Problems 647 (1948), at 649. 70 Id., at 658. 69

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still effectively on hiatus, the US Administration forged ahead with no less than fourteen invitations to additional countries for the negotiation of more reciprocal trade agreements.71 At the time, some observers lamented what they perceived to be a lack of prudence on the part of the Administration, for failing to take better advantage of the negotiating position the US held at the end of the war.72 There was no doubt at that the United States had an overwhelming ‘first mover advantage in the second half of the 1940’s, which would have enabled it to conduct whatever sort of international economic policy it chose. However, this position of power appears to have arisen with a concomitant grasp of the country’s increased international responsibilities. The need for creating a favorable environment for the flow of American investment capital, is better understood when considered in the context of the economic and political situation existing in Western Europe at the conclusion of the hostilities: “Great Britain was exhausted and impoverished; Germany did not exist; France was barely alive; defeated Italy did not count; and the smaller countries were not important.” For the Americans, in the mid and late forties, the balance of power in Europe was most frightening: on the one side was the battered array of Allied and Axis countries, and on the other was a worn, yet expanding Soviet Union. Thus the political imperative that formed the basis for American foreign policy evolved as a firm pledge to assist in the development of a politically and economically rejuvenated Western Europe.73

There was apparently no shortage of business support for “inclusion in the Charter of provisions assuring American capital access to opportunities for direct investment in foreign countries and satisfactory treatment of such investments.”74 Nevertheless, in September 1946 the US Department of State

71 Id., at 647; citing: 1945 United States Department of State, Proposals for Expansion of World Employment (U.S. Gov’t. Publication 2411, Commercial Policy Series 79, 1945). “The program provides for an amplification of the Reciprocal Trade Agreements program initiated by former Secretary of State Cordell Hull and, as evidence of the intention of the United States to retain leadership in the program, invitations have been issued to fourteen countries to negotiate reciprocal trade agreements or revisions of existing agreements of this character prior to the conference to be called for the purpose of organizing the International Trade Organization.” 72 Id., at 661–662. 73 Joseph J. Norton, Doing Business and US Commercial Treaties: The Case with Member States of the EEC, 5 Case Western Reserve Journal of International Law 4 (1972), at 12–13. 74 Jacob Viner, Conflicts of Principle in Drafting a Trade Charter, 25 Foreign Affairs 612 (1946–1947), at 626–627. Viner’s contemporaneous opinion of why such calls for investment protection needed to be curtailed reveals the ever-cautious nature of a State Department and U.S. Treasury insider: We should take great care lest we are found to be asking other countries to grant legal privileges to American capital which our own laws withhold from foreign capital and business enterprise in this country. It seems wise not to enlarge the scope of the Charter


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continued with its focus on tariffs and trade regulation, over investment protection, by issuing “a suggested Charter” for a United Nations International Trade Organization. Meetings between 17 countries would follow on this proposed Charter (with the former USSR abstaining), twice in London in 1946 and twice in Geneva in 1947, to be followed by what was supposed to be a concluding conference in Havana in 1948.75 Concerning the US Administration’s apparent neglect of investment protection at this time, it may be that there were insufficient bureaucratic resources available for the pursuit of a better-rounded international economic agenda. In this regard it should not be forgotten that, just as it was emerging from an unparalleled global conflagration, the US economy had itself been more subject to centralised planning and the national ownership of economic resources than at any other time in its history. In 1946 the Marshall Plan was still a year away, and when it was implemented it involved an unprecedented short-term investment of public funds into rebuilding the European economy. That State Department officials may have been preoccupied with reducing border barriers to trade in goods at the time was therefore only to be expected, although one could argue that the policy focus struck in 1945–1946 went a long way to cementwhat became an institutional policy distinction between regulating trade and regulating investment which persists to this day. Nevertheless, even in the midst of these events some were calling for a more integrated approach to international economic policy: [The] nature of commercial relations between countries, and particularly between the United States and foreign nations, has changed. In an earlier period our trade with foreign countries was considered as consisting of the shipment of commodities from a point of export in one country to a point of import in another country. But in fact international commerce no longer always commences at the boundary of the country of origin, nor does it terminate at the boundary of the country of destination. It usually commences at some point of production within the country of origin and, after crossing the boundary of that country and the boundary of the country of destination, enters the channels of domestic commerce within the latter country . . . Restrictions imposed upon or discriminations practised against an American enterprise in domestic business in a foreign country may result in obstructing the international trade carried on by that enterprise as effectively as a direct burden on international trade, such as exorbitant customs duties. Conversely, the elimination of high customs duties may not serve to clear the channels of international trade if there remain such obstructions in the domestic trade within one of the countries involved.76

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in this manner, and to postpone multilateral negotiations on the problems of international private investment until careful preparation has been made in that field. Id., at 612. Foster, at 655.

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todd weiler [While] the development of the business, the employment of local personnel and the availability for local consumption of the articles manufactured are beneficial to the country in which the business is conducted, the profits from the business, as well as the salaries paid to American personnel, enhance the national purchasing power of the United States. Irrespective of tariff barriers, if the operation of these businesses abroad became impossible by reason of local restrictions or discriminations, the foreign trade between the United States and these foreign countries would be seriously affected.77

With somewhat lacklustre support from US officials for anything more than just a multilateral agreement on tariffs and trade, neither the results of the March 1948 United Nations Conference on Trade and Employment, in Havana, nor the Ninth International Conference of American States held in Bogotá in May 1948, were satisfactory to US business interests or to the governments of other capital-exporting countries.78 Drafters of both the Havana Charter79 and the Economic Agreement of Bogotá80 essentially adhered to a theory of international investment protection that too closely resembled that of the 1927 League of Nations Guerrero report, seemingly maximising sovereign regulatory autonomy over providing meaningful minimum standards for protection of foreign investors and investments.81 VII. The Role of the International Law Commission Immediately following WWII, United Nations officials had been very enthusiastic about the idea of an international code for the protection of foreign investments. However, the disappointing results from Havana and Bogota led most to decide that the time was not right for a multilateral agreement.82

77

Id., at 656. Zouhair A. Kronfol, Protection of Foreign Investment: A Study in International Law (Sijthoff, 1972), at 30–31. 79 United-Nations, Havana Charter for an International Trade Organisation, 2 The International Law Quarterly 283 (1948), Chapter 3, Articles 11 & 12. 80 Pan-American-Union, Economic Agreement of Bogotá, 25 Pan American Union Law and Treaty Series (1948), Article 25. 81 In the opinion of one former UK diplomat, until it was possible to definitively state what the international law of State responsibility for aliens was, it would be premature to permit such decisions to be made on the fly, by way of investor-state dispute settlement. See: E.A.S. Brooks, Subsidiary Judicial Authorities of the United Nations Organization to Hear and Decide Claims by Individuals and Corporations against States, 3 International and Comparative Law Quarterly 523 (1950), at 527. Similar concerns were expressed a decade later by State Department official, Michael Brandon, who recommended that the OECD draft be limited to representing nothing more than a codification of obligations already extant at customary international law. Brandon, at 128. 82 See, e.g.: U.N. EcoSoc Council, Report of the 4th Sess. of Subcommission on Economic Development 10–11 (1950). 78


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Five years after the idea had fallen out of favour with Trade and Employment Committee officials, some elements of it were picked up by the International Law Commission, which had added State responsibility as one of its topics for further research on the codification of international law.83 In 1955, the ILC appointed Cuban jurist, Francisco Garcia-Amador as Special Rapporteur.84 Starting in January 1956, Garcia-Amador issued a total of six reports, each early in the new year. The gist of his thesis was that it would be favourable to achieve universal recognition of certain minimum standards of international law. These standards would apply to aliens and nationals alike, by virtue of a synthesis of customary law with the new conventional law of human rights. He also advocated further dialogue on the issue of how individuals might directly enforce these rights on their own behalf.85 Despite the fact that Garcia-Amador’s first two reports both appeared to receive short shrift from representatives from ILC member States,86 it appears that his work may have had a hand in rejuvenating academic and professional interest in the issue of whether there are, or should be, universally-applicable minimum standards of treatment. For example, at its 16th Congress in Naples, held in May 1957, the ICC issued a resolution calling upon States to give serious consideration the terms of its 1949 Draft International Code of Fair Treatment for Foreign Investments, which the ICC had revised and re-adopted at its 12th Congress in Québec City, in 1949.87 Indeed, 1957 appears to have been a seminal year for those who sought a multilateral consensus on a MST for the regulation of foreigners and their investments abroad. Just as Professor Garcia-Amador issued his Second Report, in January 1957 a US Senate Committee commenced research on the idea of a multilateral agreement with a state-to-state dispute settlement 83 Oscar Schachter, Private Foreign Investment and International Organization, 45 Cornell Law Quarterly 415 (1959–1960), at 422. 84 Daniel Bodansky & John R. Crook, Symposium: The ILC’s State Responsibility Articles: Introduction and Overview, 96 American Journal of International Law 773 (2002), at 776. 85 F.V. Garcia-Amador, International Responsibilty: Special Rapporteur’s Report, II Yearbook of the International Law Commission 173 (1956); F.V. Garcia-Amador, International Responsibilty: Special Rapporteur’s Second Report, II Yearbook of the International Law Commission 104 (1957); F.V. Garcia-Amador, International Responsibility: Special Rapporteur’s Sixth Report, II Yearbook of the International Law Commission 1 (1961); F.V. GarciaAmador, International Responsibility: Special Rapporteur’s Fifth Report, II Yearbook of the International Law Commission 41 (1960); F.V. Garcia-Amador, International Responsibility: Special Rapporteur’s Fourth Report, II Yearbook of the International Law Commission 1 (1959); and F.V. Garcia-Amador, International Responsibility: Special Rapporteur’s Third Report, II Yearbook of the International Law Commission 47 (1958). 86 Bodansky & Crook, at 776–777. 87 Article 10 of the ICC Code would have provided a right for investors to appoint representatives in the Host State, to resolve disputes over discriminatory treatment of creditors who hold bonds issued by, or loans made to, or loans guaranteed by, that Host State, first in its own courts and then, if necessary before the ICC International Court of Arbitration.

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mechanism.88 In September 1957, the Economic Conference of the Organisation ofAmerican States, meeting at Buenos Aires, passed a resolution in favour of establishing an international investment code. Also in 1957, a German business organisation known as the Society to Advance the Protection of Foreign Investments was established. Led by Hermann Abs, the General Director of Deutsche Bank (and subsequently its longest-serving Chairman) this group researched and drafted a “International Convention for the Mutual Protection of Private Property Rights in Foreign Countries,” which was made public in November 1957. In addition to setting out minimum standards of treatment, the draft convention also contemplated a compliance mechanism which would have resulted in multilateral retaliation, by all member countries, in order to ensure the compliance of a host State with a decision in favour of a private investor enforcing her rights under the Convention. VIII. Post-World War II State Practice In March, 1958, a multi-party group of British Members of Parliament also established a Commission on a World Investment Code, holding hearings over the next year before issuing a final report in July 1959. In May 1958, the Prime Minister of Malaysia called for a multilateral investment code to be established in an address given to the 14th Meeting of the UN Economic Commission for Asia and the Far East.89 His address would lead the United Nations Economic Commission for Asia and the Far East to conduct research on the subject, in conjunction with the General Legal Division of the United Nations, which resulted in a report recommending the establishment of “a regional arbitration centre which—while primarily concerned with international trade disputes-might also arbitrate investment disputes to which a government is a party.” In July 1958 a committee chaired by a German lawyer, Dr. Kurt Ehlers, presented a report to the International Bar Association’s Annual Meeting, held in Köln, which resulted in a resolution being passed also in favour of the establishment of a multilateral convention on investment protection.

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British Parliamentarians’ Commission on a World Investment Code, Memorandum on World Investment Code, undated, PG 57123.133C, available from the King’s College Archives, Cambridge University, at 2–3. 89 Annual Report of the Economic Commission for Asia and the Far East (1957–58) U.N. EcoSoc Council Off. Rec. Supp. No. 2 at 24. The Prime Minister’s address picked up upon a largely ignored United Nations General Assembly Resolution dated 11 December 1954, which called upon members to work towards the codification of rules governing the protection and security of aliens and their property abroad.


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Also in 1958, Lord Hartley Shawcross, former Nuremburg Chief Prosecutor and United Kingdom Attorney General, then a Director of Shell Oil Company, chaired a group of Dutch and British lawyers who issued their own draft investment code in April 1959, although it did not include provisions for investor-state dispute settlement. Along with Lord McNair and future Prime Minister Harold Wilson, Lord Shawcross had been involved in advising the Commission on a World Investment Code, mentioned above. During the Commission’s hearing it was confirmed that the Governments of India, Malaysia and Ghana were all in favour of the establishment of an investment protection code, as was the Brazilian Chamber of Commerce.90 Lord McNair broke with Lord Shawcross on one significant point, however. He recommended that a standing arbitral tribunal be established—to which foreign investors would have direct access. The seat of the tribunal would be at the World Bank, which would be able to utilize its authority as a lender to many developing economies to ensure compliance with the tribunal’s decisions.91 In December 1958, the Geneva-based Association for the Protection and Promotion of Investments prepared a draft investment convention which included provisions for the establishment of a special tribunal to hear disputes directly between foreign investors and host States. Also in December 1958, the UN General Assembly passed a resolution92 requesting the UN Secretariat to conduct expert studies on the best uses of private foreign investment for economic development. This request resulted in a progress report beingissued by the Office of the Secretary-General in 1960 entitled: “The Promotion of the International Flow of Private Capital.”93 The report contained a proposal for an international agreement by which an institution for the arbitration of disputes between foreign investors and capital receiving countries would be established. This proposal would have seen the establishment of a standing tribunal, with members appointed by all participating states, to which claims could be directly made by investors for breach of international agreements or contracts for the development of concessions.94

90 British Parliamentarians’ Commission on a World Investment Code, Draft Final Report, PG 5925.196C, available from the King’s College Archives, Cambridge University, at 1–3. 91 British Parliamentarians’ Commission on a World Investment Code, Report of the 11th Meeting, 16 February 1959, PG 5925.196C, available from the King’s College Archives, Cambridge University at 2. 92 U.N. Gen. Ass. Res. 1318 (XIII) (1958). 93 The Promotion of the International Flow of Private Capital, U.N. Doc. No.E/3325, Feb. 26, 1960, at 78–79; and U.N. Doc. No. E/3492, May 18, 1961. 94 Schachter, at 419–422.

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With its July 1959 report, the Commission on a World Investment Code also decided in favour of the additional establishment of a dispute settlement mechanism which would be open to private investors, reasoning that: . . . [while] a government may be ready to go to court for a major oil company, the cases of smaller companies are only too likely to be placed on one side in the interests of political relations with the state that is the other party in the dispute, and the individual on order usually gets no support at all.” . . . It is therefore vitally important that private individuals and companies as well as states should have access to the arbitration tribunal this principle has already been established in the court of the European Economic Community and it would be a necessary feature of a World Investment Convention.95

The Commission postulated that the United Nations or the World Bank could perform the role of appointing authority under its draft Convention, alternatively suggesting that dispute settlement facilities could be shared with the Secretariat of the General Agreement on Tariffs and Trade.96 The Commission was not prepared, however, to contemplate sanctions for non-compliance with a tribunal’s award. It recommended moral suasion as the sole means of compliance.97 In making these compromise suggestions the Commission was no doubt mindful of the testimony it had heard from World Bank Vice President Davidson Sommers, an American financier who expressed considerable doubts to them as to whether a multilateral code would be supported by the United States, which seemed content with its existing bilateral treaty program.98 He further questioned whether a general prohibition against discrimination was a feasible objective, suggesting that perhaps it would be more realistic to simply advocate “that when private property is taken for public use, there should be compensation period one might even go further and say that it should be promptly paid and in transferable currency.”99 While he was also in favour of the concept of direct dispute settlement between investors and host States, he believed that arbitrations should be managed by professional organisations such as the ICC or AAA, perhaps under the auspices of the United Nations. Notably, Mr. Sommers was not in favour of taking

95 British Parliamentarians’ Commission on a World Investment Code, Draft Final Report, PG 5925.196C, available from the King’s College Archives, Cambridge University at 13. 96 British Parliamentarians’ Commission on a World Investment Code, Draft Final Report, PG 5925.196C, available from the King’s College Archives, Cambridge University at 11. 97 British Parliamentarians’ Commission on a World Investment Code, Draft Final Report, PG 5925.196C, available from the King’s College Archives, Cambridge University at 14. 98 British Parliamentarians’ Commission on a World Investment Code, Report of the 8th Meeting, 17 February 1958, PG 581119.125H, available from the King’s College Archives, Cambridge University, at 1. 99 British Parliamentarians’ Commission on a World Investment Code, Report of the 8th Meeting, 17 February 1958, PG 581119.125H, available from the King’s College Archives, Cambridge University, at 2.


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advantage of the leverage that the World Bank could assert on debtor States in order to ensure compliance with arbitral awards.100 IX. Initiatives from Regional Organisations While British Members of Parliament and British and Dutch business lawyers were sorting through their positions on the need for a multilateral investment code in 1958, the Economic Committee of the Council of Europe was undertaking its own research. In its September 1959 Report, the Committee proposed the establishment of both an international investment statute and an international investment guarantee agency. The statute would have prohibited “unreasonable discrimination” and it would have provided a direct means of dispute settlement for investors vis-à-vis host States. A conference was recommended for European and African State representatives to consider the proposals, but never took place. Also in 1959, the groups led by Lord Shawcross and Mr. Abs, respectively, joined forces and produced a new draft convention, which would have prohibited discriminatory measures and provided for investor-State dispute settlement. Later that same year, the Government of the Federal Republic of Germany submitted the Abs-Shawcross Draft to the OEEC Committee for Invisible Transactions for its consideration. In October 1959, World Bank President Eugene Black reversed one of the positions taken by Mr. Sommers, by expressing the Bank’s eagerness to play host to a dispute settlement institution established under a multilateral investment convention. Then, early in 1960, the Government of the Swiss Federal Republic submitted another draft convention (which was the product of the Geneva-based Association for the Protection and Promotion of Investments) to the OEEC Committee for Invisible Transactions. That same summer, at both the IBA’s annual conference in Salzburg and the ILA’s annual conference in Hamburg, decisions were taken in support of multilateral investment codes. At the end of the year, the ICC organised a conference in Karachi, attended by professionals from twenty-eight countries, thirteen of which with less developed economies. Recommendations emanating from this event included rules ensuring non-discrimination and prompt, adequate and effective compensation for all cases of nationalisation. In 1961, the IBA passed yet another resolution in favour of a multilateral convention at its annual conference in Edinburgh; World Bank General Counsel Aaron Broches issued an official position paper on how his

100 British Parliamentarians’ Commission on a World Investment Code, Report of the 8th Meeting, 17 February 1958, PG 581119.125H, available from the King’s College Archives, Cambridge University, at 2–3.

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organisation could host an independent dispute resolution agency for the settlement of disputes between investors and States; and the revised Harvard Draft convention was published. Despite such seemingly overwhelming forward-motion, however, 1961 arguably represented the nadir of the movement towards multilateralisation of international standards on foreign investment. It was also in 1961 that Garcia-Amador delivered his sixth and final report, which was all but ignored by most members of the ILC Committee. Not only was Garcia-Amador’s quest to consolidate customary and conventional minimum standards of treatment for aliens and foreign investors with the emergent norms of conventional human rights law terminated, however. The very exercise of codifying substantive norms was abandoned in favour of a much less controversial, albeit not unimportant, agenda focusing on procedural aspects of State responsibility. In Paris, the newly renamed OECD’s Committee for Invisible Transactions completed its research agenda by the end of 1962 and published the 1963 Draft Convention, which drew heavily upon both the 1959 Abs-Shawcross Draft and the 1961 Harvard Draft, which had since been refined by Professors Sohn and Baxter in Collaboration with Professor Garcia-Amador. The OECD would continue its work for another four years, culminating in the 1967 OECD Draft Convention on the Protection of Foreign Property, but momentum towards its adoption had long since waned on the part of many member governments, although the German and Swiss governments maintained their support while simultaneously pursuing the world’s two most vigorous bilateral investment protection treaty programmes. There appeared to be very little official interest in Washington DC for a binding multilateral convention at this time,101 despite the fact members of the private sector with transnational investment interests remained staunch supporters of just such an agenda.102

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See, e.g.: Metzger. at 143–144, reporting official statements to such effect, issued in 1957, 1958 and 1959. Curiously, the author (who had served as Assistant Legal Advisor in the Department) nonetheless claimed, at 134, that Article I of the Abs Shawcross Draft (which was, in fact, a collaboration between German, British and Dutch professionals) had been “derived” from Article V of the 1953 Japan – USA Commercial Treaty. 102 William T. Ketcham, Arbitration Between a State and a Foreign Private Party, in Rights and Duties of Private Investors Abroad (Southwestern Legal Foundation International and Comparative Law Center ed. 1965). The author reveals how, in 1960 and 1961, the OEEC’s work on a multilateral code proceeded in spite of U.S. resistance. The State Department had campaigned for its abandonment when the OEEC was terminated and the OECD was established in its place. However, continuation of the work was strongly supported by business leaders, international law organisations and European governments, culminating in a May 1962 recommendation of the Consultative Assembly of the Council of Europe for all member States to actively support the OECD’s work. Accordingly, the concerns raised by the United States were not heeded. Drafts of the code were released by the OECD for comment later in 1962 and by April 1963. After heavy lobbying by business leaders, the State


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Somewhat paradoxically, the major legal legacy of this period of multilateral code promotion was the degree to which many States relied upon the OECD Draft Code as their starting point for formulating bilateral investment treaties. The major institutional legacy of this period was the approval of the draft ICSID Convention, given in 1965 by the World Bank’s Board of Directors, which came into force on 14 October 1966. While the ICSID would remain a quiet place for the next two decades, the dispute settlement mechanism it facilitated would eventually become the pre-eminent choice of bilateral treaty drafters in the 1990’s, as inventories of such instruments mushroomed worldwide. X. The Dominance of Treaty Law As the 1950’s began, there was growing recognition that more steps needed to be taken, on the international plane, to protect foreigners and their investments aboard. For example, a 1951 survey revealed that only 85 of a total of 400 treaties examined (which would have been a considerable task before the advent of the information age) contained an explicit provision concerning the legality of a State’s purported terms of an expropriation.103 Meanwhile, as the GATT dispute settlement regime was in its early stages of development, publicists and officials began contemplating the extent to which a multilateral agreement on trade in goods obviated the need for regulation of State conduct under the commercial treaty model: At the outset it is apparent that in the commercial field standards other than that of international law—particularly most-favored-nation treatment and national treatment—have played more important parts, and that the standards have been applied to much more than exchange of goods. With the utilization of the “commercial” treaty for agreements on the entry of alien persons, protection of their personal and property rights, there engaged in various activities, assurances against they are being discriminated against in such matters as internal taxation, and the securing of their exemption from military service, broader descriptive words came to be in order . . . So far as the strictly commercial provisions are concerned, the coming into effect in 1948 of the General Agreement on Tariffs and Trade did not supersede the older type of bilateral instrument, although it has raised questions of harmonization of the 2 types of

Department finally relented and endorsed work on the draft, although while maintaining reservations about whether the US Congress would ever endorse the concept of investor-state arbitration. In contrast, the Assembly of the Council of Europe expressed strong reservations about the proposed investor-state mechanism in September 1963, on the basis that it left far too much control of the process in State hands; i.e. that it was not robust enough. 103 Harry C. Hawkins, Commercial Treaties and Agreements: Principles and Practice (Rinehart & Company, 1951), at 22.

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todd weiler arrangement in so far as they attempt to deal with the same kind of discriminatory practices.104 Over recent years trade between States has begun to encompass more of the trade within States, and this in turn has led to interest in greater access to markets and opportunities to exploit them, in the right to reside abroad and the right to establish the bases of business and production operations in the territories of other countries. There is increased interest in the mobility of capital and investments, in spite of the temporary disequilibria that may then occur in the balance of payments, and in the exchange of technical and proprietary data. Perhaps this trend will be characterised by an increased importance for the GATT in its own sphere of regulation. The bilateral commercial treaty may then begin to intensify its concern with the establishment provisions . . .105

This is not to say that the United States had no policy concerning the protection of foreign investment after WWII. As a matter of fact, it was rather vigorous in pursuing bilateral treaties. Between 1946 and 1956, not less than fifteen treaties were negotiated, with both developed and developing States alike. It would simply appear that US officials were not keen on a multilateral undertaking.106 At the start of the 20th century, there were essentially eight parts to a US commercial treaty: (1) rights of establishment; (2) rights of navigation; (3) rights concerning real property; (4) rules governing foreign exchange regulations; (5) rights concerning intangible property; (6) rules governing quotas, tariffs and commodity taxes; (7) rules concerning double taxation;107 and (8) rights concerning protection of individuals.108 By the midway point of the century, double taxation had become the subject of its own treaty series; rules governing quotas, tariffs and commodity taxes had been addressed in the GATT and occasional bilateral (“reciprocal”) trade treaties; many aspects of intangible property protection, i.e. intellectual property issues, were also the subject of other multilateral treaties; and the protection of individuals was encompassed by multilateral human rights conventions. Navigation provisions were already largely superfluous as the century dawned, as shipping was largely open during peace and restricted during war. That they would eventually disappear altogether was not unexpected. Similarly, while not yet de rigueur, the inclusion of arbitration or resource to a dispute settlement body such as the International Court of Justice, for State

104

Robert Renbert Wilson, The International Law Standard in Treaties of the United States (Harvard University Press. 1953), at 87–88. 105 Almond, at 952. 106 Chinese Taipei, Ireland, Italy, Ethiopia, Germany, Japan, Israel, Greece, Denmark, Iran, Nicaragua, Netherlands, Uruguay, Columbia, Haiti. See: Wilson, A Decade of New Commercial Treaties, at 927. 107 Foster, at 653–654. 108 Wilson, A Decade of New Commercial Treaties, at 930.


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parties to a bilateral treaty was not new by 1959. Nevertheless, publicists and lesser academics almost universally cite the first treaty models to possess these two characteristics to have been the first deserving of the title “bilateral investment treaty”109—starting with the 1959 treaty between Germany and Pakistan.110 Given the negligible difference between a commercial treaty that includes navigation provisions and one that does not, a more appropriate demarcation point—along the continuum between the contemporary investment treaty and its progenitors—would seem to be the date upon which the first treaty to combine an investor-state dispute settlement mechanism with substantive provisions limited to the establishment and treatment of investments came into force.111 Apart from its apparent reluctance to concluding a multilateral agreement on investment, it would appear that otherwise the commercial treaty policies of the United States in the immediate post-war period were similar to those of most other capital-importing States. The most important of the incremental policy changes pursued in commercial treaty negotiation (between both developed and developed, and developed and non-developed countries) were: (1) expansion of establishment rights and (2) more frequent and elaborate use of the MFN and national treatment standards.112 By the time navigation provisions started dropping en masse from commercial treaties, 1959–1960, capital exporting countries such as the USA became increasingly

109 See, e.g.: Cynthia D. Wallace, The Multinational Enterprise and Legal Control (Martinus Nijhoff, 2002), at 1114; M. Sornarajah, The International Law on Foreign Investment (Cambridge University Press 3d. ed., 2010), at 172; J.W. Salacuse, Towards a Global Treaty on Foreign Investment: The Search for a Grand Bargain, in Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects (N. Horn ed., 2004), at 56; Andrew Newcombe & Lluis Paradell, Law and Practice of investment Treaties—Standards of Treatment (Kluwer, 2009), at 42; and Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008), at 18. 110 25 November 1959, ([963] UNTS 6575). 111 In other words, in the opinion of this author, the first-ever “bilateral investment treaty” to come into force (in the contemporary sense of the term) was the 1968 Agreement between the Netherlands and Indonesia, followed by the 1969 Agreement between Italy and Chad. 112 Norton, at 18; and Robert Renbert Wilson, Treaty-Investor Clauses in Commercial Treaties of the United States, 49 American Journal of International Law 366 (1955), who observed that when Congressional hearings were held on the issue of memorializing protection for “treaty investors” in law, only one witness, Charles R. Carroll, representing the U.S. National Foreign Trade Council, attended. See, also: Hawkins. at 19, observing: One of the most important functions of establishment provisions is to create conditions favourable to foreign investment, particularly direct private investment. The right to enter, travel, and reside in a country is obviously important if an enterprise is to be established there, particularly in the initial stage when managers and skilled workers may have to be provided. There must also be some assurance that in the event of legal difficulties that will be opportunity to obtain just treatment for access to the local courts there must be an opportunity to acquire property. These and other rights, and provided for in the establishment provisions of treaties.

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focused on bolstering treatment secured under treaties from capital importing countries. By this point, most developed States already maintained some form of reciprocal bilateral relationship, usually governed by treaty. It was the newly emerged, developing States with whom countries such as the United States urgently needed to negotiate some form of investment protection guarantee. It was in these countries that foreign assets were most likely in need of protection from outright nationalisation.113 One the peculiar characteristics of the way in which these treaties developed over the century was the belief that they were effectively a tool of rich countries for the subtle subjugation of smaller ones. It would have been more accurate to say, at least at that time, that since the capital exporting States already had arrangements between themselves, and because the prospects for investments in the underdeveloped world were most promising, far more treaties were negotiated in the 1960’s between developed and developing States. For example, in 1959, when the United Kingdom was agreeing to a commercial treaty with Iran and Germany was agreeing to a commercial treaty with Pakistan, the USA and France where actually agreeing to a commercial treaty as between themselves. As indicated by the new name given to this instrument (“Treaty of Establishment”), the policy focus of both parties was squarely on the protection of investment.114 Indeed, it was in response to increased nationalisation activities throughout the developing world that capital exporting States redoubled their efforts towards increasing the protections they demanded from partners to bilateral treaties. “At the same time, the treaties would provide conventional protection for [foreign] investment beyond that accorded even by the US interpretation of customary international law. Such guarantees would constitute openly recognized rules for the treatment of investment by BIT partners, thus creating a more stable and transparent and therefore a more favourable investment climate within those countries at the very minimum, the BITs would serve the educational function of informing developing countries of the type of legal climate that investors believed desirable.”115 So, with the ambiguous division between the regulation of measures affecting trade and the regulation of measures affecting investment largely

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Vandevelde, at 24–25. United States, Department of State, Press Release 820, 25 November 1959, 41 Dep’t St. Bull, 828 at 828–829. See, also: Herman Walker Jr., Convention of Establishment Between the United States and France, 54 American Journal of International Law 393, at 80, where the author explains that the previous US proposal for a commercial treaty with France, in 1927, had been propelled firstly by customs treatment issues, this treaty—shorn of provisions governing border trade measures, navigation, taxation and consular rights, was truly focused upon establishment and treatment of investment. 115 Vandevelde, at 26. 114


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solidified—at least in the minds of diplomats and policy-makers—by the end of the 1940’s, and other discrete issues—such as human rights, double taxation, intellectual property, consular protection and navigation—addressed in other international instruments, in the 1950’s the bilateral commercial treaty emerged, somewhat butterfly-like, into practice as a bilateral investment treaty. Its primary concerns were with establishment, typically regulated on the comparative basis of either MFN or national treatment and with a desire to shore up what arguably had been an international consensus concerning accepted conditions of compensation in the event of expropriation or nationalisation. The very idea of determining the propriety of expropriation was an outgrowth of the protection and security standard,116 which appears to have achieved the status of custom at some point in the 19th century. In the wake of Latin American revolutions, early experiences with nationalisation had alerted European and US diplomats to the importance of an explicit compensation standard for cases when an expropriation has occurred. This recognition spurred new treaty language, which had the effect of promoting the issue of compensation for expropriation from its original position, as part and parcel of the minimum standard of protection for aliens and their property, to one of equality with the protection and security standard. Given the mood of the day, with urgent need for development worldwide combined with increased uncertainty about the ownership of the means of production in many parts of the globe, it probably seemed to be a better idea to obtain consensus on a bilateral basis, through more focused commercial treaties, rather than attempting to achieve it multilaterally (either through a treaty or by means of a declaration of customary international law). The same sentiments117 which drove segregation of the issue of compensation for expropriation from the issue of protection and security also led treaty drafters to introduce a few other drafting ‘tricks.’ One of those techniques was to refer to “international law,” “justice,” or “equity” as part of the applicable law of any dispute under the treaty.118 The purpose of including such references in a treaty was to construct a halfway-house between a mandating a decision based on specific rules of law and a decision made ex aequo

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Wilson, The International Law Standard in Treaties of the United States, at 105. Schwarzenberger, Foreign Investments and International Law, at 109. 118 British Parliamentarians’ Commission on a World Investment Code, Draft Final Report, PG 5925.196C, available from the King’s College Archives, Cambridge University, at 10–11. The primary law relating to any investment could be the particular or general agreement covering that investment, together with the provisions of the Convention. It has normally been the custom to stipulate the law of one country or alternatively the ‘general principles of law recognized by civilized nations’ for purposes of interpretation in matters which are not entirely covered by the agreement or the Convention. 117

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et bono.119 Treaty drafters were not equating the customary international law MST (which concerned protection and security) with “general principles of law” or “justice and equity,” (which were intended to broaden the scope of justiciability for any given dispute).120 Reference was being made to international law, or principles of international law or the law of nations, as being either part of, or in addition to, the minimum standard of protection and security. The purpose of this early 20th century drafting innovation was no less and no more than to potentially gin up the discretion of the judge, commissioner or arbitrator who might some day have occasion to decide a dispute under the instant treaty.121 Inspiration for this innovation likely sprang from the use of similarly ambiguous terms in the international agreements which were giving jurisdiction to various post-revolutionary, Latin American mixed claims commissions during the same period. Another example of this same sort of drafting advance was the inclusion of prohibitions against arbitrary and/or discriminatory treatment starting in the 1920’s. This change appears to have represented a first, albeit tentative, step towards adopting treaty language that reflected how the principle of good faith conditions a State’s the exercise of general authority. Much in the same way that contemporary drafters ‘unpacked’ the standard of protection and security, by including a separate and specific obligation concerning compensation for expropriation, they also started unpacking the implicit relationship between the general principle of good faith and the exercise of sovereign authority, by including an explicit prohibition against arbitrary and/or discriminatory treatment. As we shall see, the next step would be to add a “fair and equitable treatment” provision to these treaties, starting in the 1950’s. It is important to stress, however, that even as late as the 1960’s and 1970’s, when publicists wrote about “the international minimum standard” or the customary international law MST, they were specifically referring to the protection and security standard, with or without a conjoined obligation to provide prompt, adequate and effective compensation in cases of expropriation.122 119 Earl Snyder, Foreign Investment Protection: Is Institutional Arbitration an Answer?, 40 North Carolina Law Review 665 (1962), at 681–682. Snyder was of the opinion that no halfway house was available. He advocated outright adoption of an ex aquao et bono standard instead. 120 Wilson, The International Law Standard in Treaties of the United States, at Appendix II. 121 Robert Renbert Wilson, The International Law Standard in Recent Treaties and Agreements of the United States 66 American Journal of International Law 526(1972), at 530–531. 122 See, e.g.: Schwarzenberger, Foreign Investments and International Law, at 34–36; or Kronfol, at 16–17. Referring to the Neer claim, Kronfol observes how: . . . recognition of this international standard frequently finds treaty expression, as in Article V of the US-Italian Treaty of Friendship, Commerce and Navigation (1948), which


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Between 1959 and 1981, Germany concluded more than 50 investment treaties with developed and less developed countries, almost immediately adopting the “fair gerecht und billig behandeln” standard, which appears to be somewhat more broad than “fair and equitable” or “juste et équitable” treatment, but has been used interchangeably by German drafters. Between 1961 and 1981, Switzerland had concluded approximately 30 treaties, mostly with developing countries, and were early adopters of the “juste et équitable” standard. Typically, the French and English programs are not claimed to have begun until 1972 and 1975,123 respectively, although both had already adopted the “fair and equitable”/“juste et équitable” standard in their commercial/establishment treaties since the mid-1950’s. Still, the French had concluded approximately 20 investment-exclusive treaties by 1981 while the English had concluded at least 15.124 The United States was not particularly active with its commercial treaty program in during the 1960’s and 1970’s, having already picked most of the ‘low hanging fruit’ with the approximately 150 overlapping commercial treaties it had concluded over its first two centuries, including most developed countries in both Europe and Asia. The first round of attempts to negotiate treaties dealing exclusively with investment was launched in 1980, with a second attempt launched in 1982. By 1984, ten such treaties had been submitted to the Senate for approval.125 By 1991, Germany had 66 investment treaties in force; Switzerland had 34; France had 28; the United Kingdom had 37; the Netherlands had 30; and the United States had 11.126 Today, Germany has at least 136 treaties; Switzerland 88; France 94; the United Kingdom 81; the Netherlands 91 and the USA 41.127 Both China and the Czech Republic have

provides that the nationals of each High Contracting Party shall receive within the territory of the other ‘the full protection and security required by international law.’ In more specific terms, this means fair treatment to the aliens, free access to the courts, respect for human rights and reasonable means of redress in the case of manifest denial, delay or abuse of justice. 123 The UK model was launched with a White Paper issued in 1971, at the height of the United Nations General Assembly’s fervour for NIEO policies. See: Eileen Denza & Shelagh Brooks, Investment Protection Treaties: United Kingdom Experience, 36 International and Comparative Law Quarterly 908 (1987), at 110. 124 F.A. Mann, British Treaties for the Promotion and Protection of Investments, 52 British Yearbook of International Law 241 (1981), at 241. 125 Kenneth J. Vandevelde, The Bilateral Investment Treaty Program of the United States, 21 Cornell International Law Journal 201 (1988), at 201–202. 126 Bilateral Investment Treaties 1959–1991. No. ST/CTC/136, pt. 1–37 (1992). 127 Given how late the USA came to adopting a contemporary investment treaty model, the degree to which United States practice is analysed—as if its activities were some sort of harbinger of international investment policy—is puzzling. The status of the USA, as an important (if not the seminal) player in the field, should also be evaluated in light of the fact that the US Administration was not a leader in the revival of movements towards achieving codification of international investment law, or a widely-subscribed, multilateral agreement

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approximately 90 treaties in force; Italy has over 80 in force; Belgium has approximately 70 in force; and Poland, the Russian Federation, Austria and Argentina each have approximately 60 treaties currently in force.128 Estimates from the United Nations Conference on Trade and Development indicate that there are now at least 2750 investment treaties currently in force worldwide,129 although it should be noted that this total does not include commercial treaties with investment establishment and treatment provisions;130 nor does it tally the number of countries bound to investment establishment and treatment obligations under regional agreements (such as the ASEAN Agreement on Investment), comprehensive economic agreements (such as the NAFTA) or sectoral agreements (such as the Energy Charter Treaty). In addition, not all international investment agreements currently in force include investor-state dispute settlement mechanisms. A steady churning of existing agreement can also be expected to continue, as many agreements include ‘sunset’ clauses requiring States to decide whether to renew such agreements on a regular from time to time. XI. The Calvo Doctrine and the New International Economic Order The beginning of the 1970’s was a momentous time for international law practitioners, but not because of the Barcelona Traction case. It witnessed the conjoined developments of the first investment treaties with investorstate arbitration clauses included, as described above, and the full flowering of the political ideology known as the New International Economic Order (NIEO) movement. The NIEO movement took shape when the United Nations General Assembly issued the firstof its resolutions declaring the permanent sovereignty of States over their natural resources in 1952,131 which was followed two years later by a resolution less defiantconcerning the need for private investment,132

on investment. Indeed, there is significant evidence that the USA was an obstructionist force for most of the 1950’s and 1960’s, despite strong business support for a more positive and active role to be played. 128 http://www.investmentclaims.com, “Bilateral Investment Treaties” section; visited 24 December 2010. 129 UNCTAD, Recent Developments in International Investment Agreements § 3 (United Nations. 2009), at 2–3. 130 The ILC made this observation in issuing its Draft Articles on Diplomatic Protection in 2006. International Law Commission, Draft Articles on Diplomatic Protection with Commentaries (United Nations. 2006), at 90. 131 U.N. Gen. Ass. Res. 626 (VII), 21 December 1952. 132 U.N. Gen. Ass. Res. 824 (IX), 11 December 1954.


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and then in 1962 with a similar compromise.133 The movement reached its zenith in 1974, with the General Assembly’s endorsement of the Charter of Economic Rights and Duties of States (CERDS).134 The troubled political relationship between the international rule of law and the exercise of sovereign authority, reflected in the NIEO movement, could be surmised in the following observation of an Indian legal scholar, S.N. Guha Roy, writing in 1960: The history of the establishment and consolidation of empires overseas by some of the members of the old international community and of the acquisition therein of vast economic interests by their nationals teems with instances of a total disregard of all ethical considerations. A strange irony of fate now compels those very members of the community of nations on the ebb tide of their imperial power to hold up principles of morality as shields against the liquidation of interests acquired and held by an abuse of international intercourse. Rights and interests acquired and consolidated during periods of such abuse cannot for obvious reasons carry with them in the mind of the victims of that abuse anything like the sanctity the holders of those rights and interests may and do attach to them. To the extent to which the law of responsibility of states for injuries to aliens favours such rights and interests, it protects an unjustified status quo or, to put it more bluntly, makes itself a handmaid of power in the preservation of its spoils.135

Both the earlier Calvo Doctrine and the NIEO movement must be understood in their proper, political, context. Although they both found expression in legal doctrine, they were rooted in realpolitik. Calvo’s basic postulate was that, because States were all notionally equal as a principle of international law, and each enjoyed absolute sovereignty within its territorial jurisdiction, no State could demand of another that its nationals be treated in a manner different than the host State treated its own nationals.136 Calvo thus implicitly acknowledged that a prohibition against discrimination existed, as a matter of international law, which required equality of treatment as between foreigners and nationals.137 His primary objection was to the notion that one

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U.N. Gen. Ass. Res. 1803(XVII), 14 December 1962; 2(1963) ILM 223. Charter of Economic Rights and Duties of States, G.A. Res. 3281(xxix), UN GAOR, 29th Sess., Supp. No. 31(1974) 50. 69(1975) Am. J. Int’l. L. 484; 14(1975) I.L.M. 251. 135 Guha Roy, at 866. See, also: Schachter, at 419–422. 136 Shea, at 62–72. Shea succinctly explained that Calvo’s Doctrine was about two principles: equality and nonintervention. Both aspects of the doctrine were the focus of much of the efforts expended during the ten Inter-American conferences held between 1889 and 1949. By the end of this period, however, only the non-intervention principle had been largely resolved by U.S. agreement to submit disputes to pacific means of dispute settlement such as arbitration. 137 See, also: David J. Bederman, The Spirit of International Law (University of Georgia Press. 2002), at 117 & 118. The objectives of fairness in international law as, for example, a long and convoluted pedigree. It began life is a central postulate of sovereignty, the equality of states under 134

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State could effectively impose its will on another State, by requiring treatment of its nationals to conform to an extrinsic standard (i.e. a minimum standard of treatment). If one recalls the practical realities of the day, under which adherence to notionally objective minimum standard was often being imposed through the barrel of a gun, greater sympathy for Calvo’s position is commonly discovered.138 The Calvo Doctrine was focused upon adherence to the principle of sovereign equality, rather than the means by which international obligations would be enforced. This conception of sovereign equality was the basis for the original usage of the term “national treatment.”139 While the term has now come to mean an obligation to provide foreigners with the best treatment made available to any nationals, it formerly meant the obligation to provide foreigners with the same treatment made available to nationals—no better and no worse.140 In light of the so-called human rights revolution in international law, however, this conception of ‘national treatment’ could not continue—at least not in respect of the treatment of individuals, as a matter of customary international law.141 As a legal proposition, the Calvo Doctrine was entirely consistent with the principle of good faith, allowing that there was nothing preventing States from agreeing to accord a certain level of treatment to the other’s national, or (theoretically) to agree upon any number of means of dispute settlement concerning conformity with such treatment obligations. Hence the doctrine was relied upon to reject purported exercises of diplomatic protection, especially during a time when that really meant threats, or the actual use of,

international law. This was the logical correlate of absolute territorial sovereignty enjoyed by states . . . ... [As] for nondiscrimination, states are uniquely privileged in customary international law to afford different kinds of treatment in respect to their neighbors. International actors may be juridically equal, but the reality of international life is quite different. 138 Brookens explains how the Calvo Doctrine found its roots in the earlier Drago Doctrine, which disputed the purported right of European States to use military force to collect on sovereign debts on behalf of its nationals. Ironically, the military-backed debt collection activities of European States arguably precipitated enunciation by the United States of the Monroe Doctrine, which unilaterally declared a special interest of the United States in the military and economic affairs of other American States. The effective response to United States policy was the articulation of Calvo’s Doctrine. Benoit O. Brookens, Diplomatic Protection of Foreign Economic Interests: The Changing Structure of International Law in the New International Economic Order, 20 Journal of Interamerican Studies and World Affairs 37 (1978), at 37–41. 139 Samuel K.B. Asante, International Law and Foreign Investment: A Reappraisal, 37 International and Comparative Law Quarterly 588 (1998), at 591. 140 F.V. Garcia-Amador, et al., Recent Codification of the Law of State Responsibility for Injuries for Aliens (Oceana Publications, Inc. 1974), at 158. 141 Id., at 159.


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force by rich/powerful countries against poor/weak ones.142 Subsequently it was used as a basis for rejecting diplomatic protection through arbitration, in absence of a prior agreement to settle disputes in such a manner.143 And finally, it was used as a basis for rejecting overtures for the conclusion of bilateral treaties of commerce, establishment and later, investment. Logically, however, it never prohibited any State from willingly entering into such agreements, provided that the political circumstances were such that an equitable arrangement could truly be struck.144 Similarly, the NIEO movement was founded upon a notion of sovereign equality145 that was used to justify rejection of the imposition of an international legal regime, which—while objectively fair in principle—could lead to an inequitable result in practice.146 While the primary parties to the cataclysm that was the Second World War focused their post-war efforts on finding the means to promote transnational investment in order to boost recovery and development, there was a second political event already well underway: the process of decolonization. The historical development of investment treaty law, recalled above, was almost exclusively informed by the former phenomenon alone. Decolonization was a political and economic fact that required some form of expression in international law.147 An outlet was found in the largely symbolic declarations of the United Nations General Assembly.148 The CERDS provided, in part:

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{Montt, 2009 #2504} at 32. Wilson, The International Law Standard in Treaties of the United States. at 16. “With various Latin American states the United States contracted not to resort to war or to reprisals for treaty violations unless justice and satisfaction were denied ‘in violation of the laws and of national right.” 144 See, generally: Garcia-Amador, International Responsibilty: Special Rapporteur’s Report, at 200, citing Article 9 of the Draft League of Nations Convention on the Rights and Duties of States. 145 Gibson, at 17–18, disparaging how Article IX of the 1933 Pan-American Convention on the Rights and Duties of States, to which the USA was a party, provided that “. . . nationals and foreigners are under the same protection of the law and the national authorities and foreigners may not claim rights other or more extensive than those of nationals.” He saw this provision as: “obviously in conflict with the principles that have been discussed above. International law, as is the case with any other l, must meet the test of time and practice. The convention has not been so tested. Regardless of the merit of such a provision as a factor in international peace and relations, it is a conventional departure from an impressive and well-established body of law.” 146 Baade provided the example of how most any expropriation of a monopoly right to exploit natural resources, or provide services, in a former colony was going to run afoul of an anti-discrimination rule because the only investor negatively affected would be the nowforeign enterprise based in the territory of the former colonial master State. {Baade, 1967 #2503} at 24–25. 147 For further background on the NIEO movement generally, see: Brookens. 148 {Higgins, 1963 #2505} at 5. 143

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todd weiler Chapter I—Fundamentals of International Economic Relations Economic as well as political and other relations among States shall be governed, inter alia, by the following principles: a. Sovereignty, territorial integrity and political independence of States; b. Sovereign equality of all States; ... h. Peaceful settlement of disputes; ... j. Fulfillment in good faith of international obligations; k. Respect for human rights and international obligations; ... Chapter II Economic Rights and Duties of States Article 2 1. Every State has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities. 2. Each State has the right: a. To regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and regulations and in conformity with its national objectives and priorities. No State shall be compelled to grant preferential treatment to foreign investment; b. To regulate and supervise the activities of transnational corporations within its national jurisdiction and take measures to ensure that such activities comply with its laws, rules and regulations and conform with its economic and social policies. Transnational corporations shall not intervene in the internal affairs of a host State. Every State should, with full regard for its sovereign rights, cooperate with other States in the exercise of the right set forth in this subparagraph; c. To nationalize, expropriate or transfer ownership of foreign property, in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the Stateconsiders pertinent. In any case where the question of compensation gives rise to a controversy, it shall be settled under the domestic law of the nationalizing State and by its tribunals, unless it is freely and mutually agreed by all States concerned that other peaceful means be sought on the basis of the sovereign equality of States and in accordance with the principle of free choice of means.

Upon closer examination, therewas verylittle in the language of the CERDS that would have completely precluded the universal recognition of a minimum standard of international law, or recognition that individualscould enjoy independent rights in international law, vis-à-vis their relationships with States. This is particularly true of elements of the minimum standard reflected in the human rights treaties to which the vast majority of CERDS proponents were also a party. Arguably the only aspect of the minimum standard with which it was fundamentally at odds was the proposition that a determination of appropriate


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compensation for takings must be made by exclusive recourse to international standards.149 While there may remain some dispute as to whether such a prescription is part of the customary minimum standard, its inclusion in most of the 2750 investment agreements currently in force may have rendered the debate moot—as a practical matter—in the majority of cases. On the other hand, given the recent spate of expropriations, and of denunciations of either investment agreements or of the ICSID Convention—by a handful of South American States—this issue may be ripe for a return to relevance.150 The principle of sovereign equality enunciated in the CERDS also appears to have been entirely consistent with the Calvo Doctrine. Article 2 confirms the right of States to bind themselves to international standards for their treatment of foreign investment, while re-asserting the sovereign right to regulate foreign investment in the public interest. Moreover, the Charter confirms the application of the “fundamental” international law principle that States must fulfill their international obligations in good faith, which would preclude any exercise of sovereign authority, under Article 2, in a manner that would constitute an abuse of rights—presumably including overt discrimination on the basis of nationality.151 Apropos of this proposition, although Weston expressed grave concerns about the CERDS at the time, he nonetheless observed: [For] all that one may appeal for heightened fact/policy sensitivity on all sides, there is at least one aspect of the doctrine of alien non-discrimination that in principle should not be open to debate. Actually, it is central to heightened fact/policy sensitivity, the diacritical skein that winds through all the questions raised so far. I refer to the concept of arbitrariness, praised by Orrego Vicuna as a “profound moral judgment about what is just and unjust.” Whether the

149 In a paper published twenty years ago, Prof. Dolzer made out an excellent case for the proposition that the so-called ‘Hull Formula,’ requiring “prompt, adequate and effective” compensation for takings of foreign-owned property, did indeed constitute a rule of customary international law, at least as late 1963, when United Nations Resolution 1803 (XVII), on the sovereign regulation of natural resources, was issued. See: R. Dolzer, “New Foundations of the Law of Expropriation of Alien Property International Law of Expropriation” 75 (1981) Am. J. Int’l L. 553 at 557–562. 150 This caveat notwithstanding, there nevertheless remains the issue of whether international law still regulates the means chosen by a State to nationalize or expropriate, as well as the manner in which it determines to pay, and pays, compensation. A quick review of the constitutions, civil codes and diplomatic practices of even these seemingly outlining States would reveal that all adhere to a belief—at least on paper—that it is wrongful for a State to engage in a discriminatory exercise of sovereign authority constituting an abuse of right. 151 The applicability of the principle of good faith to exercise of regulatory authority set out in Article 2, in a commercial context, is confirmed by the obligation contained within Article 6, which provides, in part: “All States share the responsibility to promote the regular flow and access of all commercial goods traded at stable, remunerative and equitable prices, thus contributing to the equitable development of the world economy, taking into account, in particular, the interests of developing countries.”

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todd weiler question is to determine which alien interest shall be subjected to deprivation, or to decide who shall receive what compensation therefore (if any), or to evaluate the procedures for reaching these determinations and decisions (this last issue being one we associate with “denial of justice” claims), it cannot-must not-be answered arbitrarily (i.e., capriciously or without reasons sanctioned by the common interest of an increasingly interdependent and interpenetrating world community).152

The very notion of the international rule of law reflects the fundamental tension that is bound to exist between the principle of sovereign equality of States, which posits the State, ab initio, as the legitimate holder of absolute regulatory authority, and the principle of good faith, which conditions the manner in which such authority can be exercised, by reference to external rules. Positivists tend to favour rules agreed as binding between sovereigns, whereas naturalists believe some rules exist as a priori limitations on the exercise of sovereign authority.153 The crux of NIEO doctrine was not fundamentally different from the status quo ante conception of international law, explained above as a rule of law regime that evolved over centuries of State practice involving equal sovereigns.154 The root of the problem was political. It began with European powers, and the United States, using military force to secure capitulation treaties with Asian countries. Military force was then used as a means of diplomatic protection in Latin America, essentially resurrecting the retrograde regime of reprisal long since banished by commercial treaty practice in Europe. Next came the imposition, by threat and/or use of force, of mixed claims commissions in Latin America. Finally, as African and other Asian countries emerged from centuries of colonial rule, the threat of military intervention hung over disputes involving the equitable exploitation of natural resources, the control of which remained in colonial hands, albeit in the private sector.

152 Burns H. Weston, The Charter of Economic Rights & Duties of States & the Deprivation of Foreign—Owned Wealth, 75 American Journal of International Law 437(1981), at 445–446. 153 The concept of customary international law can be seen as an imaginative attempt, primarily by positivists, to bridge the gap between the two perspectives. In the orthodox theory of customary international law formation, a prescribed “test” is employed through which specific rules can be declared as binding amongst States, without the need for evidence of a formal agreement between them. The problem is that the test is largely unworkable and subject to at least as much indeterminacy as any inductive approach, through which a similar set of universally binding rules could otherwise be established. What happens instead—as a matter of work-a-day reality—is that lawyers and decision-makers rely instead upon an implicit rule of iteration, whereby the repeated declaration of the existence of either a customary rule or application of general principle (and it does not matter which) leads one to the conclusion that such a rule must therefore truly exist and be binding in resolution of future disputes. 154 {Sheikh, 1984 #2506} at 109–110.


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In short, the germ of the NIEO movement lay in the fact that Imperial States consistently invoked or employed otherwise sound principles and instruments of international law in ways calculated to lend legitimacy to political outcomes of truly dubious moral legitimacy. An international rule of law regime, accreted over centuries of interaction amongst largely equal sovereigns, could not be so easily grafted onto the circumstances that existed in post-colonial periods. The notional equality of sovereign States theoretically supported extension of the status quo ante regime of international law to the relationships that arose between newly independent States and their former colonial masters (and/or the two global hegemons, the USA and USSR). However, the practical inequality that typified these relationships (in terms of social, economic and/or military inequalities) revealed just how ill fitting the ‘old’ regime of international law would be. That is how a fundamentally political conflict—between ‘new’ and ‘old’ or ‘less developed’ and ‘developed’ States—was transposed into what would become a conflict over legal doctrine. XII. Conclusion A straight line could arguably be drawn between the 19th century doctrines of Argentinean publicist, Carlos Calvo, and the NIEO movement. The former could be seen as Latin America’s response to the inequitable use of international law devices, by the United States and European former-colonizers, to legitimize their repeated exercises of brute military and/or economic force. The latter could be seen as a similar expression of the ‘Third World’ response to similar tactics used by the very same States. One demonstration of the similarity of these two movements was how the reasoning behind both doctrines was used to prevent multilateral consensus being reached—either on a codification of the customary law of State responsibility for the treatment of aliens, in the 1930’s, or on multilateral investment code, in the 1950’s and 1960’s.155 Yet another demonstration of the universality of these doctrines can be seen in the recent process of retrenchment, if not outright retreat, undertaken by Canada and the United States in respect of the language used in their treaty models, once both found themselves in the unfamiliar role of

155 See, e.g.: Dunn, The Protection of Nationals: A Study in the Application of International Law, at 64; Green H. Hackworth, Responsibility of States for Damages Caused in their Territory to the Person or Property of Foreigners: The Hague Conference for the Codification of International Law, 24 American Journal of International Law 500(1930), at 515; Bodansky & Crook, at 776–778; and Schachter, at 421–424.

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Respondent under the NAFTA’s investment chapter.156 Indeed, over a century ago it was observed that the United States would not likely be willing to subject its own government agencies to the same customary international law minimum standards of treatment it sought to be applied to Latin American States under the guise of diplomatic protection.157 H.H. Almond, The Anglo- Japanese Commercial Treaty of 1963, 13 International and Comparative Law Quarterly 925 (1964). Guillermo Aguilar Alvarez & William W. Park, The New Face of Investment Arbitration: Capital Exporters as Host States Under NAFTA Chapter 11 (15 May 2002, 2002). H.E. Jiménez de Aréchaga, International Responsibility (Max Sorensen ed., St. Martin’s Press, 1968). Samuel K.B. Asante, International Law and Foreign Investment: A Reappraisal, 37 International and Comparative Law Quarterly 588 (1998). David J. Bederman, The Spirit of International Law (University of Georgia Press, 2002). Bilateral Investment Treaties 1959–1991. No. ST/CTC/136, pt. 1–37 (1992). Daniel Bodansky & John R. Crook, Symposium: The ILC’s State Responsibility Articles: Introduction and Overview, 96 American Journal of International Law 773 (2002). M. Brandon, Recent Measures to Improve the International Investment Climate, Journal of Public Law 125 (1960). Benoit O. Brookens, Diplomatic Protection of Foreign Economic Interests: The Changing Structure of International Law in the New International Economic Order, 20 Journal of Interamerican Studies and World Affairs 37 (1978). E.A.S. Brooks, Subsidiary Judicial Authorities of the United Nations Organization to Hear and Decide Claims by Individuals and Corporations against States, 3 International and Comparative Law Quarterly 523 (1950). Geoffrey Butler & Simon Maccoby, The Development of International Law (Longmans, 1928). Thomas E. Carbonneau, The Convergence of the Law of State Responsibility for Injury to Aliens and International Human Rights Norms in the Revised Restatement, 25 Virginia Journal of International Law 99 (1984–1985). Haim H. Cohn, Grotian Concept of Good Faith, 7 Tel Aviv University Studies in Law 9 (1985–1986). John W. Cutler, The Treatment of Foreigners: In Relation to the Draft Convention and Conference of 1929, American Journal of International Law 225 (1933). Eileen Denza & Shelagh Brooks, Investment Protection Treaties: United Kingdom Experience, 36 International and Comparative Law Quarterly 908 (1987). Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008).

156 Indeed, Schacter presciently observed in 1960 that it was doubtful that any capital exporting State would be truly willing to have the standards contained within the Abs-Shawcross Draft, the second Harvard Draft or the OECD Draft conventions applied to their own measures, should there come a day when they became capital importers themselves. Schachter. at 423. See, e.g.: Guillermo Aguilar Alvarez & William W. Park, The New Face of Investment Arbitration: Capital Exporters as Host States Under NAFTA Chapter 11 (15 May 2002, 2002); and {Schwebel, 2005 #2502}. 157 Amos S. Hershey, The Calvo and Drago Doctrines, 1 American Journal of International Law 26(1907), at 32–33. See, also: The Cadenhead case (Great Britain v United States), Case No. 37, Decision, 1 May 1914, 8 (1914) A.J.I.L. 663 at 664–665; and Hersch Lauterpacht, The Function of Law in the International Community (Clarendon Press, 1933), at 122.


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Frederick Sherwood Dunn, The Protection of Nationals: A Study in the Application of International Law (Johns Hopkins Press, 1932). ——, The Diplomatic Protection of Americans in Mexico (Columbia University Press, 1933). Austin T. Foster, Some Aspects of the Commercial Treaty Program of the United States: Past and Present, 11 Law and Contemporary Problems 647 (1948). F.V. Garcia-Amador, International Responsibilty: Special Rapporteur’s Report, II Yearbook of the International Law Commission 173 (1956). ——, International Responsibilty: Special Rapporteur’s Second Report, II Yearbook of the International Law Commission 104 (1957). ——, International Responsibility: Special Rapporteur’s Sixth Report, II Yearbook of the International Law Commission 1 (1961). ——, International Responsibility: Special Rapporteur’s Fifth Report, II Yearbook of the International Law Commission 41 (1960). ——, International Responsibility: Special Rapporteur’s Fourth Report, II Yearbook of the International Law Commission 1 (1959). ——, International Responsibility: Special Rapporteur’s Third Report, II Yearbook of the International Law Commission 47 (1958). ——, et al., Recent Codification of the Law of State Responsibility for Injuries for Aliens (Oceana Publications, Inc. 1974). William Marion Gibson, Aliens and the Law: Some Legal Aspects of the National Treatment of Aliens in the United States (University of North Carolina Press, 1940). Great-Britain, A collection of all the treaties of peace, alliance, and commerce, between Great Britain and other powers, from the revolution in 1688, to the present time §1 (J. Almon, 1772). Green H. Hackworth, Responsibility of States for Damages Caused in their Territory to the Person or Property of Foreigners: The Hague Conference for the Codification of International Law, 24 American Journal of International Law 500 (1930). Harry C. Hawkins, Commercial Treaties and Agreements: Principles and Practice (Rinehart & Company, 1951). Amos S. Hershey, The Calvo and Drago Doctrines, 1 American Journal of International Law 26 (1907). Charles H. Hyde, International Law, Chiefly as Interpreted and Applied by the United States § 1 (Little Brown 2 ed., 1947). International Law Commission, Draft Articles on Diplomatic Protection with Commentaries (United Nations, 2006). Philip C. Jessup, Responsibility of States for Injuries to Individuals, 46 Columbia Law Review 903 (1946). William T. Ketcham, Arbitration Between a State and a Foreign Private Party, in Rights and Duties of Private Investors Abroad (Southwestern Legal Foundation International and Comparative Law Center ed., 1965). Zouhair A. Kronfol, Protection of Foreign Investment: A Study in International Law (Sijthoff, 1972). Hersch Lauterpacht, The Grotian Tradition in International Law, 23 British Yearbook of International Law 1 (1946). ——, The Function of Law in the International Community (Clarendon Press, 1933). Richard B. Lillich, The Human Rights of Aliens in Contemporary International Law (Manchester University Press, 1984). ——, The Current Status of the Law of State Responsibility for Injuries to Aliens (Richard B. Lillich ed., University Press of Virginia 1983). F.A. Mann, British Treaties for the Promotion and Protection of Investments, 52 British Yearbook of International Law 241 (1981). Stanley D. Metzger, Multilateral Conventions for the Protection of Private Foreign Investment, 9 Journal of Public Law 133 (1960). Arthur S. Miller, Protection of Private Foreign Investment by Multilateral Convention, 53The American Journal of International Law 371 (1959).

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Stephen C. Neff, Peace and Prosperity: Commercial Aspects of Peacemaking (Randall Lesaffer ed., Cambridge University Press, 2004). Andrew Newcombe & Lluis Paradell, Law and Practice of investment Treaties- Standards of Treatment (Kluwer, 2009). Joseph J. Norton, Doing Business and US Commercial Treaties: The Case with Member States of the EEC, 5 Case Western Reserve Journal of International Law 4 (1972). E.I. Nwogugu, The Legal Problems of Foreign investment in Developing Countries (Oceana, 1965). Milton Offutt, The Protection of Citizens Abroad by the Armed Forces of the United States (Johns Hopkins Press, 1928). S.N. Guha Roy, Is the Law of Responsibility of States for Injuries to Aliens a Part of Universal International Law?, 55 American Journal of International Law 863(1961). Pan-American-Union, Economic Agreement of Bogotá, 25 Pan American Union Law and Treaty Series (1948). Esther Pascua, Peace Among Equals (Philip de Souza & John France eds., Cambridge University Press, 2008). J.W. Salacuse, Towards a Global Treaty on Foreign Investment: The Search for a Grand Bargain, in Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects (N. Horn ed., 2004). Oscar Schachter, Private Foreign Investment and International Organization, 45 Cornell Law Quarterly 415 (1959–1960). Georg Schwarzenberger, The Protection of Human Rights in British State Practice, 10 Review of Politics 174 (1948). ——, Foreign Investments and International Law (Stevens & Sons, 1969). Donald R. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (University of Minnesoate Press, 1955). Ibrahim F.I. Shihata, Legal Treatment of Foreign Investment: World Bank Guidelines (Martinus Nijhoff, 1993). Earl Snyder, Protection of Private Foreign Investment: Examination and Appraisal, 10 International and Comparative Law Quarterly 469 (1961). ——, Foreign Investment Protection: Is Institutional Arbitration an Answer?, 40 North Carolina Law Review 665 (1962). M. Sornarajah, The International Law on Foreign Investment (Cambridge University Press 3d, ed., 2010). Treaty of Amity, Commerce and Navigation between His Britanic Majesty and the United States of America (52 CTS 243 ed., 1794). United-Nations, Havana Charter for an International Trade Organisation, 2 The International Law Quarterly 283 (1948). Kenneth J. Vandevelde, The Bilateral Investment Treaty Program of the United States, 21 Cornell International Law Journal 201 (1988). ——, US International Investment Agreements (Oxford University Press, 2009). Jacob Viner, Conflicts of Principle in Drafting a Trade Charter, 25 Foreign Affairs 612 (1946– 1947). Herman Walker Jr., Convention of Establishment Between the United States and France, 54 American Journal of International Law, 393. Cynthia D. Wallace, The Multinational Enterprise and Legal Control (Martinus Nijhoff, 2002). Dong Wang, China’s Unequal Treaties: Narrating National History (Rowman & Littlefield, 2008). Burns H. Weston, The Charter of Economic Rights & Duties of States & the Deprivation of Foreign—Owned Wealth, 75 American Journal of International Law 437 (1981). Robert Renbert Wilson, Property-Protection Provisions in United States Commercial Treaties, 45 American Journal of International Law 83 (1951). ——, A Decade of New Commercial Treaties, 50 American Journal of International Law 927 (1956). ——, Treaty-Investor Clauses in Commercial Treaties of the United States, 49 American Journal of International Law 366 (1955).


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——, The International Law Standard in Treaties of the United States (Harvard University Press, 1953). ——, The International Law Standard in Recent Treaties and Agreements of the United States 66 American Journal of International Law 526 (1972). UNCTAD, Recent Developments in International Investment Agreements § 3 (United Nations, 2009).

STATES, SANCTIONS AND SOFT LAW: AN ANALYSIS OF DIFFERING APPROACHES TO BUSINESS AND HUMAN RIGHTS FRAMEWORKS Stéphane Brabant, Anna Kirk and Jonathan Proust1 I. Introduction It is now well accepted that corporate entities, and in particular transnational corporations [TNCs], can have a significant impact upon the enjoyment of human rights by private individuals. This impact can occur in a variety of ways including the direct infringement of human rights, the circumvention of human rights laws through stabilisation agreements,2 and accepting benefits arising from the human rights abuses of others (for example, by a State). It is no surprise that such entities have considerable power and influence in many areas, including human rights, given their dominant position in the global economy—the two hundred largest TNCs currently represent a quarter of trade worldwide.3 The challenge facing corporations and the international community is how to ensure that legitimate business interests complement, rather than harm, human rights. This chapter compares and contrasts two different approaches to managing this challenge: (i) the approach suggested by the late Professor Thomas Wälde that “soft law” can effectively lead to “hard sanctions” and (ii) the tripartite framework advanced by Professor John Ruggie pursuant to his mandate as the Special Representative of the Secretary General on Business and Human Rights. Although these approaches differ in emphasis and methodology, this chapter concludes that they are nonetheless complementary and important lessons can be drawn from both. There has been a significant growth in the number of human rights/labour related standards over the past 10–15 years. This trend began in the second half of the 20th century, but has recently gained momentum as the media 1 Stéphane Brabant is a Partner at Herbert Smith LLP. Anna Kirk is a Senior Associate and Jonathan Proust is a lawyer and PhD candidate also at Herbert Smith LLP. This article was up-to-date at the time of writing in 2010. 2 Shemberg, A., Stabilization Clauses and Human Rights—A research project conducted for IFC and the United Nations Special Representative to the Secretary General on Business and Human Rights (March 11 2008), Executive Summary, p. vii. 3 Verna, G., Bertrand, J., “Ethique de la production en sous-traitance: le cas de l’industrie du vêtement” available at http://www.fsa.ulaval.ca/personnel/VernaG/PUB/codes.html.

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and NGOs have brought the plight of workers and others affected by corporate activities into the public eye. However, as yet, none of these initiatives have been sufficient to regulate corporations in the human rights area or to fill the gap in accountability that is still perceived to exist. The challenge of reconciling business and human rights interests extends beyond large TNCs that are the traditional focus of such debates to smaller business operations and those that supply large TNCs. The trend towards outsourcing or sub-contracting parts of the business process (particularly to companies operating in States where local human rights laws may be less stringent) makes this point all the more important. The favourable economic terms of these sub-contracting agreements allow companies to be more competitive in a global market—but such competitiveness can come at a cost for human rights. In 2005, the UN Commission on Human Rights4 called for the appointment of a Special Representative of the Secretary on the issue of human rights and transnational corporations and other business enterprises. This mandate (which has since been endorsed by the Human Rights Council) led Kofi Annan to appoint Professor John Ruggie, a professor of human rights and international affairs at the Kennedy School of Government (Harvard University), as his Special Representative on this issue. As is explained in further detail below, after an initial term of three years, the Special Representative produced a report recommending a tripartite framework of “protect, respect and remedy” to assist businesses in ensuring that their legitimate business activities do not harm human rights.5 The Special Representative’s mission has been renewed for an additional three years,6 during which time he has been charged with “operationalising” this framework. Ruggie’s final report is due in 2011. It is understood that, following a survey of the interests of various relevant actors, Ruggie will present a number of proposals for securing genuine respect for human rights within transnational companies.7

4 See Commission on Human Rights Resolution 2005/69 (20 April 2005). The mandate of the Special Representative was vast and included identifying corporate responsibility standards; considering the appropriate role of states and regulation in this area; clarifying concepts such as complicity and sphere of influence; and developing impact assessment criteria and a best practice compendium. 5 Ruggie, J., Protect, Respect and Remedy: a Framework for Business and Human Rights, A/HRC/8/5, 7 April 2008. 6 See Human Rights Council Resolution 8/7 (18 June 2008). 7 See Professor Ruggie’s consultation in Dehli which took place 5/6 February 2009, available at http://www.reports-and-materials.org/Report-Ruggie-consultation-Delhi-5-6-Feb-2009.pdf. Also see Ruggie, J., Business and Human Rights: Further steps toward the operationalization of the “protect, respect and remedy” framework, A/HRC/14/27, 9 April 2010.

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Unsurprisingly, both prior to and throughout the mandate of Ruggie, many scholars have commented on the interrelationship between business and human rights and have themselves proposed alternative ways forward. One such scholar and commentator was Professor Thomas Wälde. Wälde took a slightly different (but not necessarily inconsistent) approach from Ruggie by concentrating on encouraging the emergence of soft law standards, as a powerful regulatory mechanism for corporate responsibility in the area of human rights. The expression “soft law” can be contrasted with “hard law”—the latter being laws in the traditional sense that they are legally enforceable in the courts and carry with them specific penalties for breach. Soft law, on the other hand, is a concept often found in international law and refers to documents that are not “law” in a traditional sense but “their importance within the general framework of international legal development is such that particular attention requires to be paid to [them].”8 Soft law “recommends”, but does not “require”. As such, violations of soft law do not traditionally result in legal sanction. Soft law is therefore often seen as aspirational, seeking to set out best practice rather than an expected or minimum standard of conduct. However, Wälde set himself apart from the traditional conception of soft law by advancing the notion that soft law can be just as effective at changing behaviour as traditional hard law and can lead to substantial penalties/sanctions for those that violate it.9 He was a fervent defender of soft law, when combined with a legal arsenal of penalties.10 This chapter considers the differing approaches taken by Ruggie and Wälde and summarises where they are similar and where they diverge. It concludes with the suggestion that combining the two visions could provide an effective method of ensuring the compliance of corporations and TNCs with human rights concepts.

8

Shaw, M., International Law, Cambridge University Press (6th ed, 2008), p. 117. See, for example, Wälde, T.W., “The Role of International ‘Soft Law’ in Natural Resources and Energy Investment”, OGEL, Vol. 2, Issue 4. See also Wälde, T.W., Worika, I. et al., “Architecture for the Kyoto Protocol”: 8 RECIEL 168–180 (1999) (available at www .gasandoil.com/ogel). 10 See Wälde, T.W., “Managing the risk of sanctions in the global oil & gas industry: Corporate response under political, legal and commerical pressures” Texas Intl Law J. 184–230 (2001). 9

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stéphane brabant, anna kirk and jonathan proust II. Soft Law but Hard Sanctions: Wälde’s Approach to Human Rights Regulation

This section considers the views expressed by Wälde on the power of soft law to hold corporations accountable in the area of human rights. As noted above, Wälde insightfully commented that, although soft law instruments have traditionally been seen as unenforceable, the reality in the area of business and human rights is often far different. A breach of soft law, such as a code of conduct, can have real and serious consequences for a corporation that affect its bottom line. As a result, the distinction between “hard” law and “soft” law in this context is often unhelpful.11 This section begins by briefly explaining the development of codes of conduct and other relevant soft law instruments. It goes on to consider in more detail Wälde’s views and to explore the potential “hard sanctions” that the Professor identifies as arising out of soft law instruments, including the use of these soft law instruments in the courts. Finally, it concludes by considering the soft law debate in the wider context of the corporate supply chain (an important issue in any regulatory framework for business and human rights). A. Soft Law Instruments: Codes of Conduct The “code of conduct” (whether produced by a company, an industry group, an NGO or an international organisation) is one of the key soft law instruments employed to “regulate” corporate conduct in relation to human rights and other ethical issues. There are a vast array of views on the effectiveness of such codes, although there are few that would advocate that codes of conduct alone are a sufficient form of regulation. Codes of conduct are not new. The modern form of code arose in the 1930s in the United States, with early examples being adopted by Ford and Johnson & Johnson. Typically, a code of conduct provides general guidance or commitments on how a business will approach certain “ethical issues”. Common issues addressed by such codes include health and safety issues, environmental protection, labour rights, community engagement, transparency, and anti-corruption measures.12 Some codes choose to focus on one or two of these areas,13 while others attempt to cover a broad range of issues 11

Wälde, T.W., supra n. 9, p. 4. See Ruggie, J., Human Rights Policies and Management Practices of Fortune Global 500 Firms: Results of a Survey, Harvard University John F. Kennedy School of Government, 1 September 2006. 13 For example, the Voluntary Principles on Security and Human Rights which is an energy sector initiative specifically focused on human rights issues arising out of a company’s security 12


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and areas.14 Some codes15 reference other international documents, such as the Universal Declaration of Human Rights16 or the International Labour Organisation [ILO] Declaration on Fundamental Principles and Rights at Work.17 More recently, some companies and TNCs are applying their codes not only internally, but also to sub-contractors. Most large TNCs have now developed their own codes of conduct and there are also a multitude of industry and sector codes available.18 These codes vary in how they express commitments from vague, generalised declarations to a specific set of principles to which a company pledges to adhere. Their impact within a company can also vary, depending on the company’s commitment to implementing and enforcing the code throughout its operations. At the international level, codes of conduct for TNCs also began to flourish from the 1970s. Such codes were developed by the Organisation for Economic Co-operation and Development [OECD], the ILO and the World Health Organization [WHO]. More recently, the UN has developed the Global Compact initiative, which now has almost 8,000 corporate members who have pledged to adhere to ten core principles covering human rights, labour, the environment and corruption.19 The proliferation of codes of conduct has been a concern to some who suggest that the varying standards found in such codes dilute the effectiveness of human rights norms, a problem which would be minimised through the adoption of a clear set of minimum standards.20 There is also a concern that the plethora of standards and codes currently available creates confusion over which human rights norms companies should subscribe to and whether it would therefore be preferable to have an international benchmark to ensure consistency.21

policies (highly relevant to some oil companies operating in conflict prone areas in developing countries). 14 See, for example, the BHP Billiton code of conduct available at http://www.bhpbilliton .com/bbContentRepository/docs/workingWithIntegrity.pdf. 15 See, for example, the Alcatel Lucent code of conduct, available at http://www.alcatellucent.com/csr/htm/fr/ethique-Chartes.html. 16 Available at http://www.un.org/en/documents/udhr. 17 Available at http://www.ilo.org/declaration/lang-en/index.htm. 18 Examples of such industry codes can be found in the textiles industry, in the automobile industry, the energy sector and in the diamond mining industry (the Kimberley Process), to name but a few. 19 For details, see http://www.unglobalcompact.org. 20 International Council on Human Rights Policy, Beyond Voluntarism—Human rights and the developing international legal obligations of companies (2002), pp. 18–19. 21 See Joseph, S., “The Human Rights Accountability of MNEs” in Kamminga, M., Zia-Zarifi, S., [Eds.], Liability of Multinational Corporations under International Law, Kluwer Law International (2000), p. 87.

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Although the lack of consistency between codes is potentially concerning, one of their key advantages is that they can be tailored to the needs of individual companies (or TNCs) or to the issues that face a particular industry sector. As such, codes of conduct are far more flexible than traditional regulatory tools, and in this sense offer a valuable and effective alternative that should not be underestimated. Companies that prefer to avoid more traditional forms of regulation might also be inclined to adopt and to adhere to voluntary codes to dissuade regulators from introducing more general laws at the national or international level. One commentator has noted therefore that the objective of these codes is for companies to “mettre de l’ordre dans leur maison plutôt que de voir l’Etat le faire plus ‘lourdement’.”22 Although codes of conduct are “voluntary” instruments, they should not necessarily be seen as the antithesis of traditional hard law, but rather as an enhancement of such laws. Their purpose is not to replace legal regulation, but to complement it.23 Moreover, as explored below, the line between traditional hard law and soft standards such as codes of conduct is becoming ever more blurred and it is possible to discern from these codes a certain level of consensus on the particular human rights responsibilities that are most relevant to corporations. As these standards become “expected behaviour”, it is harder for companies to ignore them. The legal value of this creeping codification carried out by companies themselves is difficult to quantify in concrete terms—but there is no doubt that such codes of conduct now occupy an important position in the regulatory arsenal of those seeking to hold companies accountable for their human rights impact. B. Wälde’s Proposal: Soft Law but Hard Sanctions Wälde was one of the early commentators to recognise the cardinal role of soft law (including codes of conduct) in regulating corporations—in this sense he was a “visionary” in this area, leading the way with concepts that are still the subject of debate even today. His focus was on the international energy sector and was wider than just human rights, considering soft law regulation in a range of fields such as trade, investment and financing. The energy sector has featured prominently in the business and human rights

22 Meaning to “put their own house in order to avoid having the state do so in a more ‘cumbersome’ way.” Farjat, G., “Réflexions sur les codes de conduite privéees” in Goldman, B., Le droit des relations économiques internationales, Litec (1982). 23 Rosé, J., Responsabilité sociale de l’entreprise: Pour un nouveau contrat social, Collection: Méthodes et recherches, 2 October 2006, p. 101.


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debate due to a number of high profile allegations against international oil companies relating to their conduct in developing countries.24 Wälde proffered the following observation regarding the nature of soft law:25 [Guidelines, codes of conduct, recommendations and other forms of normative instruments] can be qualified as “soft-law”—to contrast it with legally binding hard law. But this qualification is not always helpful in appreciating their nature and practical relevance: some hard-law international treaty language is so openended, and so devoid of general acceptance and compliance mechanism, while some soft-law instruments—e.g. universally accepted and legitimated codes and guidelines—carry a de-facto force of law and are disregarded only at considerable risk.

Wälde emphasised that codes of conduct are not legally binding per se, but that they also cannot be ignored and therefore have indirect legal effect. In particular, soft law can be highly influential when courts or tribunals interpret laws, treaties and contracts—as Wälde noted, a tribunal would be cautious in interpreting a treaty provision in a way that was inconsistent with recognised soft law standards.26 His analysis demonstrated that the division between hard and soft law cannot be taken for granted, and at times is more illusionary than real. Wälde’s concepts were highly original when first published—he saw soft law as having a binding legal value wherever violations lead to a “traditional” legal penalty. He warned corporate lawyers that it would be “professionally negligent” to ignore such standards when advising their clients—an extremely innovative concept for many lawyers at the time (and even today).27 Wälde’s analysis leads to a different meaning of the term “soft”—instead of being seen as a law that lacks binding effect, it is viewed as a type of flexible law that can be moulded to suit the specific needs of the situation without necessarily compromising its effectiveness. This concept is now far more recognised and legal authors have, for example, suggested substituting “flexible” (souple) for “soft” (mou).28 While many have criticised,29 and still criticise, codes of conduct and other soft law instruments as lacking “teeth”, Wälde’s work (and the work of

24 For example, the activities of Shell in Nigeria, Talisman in the Sudan and Unocal/Total in Myanmar. 25 Wälde, T.W., supra n. 9, p. 4. 26 Ibid., pp. 8–9. 27 Wälde, T.W., supra n. 9, Summary. 28 Thibierge, C., “Le droit souple: réflexion sur les textures du droit” RTD Civ. 2003, p. 599. 29 See Chatzistavrou, F., “L’usage du soft law dans le système juridique international et ses implications sémantiques et pratiques sur la notion de règle de droit”, Revue Le Portique, No. 15, “La Loi”, 2005, available at http://leportique.revues.org/index591.html.

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others since)30 has demonstrated that, in reality, penalties do exist for those who breach soft law, although (as explained below) such penalties may or may not take a traditional legal form. Wälde’s pragmatic approach emphasised the utility of soft law in shaping and framing the mechanisms for regulating corporate compliance with human rights standards. The value of soft law is highlighted by the gaps that remain in the implementation of internationally recognised human rights obligations in the domestic laws of many States31 (especially developing countries where hard law may not be as robust). In particular, the clear application of international human rights principles to corporations either in international or domestic law is often lacking. This legal void needs to be filled, which is where the flexibility of soft law has real advantage. It is far easier to reach consensus on soft law instruments than treaties in the international arena and soft law standards that gain widespread acceptance may eventually crystallise into a type of “customary” practice, such that corporations cannot ignore them in reality, even if not formally “binding”. Examples of this crystallisation can be seen in other widely accepted human rights instruments that take the form of “soft law”, including the Universal Declaration of Human Rights32 and the ILO Declaration of Fundamental Principles and Rights at Work.33 Moreover, the translation of international human rights norms into something that is both relevant and practical in the corporate context is not an easy task. Here, once again, the flexibility of soft law has many advantages. Human rights responsibilities can be tailored by a company or industry to be relevant to an individual company or to a certain sector, making it easier to implement and monitor. This is far more difficult in the realm of traditional hard law where common standards are generally applied to all—the consequence is inevitably that only the minimum (or most common denominator)

30 See, for example, Trocmé, R., “La responsabilité sociale des entreprises au niveau mondial: éléments de définition, difficultés et enjeux” available at http://www.aidh.org/uni/biblio/ pdf/3-2.pdf. 31 It is well recognised that, even for those international instruments that are widely ratified (for example, the Convention on the Rights of the Child), widespread abuses still occur. Child labour is key issue addressed in many codes of conduct and international guidelines (including the OECD Guidelines and the UN Global Compact). 32 The Universal Declaration of Human Rights is recognised as, at least in part, having acquired cusotmary status and almost every government in the world has endorsed the Universal Declaration at some point. See Hannum, H., “The Status and Future of the Customary International Law of Human Rights” 25 Georgia Journal of International & Comparative Law 287 (1995), pp. 317–329. 33 Article 2 of the Declaration states that “all Members, even if they have not ratified the Conventions in question, have an obligation arising from the very fact of membership in the Organization to respect, to promote and to realize, in good faith and in accordance with the Constitution, the principles concerning the fundamental rights which are the subject of those Conventions”.


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can be incorporated into hard law. However, the consequence of such tailoring is that companies may be tempted to “pick and choose” which human rights to respect—focusing on some rights to the detriment of others. The pros and cons of such flexibility demonstrate the complementary nature of hard and soft law, as each one supplements rather than replaces the other. C. Examples of “Hard Sanctions” that can Result from “Soft Law” There are a multitude of key players (including States, NGOs and TNCs themselves) that operate to ensure that soft law standards cannot be ignored by TNCs, if an investment is to be successful. Wälde highlighted in particular the ability of soft law standards to influence arbitral tribunals (and other decision makers) in the dispute resolution process, demonstrating that it would be naive of any company to ignore such standards on the misunderstanding that they had no legal relevance.34 The same could be said for the influence such standards have on financiers and project developers concerning all aspects of large international investment projects (particularly in the energy sector). Wälde focused primarily on the “legalisation” of soft law standards through their incorporation into hard law (either expressly or implicitly) or through the influence they have on the way in which hard law instruments are interpreted. However, he also touches upon the many forms of “sanctions” that can be imposed on a company for failure to comply with soft law.35 In particular, the market and the media can impose significant sanctions on companies that are perceived as violating certain norms of behaviour or commitments made by such companies (for example, commitments made in codes of conduct). A few of these sanctions are briefly explored below, although this list should not be seen as exhaustive. Companies can be exposed to significant media campaigns or “bad press” as a result of a failure to comply either with published codes of conduct or with broader principles generally applied to companies in the particular industry. There have been a number of widespread and influential media and NGO campaigns relating to ethical issues in the past. Such campaigns can severely damage a company’s reputation, as illustrated by the campaign against Gap Inc. where the National Labor Committee of New York took up the cause on behalf of workers in Latin America employed by sub-contractors to Gap. The campaign exposed illegal working conditions, cases of physical violence, mandatory overtime and dismissals of unionised employees who

34

Wälde, T.W., supra n. 9, pp. 5–12. See description of the influence of NGO pressure and campaigns at Wälde, T.W., supra n. 9, pp. 14–17. 35

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attempted to complain of these labour law infringements in their plant in El Salvador. As well as drafting a code of conduct, Gap agreed to negotiate with and place pressure on its sub-contractor to improve working conditions.36 Similarly, TNCs in the energy sector have often been the target of NGO pressure. As a result, the energy sector has developed a number of codes in relation to human rights issues (such as the Voluntary Principle on Security and Human Rights), as well as individual codes adopted by TNCs. Once such codes have been adopted, vigilant NGOs sometimes act as “watchdogs” to ensure that they are adhered to.37 The result can work well for all concerned, with conditions improving and companies benefiting from improved reputation. Product boycotts and shareholder campaigns are also real risks for those companies that chose not to comply with commonly accepted standards of behaviour or with their own specific human rights commitments. Companies such as Nestle and Coca-Cola have been the subject of such product boycotts.38 In addition, a company might face more formal sanctions from the stock market, including de-listing if it fails to meet the standards of the particular index on which it is registered. A company could also be barred from participating in certain associations if it fails to comply with its code. The Global Compact, for example, has the power to suspend members if they fail to comply with its principles. Upstream, a failure to comply with soft law could result in other businesses not wanting to be associated with, or transact with, the company in question. Some companies will only do business with other companies that adhere to particular ethical values or that show a commitment to human rights standards in their daily conduct. It may also be that a code of conduct is incorporated into a contract (for example, a contract with a supplier) and failure to abide by the code can result in termination of that contract.39 Companies requiring finance for projects or investments may also find themselves in difficulty if evident human rights issues exist with the proposed project. Many financial institutions have signed up to their own codes

36

For details see www.nlcnet.org/article.php?id=300. Wälde, T.W., supra n. 9, p. 17. 38 Nestlé products were boycotted all over the world following its role in the marketing breast-milk substitutes to mothers in Africa (see Cassese, A., Human Rights in a Changing World, Polity Press (1990), chapter 8). Universities in the United States boycotted Coca-Cola products following a number of allegations of human rights abuses around the world (see http://www.corpwatch.org/article.php?id=11925). 39 Ricour, C., “Les chartes éthiques d’entreprise Soft Law ou Hard Law?” Personnel No. 448, March/April 2004, p. 11. 37


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or to industry standards such as the Equator Principles,40 making them reluctant to be associated with projects where potential human rights abuses may result. Similarly, international funding agencies such as the International Finance Corporation and the World Bank have their own specific criteria to which they have publicly committed.41 Companies failing to meet certain criteria may find it difficult to secure funding for large scale projects or investments. The “bankability” of a project or investment is crucial and, regardless of the legal status of a code, a company may find itself with no choice but to comply with such codes in order to obtain funding. Finally, as explained in more detail below, codes of conduct may actually be used before the courts to hold a company accountable for failing to comply with publicly declared commitments. In this way, codes of conduct can be transformed from general guidelines into specific standards to which a company will be held. However, it is noted that this more traditional form of sanction is not commonly employed in relation to soft law. As demonstrated above, the failure to comply with a code of conduct may result in financial consequences for a company or lead to that company being deprived of a business opportunity. Such sanctions—although not formal legal penalties—are very real for corporations and potentially more persuasive in the private economic sphere. From this perspective, the actual effectiveness of soft law becomes readily apparent and soft law can therefore be regarded as a genuine form of regulation. D. How Others have Approached this Issue 1. Scholars’ perspective—debates on the validity of soft law Soft law has stirred debate amongst academics and judges alike. Far from being consensual, their views on the validity of soft law diverge. Indeed, many scholars do not attribute to soft law the binding qualities noted by Wälde and consider codes of conduct to be “traditional” soft law—an indeterminate type of law that some authors have described as “hazy”.42 In a famous article, WEIL even described soft law as “non-law.”43 However,

40 Available on http://www.equator-principles.com/index.shtml. Banks that have adopted these principles include Bank of America, Barlcays, Credit Suisse, HSBC, Standard Chartered and ING Group amongst others. 41 See http://www.ifc.org/ifcext/sustainability.nsf/Content/EnvSocStandards and http:// econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTWDRS/ EXTWDR2006/0,,menuPK:477658~pagePK:64167702~piPK:64167676~theSite PK:477642,00.html. 42 See Osman, F., “Les principes généraux de la lex mercatoria : contribution à l’étude d’un ordre juridique anational” préf. E. Loquin, L.G.J., bibl. de dr. privé, t. 224. (1992), para. 515. 43 Weil, P., “Vers une normativité relative en droit international”, RGDIP 1982, pp. 5–6.

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Chatzistavrou took a more even tone, stating that soft law instruments are different from binding contractual instruments under international law in that they are not necessarily or immediately legal in nature, and therefore are not necessarily binding.44 The idea that soft law is not necessarily binding means that each instrument must be examined individually to determine its legal effect—both in theory and in practice. Much will depend on the content of the individual instrument. For example, codes may contain general principles without any specific guidance on how they are to be applied or what they actually mean in practice or a general commitment to respect human rights with no detail as to what this entails. Codes of conduct are therefore often seen as declarations of good intent, rather than as genuinely restrictive standards with which companies and their employees must comply. Nonetheless, as demonstrated above, codes can and do have substantial implications beyond that which may have been initially intended by their drafters. 2. The approach of the courts to codes of conduct: civil law vs. common law Courts too have considered the application of codes of conduct with varying outcomes. The French courts have attempted to give codes of conduct a legal definition, whereby they are understood as ‘natural’ obligations that are converted into a ‘civil’ obligation. A natural obligation is an intermediate category of obligation, sitting between legal and moral obligations. Natural obligations are recognised by French Law under article 1235 of the Civil Code, but traditionally no sanction has been imposed for their breach nor have they been judicially enforced. However, this is changing. The French Cour de Cassation (Supreme Court) held in a leading case that a firm and unilateral undertaking to perform a natural obligation brought that obligation within the rules for civil obligations under French law, thereby requiring the company to observe what was originally a mere “moral” commitment.45 Enforcement was therefore possible. This may be one of the reasons that codes of conduct tend to be drafted in general terms. While a unilateral commitment can become binding on those who made it,46 the nature of the obligation will be determined by how firm the particular commitment was.47 For example, in the case referred to above,

44

Chatzistavrou, F., supra n. 28. Cass civ. 1, 4 Janvier 2005: D 2005 p. 1393. See also Loiseau, G., “L’obligation naturelle devant la cour de cassation”, D. 1997, Chr., p. 85. 46 Professor Izorche, in particular, has developed this threory in “l’avenement de l’engagement unilatéral en droit privé contemporain”, thèse Aix 1989 PUAM 1995. 47 In this respect, the case law on advertised lotteries is useful for its definition of the criteria of firmness and precision. See Cass civ. 1, 28 Mars 1995 (Bulletin Civil 1995, No. 150). 45


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a specific undertaking to reduce employees’ working time that was set out in a report from company management constituted a commitment to third parties that would bind the company legally. In addition to a clear commitment, the Cour de Cassation has also emphasised the need to precisely identify a beneficiary. Because of these requirements, enforcing a general code of conduct, even if it contains specific commitments, will not necessarily be easy. Nonetheless, some authors have now suggested that codes of conduct may be considered to be quasi-contracts that are binding on the drafter.48 In contrast to the French approach, codes of conduct would not usually be enforceable in common law jurisdictions, unless they were specifically incorporated into a contractual commitment. However, the Nike v. Kasky49 decision in the Californian courts does demonstrate how a company cannot simply ignore a code of conduct and how the law can be used in innovative ways to force companies to comply with representations made. In the early 1990s, Nike was accused of failing to abide by its code of conduct in its Asian production plants. Nike responded by strengthening the code in 1996. In 1998, Marc Kasky, an American citizen, accused Nike of misleading advertising, by claiming that the standards that Nike publicly purported to adhere to were not being followed (it was irrelevant that the actual breaches were being carried out by a sub-contractor). According to Mr Kasky, the stance Nike took in public was inconsistent with reality and was merely “marketing talk” intended to increase the company’s sales. Nike eventually acknowledged that “virtually everything a company does is intended to improve its financial results”,50 extolling the virtues of freedom of expression and admitting that, ultimately, the code was promotional in nature and thus that liability should not attach to the company. Nike relied on the First Amendment to the US Constitution, which provides for complete freedom of expression for all US citizens. The California court nevertheless ruled that the company was guilty of misleading advertising, finding that the Nike letters published in the press stating that Nike and its sub-contractors were following the code of conduct were sufficient to constitute a breach of the Trade Practices Act.51 After this ruling, there was concern that codes of conduct may have acquired some genuine legal force. However, while the case certainly demonstrates that the innovative use of legal principles unrelated to human rights

48 Desbarats, I., “La valeur juridique d’un engagement dit socialement responsable” JCP, Entreprises et Affaires, No. 1214, 2006, pp. 254–261. 49 Nike, Inc., et al., v. Kasky, 539 U.S. 654 (2003) (also see http://www.altlaw.org/v1/ cases/1400041). 50 See http://www.corpwatch.org/article.php?id=6313. 51 For further detail see Sobczak, A., “Le cadre juridique de la R.S.E en Europe et aux EtatsUnis”, Droit Social, September/October 2002, Nos. 9–10, pp. 806–811.

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law can be very effective, the use of these alternative legal methods of enforcing codes has not been widely pursued. It would be too soon to speculate that codes of conduct are generally considered binding by the courts. Certainly, the Nike decision does not settle the substantive and thorny question of the actual legal value of codes of conduct, especially as there have been few subsequent cases where codes of conduct or public commitments have been directly at issue. As noted above, the legal force of soft law standards is an issue that Wälde highlighted. He stated, “I have not encountered as yet a dispute where reference to international standards—beyond the safe ground of legally binding international law—has not been made, often in a way that significantly influences the resolution of the dispute.”52 He further noted that: Tribunals as international courts wish to be seen as rather “going with the stream” of contemporary public opinion, of comparative practice in other countries and the expertise and judgement that emerges from authoritative and serious international industry and professional associations. International standards help the tribunal to find a solid footing to avoid the criticism of replying on its subjective sympathies on cultural biases.53

As a result, the power of codes of conduct and international soft law standards to influence decisions in both courts and arbitral tribunals is evident. The message for companies and their advisers (including their legal advisers) is that such standards and commitments should not be ignored, even if they are not contained in a legally binding instrument. This was the central thesis of much of Wälde’s work on this topic. It is possible that this will be developed further in the future by arbitral tribunals as human rights issues become more common in investment disputes (due to the greater awareness of both investors and States of the importance of human rights compliance in business activities). E. The Application of Soft Law Towards Sub-contractors: A Gordian Knot in the Effective Application of Fundamental Rights Before turning to consider the contribution of Ruggie to the business and human rights debate, it is worth taking a moment to reflect on the relationship between a company and its sub-contractor with regard to codes of conduct. This is an important aspect of the business and human rights debate that is sometimes neglected. Legal practitioners have traditionally focused their

52 53

Wälde, T.W., supra n. 9, p. 5. Ibid., p. 9.


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attention on this relationship in terms of the division of liability between company and sub-contractor when violations of human rights occur.54 In French law, this issue is addressed in Article 1384–1 of the French Civil Code “[a] person is liable not only for the damages he causes by his own act, but also for that which is caused by the acts of persons for whom he is responsible, or by things which are in his custody”.55 Sub-contractors and instructing companies are obviously separate legal separate entities and one is therefore not liable for the actions of the other (no vicarious liability exists as there is no employer/employee (préposé) relationship). Similar regimes exist in most jurisdictions around the world (including common law jurisdictions, such as England and Wales). In addition, sub-contractors are responsible for managing their own suppliers of goods and services. They must meet and comply with quality standards that are defined and appended to sub-contracting agreements in accordance with the instructing company’s policies.56 However, the contracting company will generally not be liable for unlawful conduct by its sub-contractors and, while (as noted above) more companies now refer to sub-contractors in their codes of conduct, seldom are firm commitments demanded from sub-contractors. For example, Article 2 of Levi’s code of conduct states “we expect that, as private individuals, our business partners respect the law and conform to the legal requirements relating to the conduct of their activities.” The position is similar in respect of environmental norms: “we shall only conduct business with those partners who undertook, like ourselves, to protect the environment, and whose activities respect the philosophy and guiding principles Levi’s Strauss relating to the environment.”57 It is rare therefore for a company to accept any responsibility for the activities of its sub-contractors, even if that company prescribes guidelines for its sub-contractors to follow as a ‘best endeavours’ obligation. The assumption is that if the sub-contractor fails to comply with the relevant standard, the principal company has the power (but not the obligation) to terminate the relationship. 54 See http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social -responsibility/index_en.htm. 55 Paragraphs 4 et seq. define the different cases where this liability may be engaged. Nonetheless, this exclusive list has been extended following the well-known Blieck case. The Cour de Cassation decided to abandon its conservative interpretation of Article 1384. This case clearly provides that the list of persons liable for the acts of third parties under Article 1384 is not an exclusive list. The court established, “without expressly formulating”, the general principle of third party liability. 56 See Cour de cassation, 3ème Chambre Civile, 28 November 2001; Société Haironvielle contre Société Albingia, Karila, Jean-Pierre, Dalloz, No. 18, 2 May 2002, pp. 1442–1445. 57 Article 3 of Levi’s Code of Conduct available at http://actrav.itcilo.org/actrav-english/ telearn/global/ilo/code/levi.htm.

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However, the fact that termination follows a breach of a code by a subcontractor is far from a foregone conclusion. A company may decide to disregard such breaches, and sign contracts (or continue contracts) with a supplier or simply unilaterally amend its code of conduct. In 1995, for example, Levi changed an inconvenient clause in its code which stated “nous n’établirons ni ne renouvellerons de relations contractuelles dans les pays où la violation des droits fondamentaux de l’homme est généralisé”58 to read59 “nous déterminerons si le contexte en matière des droits de la personne pourrait nous empêcher d’exercer nos activités, tout en respectant les directives globales d’approvisionnement et d’autres politiques de la compagnie.”60 Such changes demonstrate the inherent weaknesses of soft law, where inconvenient provisions can simply be changed at the whim of a company.61 It is interesting to note, however, that under French law, it is possible for a sub-contract to be re-characterised as an employment contract in certain circumstances. For example, the commercial division of the French Cour de Cassation has previously characterised a sub-contract as an employment contract, whereby the sub-contractor was considered as an employee of the instructing company.62 In this situation, where a person “instructs” an employee to carry out various tasks in the former’s service and under their authority, the grounds for vicarious liability are satisfied, resulting in liability for the employer for any damage caused by the employee.63 However, this would only occur where the sub-contractor (like an employee) commits the violation “in the course of his/her duties”.64 It is also noted that several recent decisions have limited the concept of vicarious liability, so it is far from certain that such a concept would apply in any given situation.65 Another issue that generally arises in relation to the imposition of codes of conduct on sub-contractors is whether the company imposing the code can effectively monitor compliance. Without such monitoring mechanisms in place, the value of requiring sub-contractors to comply with a code of

58 In English: “we will not establish or renew contractual relationships in countries where violations of fundamental human rights are widespread.” 59 In English: “we will determine whether the context in terms of human rights may prevent us from conducting our business, while following global guidelines on sourcing and other company policies.” 60 Levi’s code is available at http://actrav.itcilo.org/actrav-english/telearn/global/ilo/code/ levi.htm. 61 See The Report of the Conseil Constitutionnel at http://www.conseil-constitutionnel.fr/ conseil-constitutionnel/root/bank_mm/pdf/Conseil/securitejuridique.pdf. 62 Com, 19 December 2000. 63 Benabent, A., Droit civil les obligations, Montchretien (11th ed, 2005), page 397. 64 Idem. 65 Civ. 2e, 7 November 1993, Bull viv., II, No. 117; Civ. 2e, 3 June 2004, Bull civ., II, No. 275; RTD civ. 2004–742, obs Jourdain; JCP 2005.I.132, No. 5, obs VINEY.


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conduct significantly diminishes. Although a company is in a “position of force”66 vis-à-vis the sub-contractor, which gives the company power to impose measures on the sub-contractor, genuine monitoring of the compliance of sub-contractors with codes of conduct varies widely from regular due diligence to no formal monitoring at all. Even those companies that do attempt to put in place monitoring frameworks can struggle. For example, Nike decided to set up an internal monitoring programme for its sub-contractors, but those responsible for this monitoring process were also given other (separate) roles within the company and therefore monitoring was not always their primary focus.67 Because of this ambivalent role, NGOs have expressed reservations about the actual effectiveness of the monitoring process.68 Overall, effective monitoring of sub-contractors by corporations remains sketchy and the application of the codes is partial.69 NGOs have often requested external audits to measure the genuine impact of codes of good conduct within companies.70 However, as yet, adoption of transparent monitoring processes is not widespread. Most of these companies prefer to push monitoring criticisms to the back and emphasise the “positive impact codes of conduct have on their business”.71 The role of the State in safeguarding against sub-contracting to entities which violate human rights is also an interesting (and controversial) topic. VERNA has considered whether States should ban imports of products made in questionable conditions or to penalise companies or their managers for unethical practices in foreign countries for which they would be held directly or indirectly liable.72 However, he considered that it would be difficult for States to act individually in this area and that international consensus was required. Clearly, there are many considerations to be taken into account if a State were to impose product bans, particularly in relation to international trade law (imposing an importing ban may well infringe international trade obligations). Moreover, the subjectivity involved in deciding what should or should not be banned appears fraught with difficulty. If national policy 66 Intervention of Profressor Philippe Delebecque “Colloque Sur Le Contrat De SousTraitance Organise Par L’imtm” 26 November 2001, at http://www.cdmt.droit.u-3mrs.fr/actu/ imtm1101.htm. 67 See Verna, G., Bertrand, J., supra n. 3, p. 7. 68 In this regard, sub-contractors have affirmed that their “assessors” never question work conditions in factories, and that the code of conduct was largely ignored. 69 Brac, M., “Codes de bonne conduite; quand les sociétés jouent à l’apprenti législateur” available at http://www.glose.org/CEDCACE3.pdf. 70 See the example of Apple at http://www.maxisciences.com/apple/apple-et-le-code-debonne-conduite-des-sous-traitants_art6135.html. 71 Verna, G., Bertrand, J., supra n. 3, p. 8. 72 Ibid., p. 11.

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were involved, it is also likely that such bans would be imposed on a general basis, rather than on a case-by-case basis (in relation to individual codes of conduct). III. The Ruggie Report—A Complementary Relationship between State Protection and Company Compliance with Human Rights is Necessary The focus on soft law instruments by Wälde contrasts to some extent with the traditional UN approach to human rights, in which treaties predominate. The obligations placed on States are intended, to a large extent, to negate the need for soft law as States have an obligation to ensure that private actors such as corporations respect human rights within their jurisdictions. However, reality does not necessarily reflect this conclusion either in relation to corporations or States themselves. As a result, a gap in the accountability of corporations exists in many jurisdictions where victims of violations of human rights are left with no remedy and no mechanism through which to enforce their rights. Moreover, not all States are party to all key human rights treaties and therefore coverage is far from universal. Nonetheless, the role of the State is important. Ruggie has emphasised this in his tripartite approach to business and human rights regulation. While Ruggie’s proposals do not undermine (and indeed endorse) the appropriate use of soft law, there is an additional element that resonates strongly—the role of the State (and consequently of domestic legislation and traditional “hard law”). This section considers Ruggie’s proposals in more detail. A. The Tripartite Framework: Protect, Respect and Remedy Ruggie has published a number of reports setting out his views on the topics he has been asked to address.73 His first three-year mandate focused on surveying the application of human rights within TNCs. At the end of his first mandate, Ruggie proposed the following tripartite framework: “protect, respect and remedy”.74 As the first component of the proposed framework, the Special Representative calls on States to regulate the activities of companies through national regulatory frameworks. States have a clear obligation under inter-

73 Ruggie produced interim reports in 2006 and 2007, with the main report from the first term of his mandate being published in April 2008 (see Ruggie, J., supra n. 5). Ruggie’s most recent report as at the date of writing was published on 9 April 2010 (see Ruggie, J., supra n. 7). Ruggie’s final report is due in 2011. 74 Ruggie, J., supra n. 5.


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national human rights law to protect individuals within their jurisdiction from breaches of their human rights. Indeed, the State’s duty to provide protection against the abuses by corporations is now widely accepted in international case law75—although there remain significant shortcomings in the implementation of this duty. While protection is an existing obligation, Ruggie’s research demonstrates that many States have not fully grasped the application of this duty in the business and human rights context. Therefore, by emphasising this obligation, it is hoped that States (whether through domestic (or extra-territorial) regulation and/or through soft law means) will ensure that companies operating within their jurisdictions respect human rights. Of course, one of the key limitations in this area is the fact that not all States accept all human rights obligations which makes uniform practice difficult to achieve—even the two primary human rights covenants (the ICCPR and ICESCR) are not universally ratified. Harmonising national standards is likely to be an important element in any framework that addresses TNCs which operate across national borders. Ruggie reasserted the State’s role as the primary party responsible for defending human rights. It is for the State to take all necessary measures to protect its citizens from violations of their human rights—whether by the State or by private actors, such as corporations. This duty to protect includes preventative measures along with investigations into clear or suspected violations of human rights, sentencing of guilty parties and awards of damages. Ruggie did not shied away from referring to the State’s role as the cornerstone of a framework that protects human rights. The second component of the proposed framework reflects the responsibility of corporations to respect human rights. Ruggie noted from the outset that globalisation had created gaps in the regulatory framework that corporations have been able to take advantage of and, in some circumstances, this has led to violations of human rights.76 Therefore, the responsibility of a corporation to respect human rights (regardless of any legal obligation that exists) is a key component of the framework. This duty has deliberately been

75 See Velásquez Rodriguez v. Honduras [1988] IACHR, Series C, no. 4 (29 July 1988); Hopu and Bessert v. France Communication No. 549/1993, CCPR/C/60/D/549/1993/Rev.1 (29 December 1997); The Social and Economic Rights Action Center and the Center for Economic and Social Rights v. Nigeria Communication No. 155/96, ACHPR/COMM/A044/1 (27 May 2002); and Hatton v. United Kingdom (2003) 37 EHRR 611. Also see: Clapham, A., Human Rights in the Private Sphere, Clarendon Press (1993), Chapter 4; Kinley, D., “Human Rights as Legally Binding or Merely Relevant?” in Bottomley, S., Kinley, D., [Eds.] Commercial Law and Human Rights, Dartmouth Publishing Company (2002), pp. 38–42; and Chirwa, D.M., “The Doctrine of State Responsibility as a Potential Means of Holding Private Actors Accountable for Human Rights” 5 Melbourne Journal of International Law 1, pp. 11–13. 76 Ruggie, J., surpa n. 5, para 11.

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framed as a “responsibility” (suggesting a moral rather than a legal duty), to avoid the contentious language of “obligation” which has caused bitter divisions in this area in the past.77 In particular, companies have a responsibility to respect human rights wherever national laws do not exist, or if they do exist, wherever the State does not have the institutional capacity (or will) to enforce compliance. According to the report, the minimum responsibility borne by companies is to “do no harm” (meaning not to infringe on the rights of others).78 As noted above, many companies have already recognised this responsibility by adopting codes of conduct in this area. However, smaller companies or companies without a public profile (and therefore less exposure to NGO or media pressures) may be less inclined to do so without further impetus. An international consensus on this topic may therefore assist in generating widespread adoption of codes and encouraging compliance with international standards. The link between Ruggie’s work and Wälde’s observations is evident in this respect. In relation to TNCs, the responsibility to respect does not only apply to each individual entity, but also to the TNC as a whole. TNCs usually adopt group-wide policies and a parent company should have a responsibility to ensure compliance with that policy and with relevant laws throughout the corporate group. From a pragmatic point of view, this approach could mean that a “parent” company is held liable for the actions of its subsidiaries abroad—although this would involve a significant departure from the corporate law doctrine of separate legal personality and is not without controversy.79 This issue is often debated when considering corporate liability for human rights violations, as victims of alleged abuses may prefer to bring a claim against a parent company rather than a local subsidiary for a variety of reasons.80

77 The debate following the publication of the United Nations’ Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights is an example of such division (see Ruggie, J., Interim Report of the Social Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises, E/CN.4/2006/97, 22 February 2006, paras 56–69). 78 Ruggie, J., surpa n. 5, para 49. 79 For an overview of “enterprise theory” see the work of Phillip Blumberg, such as “Accountability of Multinational Corporations. The barriers presented by Concepts of the Corporate Judicial Entity” 24 Hastings International and Coperative Law Review 297. For a summary of the arguments for and against group liability see Dine, J., Companies, International Trade and Human Rights, Cambridge University Press (2005), pp. 53 & 55 and Joseph, S., Corporations and Transnational Human Rights Litigation, Hart Publishing (2004), pp. 138–142. 80 Such reasons include access to the more sophistocated judicidal system that may exist in the “home” state and the ability of a parent company to compensate victims (see Joseph, S., supra n. 75, pp. 16–17).


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The final component of the framework is “remedy”. Ruggie notes that “[s]tate regulation proscribing certain corporate conduct will have little impact without accompanying mechanisms to investigate, punish and redress abuses.”81 Access to an effective remedy is vital for victims of corporate human rights abuses, but such remedies are currently proving elusive. Ruggie did not provide any details regarding potential remedies when setting out his initial framework, although he did note that remedy mechanisms should fulfil certain criteria; they must be: legitimate, accessible, predictable, equitable, rights-compatible and transparent.82 It is also clear that Ruggie has not limited himself to considering traditional judicial remedies alone. In his 2010 report, Ruggie set out three main categories of remedies: corporatebased remedies; state-based non-judicial remedies; and traditional legal remedies—all of which were considered complementary.83 His final report in 2011 will elaborate on these. Once again Ruggie and Wälde share similar approaches in acknowledging the importance of market and other sanctions that may be imposed on companies. However, Ruggie has been more victim-focused in his approach noting that, while non-judicial grievance mechanisms are just as valid as traditional judicial ones, they should ensure a proper remedy is provided to the victim (something that does not occur in more general, market-based sanctions). In his 2008 report, Ruggie took a broad view of human rights, and refused to set out a restrictive list of rights and duties that economic actors should respect. There is no doubt that creating a definitive list of human rights that apply to corporations would be a difficult task, assuming that list would be more restrictive than the broad array of obligations that apply to States. In Ruggie’s view “virtually all rights are relevant, though some may be more so than others in particular circumstances.”84 However, guidance for companies is essential if Ruggie’s framework is to be adopted effectively. Leaving companies with the difficult task of discerning which human rights they should respect and exactly what such respect entails would likely lead to inconsistent practice and some important human rights (for example, the right to life) being largely forgotten, as their link to corporate activity may not be immediately apparent. The outcome of this second mandate will be

81

Ruggie, J., supra n. 5, para 82. Ruggie, J., supra n. 5, para 92. 83 Ruggie, J., supra n. 7, paras 91–113. 84 Opening address by Ruggie at the UN Consultation on Operationalizing the Framework for Business and Human Rights, 5/6 October 2009, Palais des Nations, Geneva. 82

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crucial in this respect as it will detail how Ruggie proposes that his framework should be “operationalised”. The Special Representative’s renewed mandate demonstrates the significant attention now being paid to remedying the gap in corporate accountability for human rights impacts. Ruggie has been mandated (amongst other things) to “propose views and concrete and practical recommendations on ways to strengthen the fulfilment of the duty of the State to protect all human rights from abuses by or involving [corporations]” and to “elaborate further on the scope and content of the corporate responsibility to respect all human rights and to provide concrete guidance to business and other stakeholders.”85 In many ways, the use of a Special Representative to consider these issues on an international scale is quite different from the world envisioned by Wälde, where progress in this area was far more ad hoc and market-driven. However, a Special Representative who has been cognisant of (and sensitive to) the views of all stakeholders—public entities (States), private entities (companies), and various other interest groups (such as NGOs)—has the advantage of building international consensus in this area, which has traditional been fraught with polarised views between those on each “side” of the debate.86 The fact that governments, corporations and civil society have endorsed Ruggie’s proposed framework is testimony to his achievements to date. B. The Need for Re-entrenchment of the Obligation to Perform Due Diligence in Companies Ruggie has criticised the fact that very few companies have formal systems for monitoring human rights compliance with human rights commitments, which reveals the lack of oversight that companies exercise over their business activities in this regard.87 As a result, he has recommended that routine due diligence be undertaken by companies to improve the situation. Due diligence has been broken down into several aspects by Ruggie, including corporate policy, human rights impact assessments, and continued monitoring and assessment of human rights risks and compliance. There are a variety of ways in which such due diligence could be undertaken, ranging from internal solutions to the engagement of an independent third party who may or may not make its findings public.

85

Human Rights Council Resolution 8/7 (18 June 2008). The difficulties following the publication of the UN Norms is an example (see Ruggie, J. supra n. 75). 87 Ruggie, J., supra n. 5, paras 56–64. 86


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Due diligence is both an ongoing compliance objective as well as a task that should be undertaken before a specific project is commenced. The advantage of this approach for companies is that it identifies potential human rights violations as early as possible, so that such issues can be resolved and any violation (and consequent liability) avoided. Obviously, companies can also ensure that they select appropriate suppliers or sub-contractors through the use of such due diligence. However, until some consensus is formed on the specific human rights that companies should respect (a point neither Ruggie nor Wälde address specifically), it will be difficult to achieve uniform or consistent practice in this area in the short term. Undertaking such due diligence inquiries is currently more common in the United States than in Europe, where the process has not been widely adopted.88 However, lawyers are seeing an increase of this type of work in Europe and Ruggie’s work in promoting due diligence exercises may well be contributing to an increase in such due diligence. This demonstrates the powerful influence that the Special Representative potentially has in this debate and the crucial importance of his continued mandate which is likely to shed more light on the due diligence concept. C. The Specific Issue of Stabilisation Clauses in International Investment Contracts Finally, it is worth noting that, throughout his mandate, Ruggie has taken a particular interest in international investment contracts. More specifically, he has been considering the impact of stabilisation clauses in such contracts, which have the potential to insulate corporations from developments in domestic human rights legislation.89 Stabilisation clauses (which have been recognised as valid by various arbitration tribunals)90 can prevent States applying human rights law more strictly or strengthening it.91 Consequently, under the cover of the limitations of a stabilisation clause, a State may refuse to develop its substantive law to better reflect the international human rights standards.

88

http://www.ebs-paris.com/recherche-documents/josse_roussel_documents_4.pdf. Shember, A., supra n. 2. 90 See, for example, El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jusrisdiction, 27 April 2006; CIRDI AGIP v. Democratic Republic of Congo, 30 November 1979, Rev. crit. dr. int. pr., 1982.92, spéc. p. 104, Yearbook Commercial Arbitration, 1983.133, spéc. p. 142 and Kuwait v. American Independent Oil Company (Aminoil) 21 LLM 976 (1982). 91 The State may constitutionalise the fundamental right in question in order to overcome the obstacle presented by the stabilisation clause. 89

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However, there are many types of stabilisation clauses and it is certainly possible to balance legitimate corporate interests in protecting investments with the evolution of human rights standards. Human rights standards can be carved out from stabilisation provisions (for example, through a “human rights exception”) and it is expected that the results of Ruggie’s investigations will encourage both States and corporations to find ways of doing so. A connected issue that is sometimes raised in the context of international investment contracts relates to the arbitration of disputes arising out of these contracts. Where such disputes involve a human rights element, the confidential nature of arbitration often runs counter to principles of transparency and accountability that underpin the business and human rights debate. Both Ruggie and Wälde92 have highlighted the transparency theme and it will be interesting to follow the impact (if any) that this debate has on the arbitral procedure adopted in cases with a significant human rights element. IV. Conclusion—Two Complementary Visions for Effectively Defending Human Rights in the Business World The conclusions reached by Ruggie both contrast with and complement those of Wälde. The work of the Ruggie seeks to define a framework that includes both legal and non-legal regulatory mechanisms and that employs effective remedies, enabling genuine implementation of human rights both domestically and internationally. Soft law will always hold an important place in any such framework, given the necessary vagaries that accompany any international consensus. International hard law found in treaties (and implemented through domestic laws) must therefore be accompanied by soft law, if an effective framework is to be implemented. The broad consensus required to bring such a framework to fruition is a considerable challenge, and one that (to date) Ruggie has managed well. Despite having interests that are at times diametrically opposed, stakeholders will need to find solutions so that the regulatory gap identified by Ruggie can be remedied. The work of Ruggie as he completes the second phase of his mandate will be crucial to achieving this consensus and for making real progress in the creation of a framework that can effectively address the accountability gap that still exists. Finally, to conclude this brief exploration of the work of Wälde and Ruggie, set out below are a number of further observations that should be borne in mind as Ruggie’s framework is taken forward. These observations 92 Ruggie, J., supra n. 5, para 37; Wälde, T.W., “Transparency, Amicus Curiae Briefs and Third Party Rights”, OGEL, Vol. 2, Issue 2 (2004).


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are far from exhaustive, but it can be easy to forget to take them into account when considering next steps and the best way forward. At a general level, it is important that future work in this area takes into account all companies, whether international TNCs, state entities or domestic companies. The role of national companies from emerging economies is often neglected, although it is noted that neither Ruggie nor Wälde limit themselves to TNCs alone. To take the energy industry as an example, it is seldom acknowledged that the vast majority of energy resources are exploited either by domestic companies or directly by States via State-owned or Statecontrolled companies. Therefore, any international framework must cover these companies, as well as the more visible TNCs usually targeted by NGOs and the media. Generally speaking, TNCs may have little to “fear” from further regulation or the hardening of soft law standards (either through judicial application or market-based sanctions), given that they have been exposed to sanctions in this area for some time. TNCs may even welcome the levelling of the “playing field” so that national and state-owned and domestic companies are subject to the same “rules” as TNCs with regard to human rights compliance. With regard to potential remedies, an important element that should be factored into any framework is the role of regional organisations. Regional organisations have played an important role in the enhancement of human rights generally to date (for example, the African Charter on Human and Peoples’ Rights93 is a fundamental document helping to protect the rights of those in Africa. Similarly, the European Convention on Human Rights94 performs the same role in Europe). Although regional organisations have focused on State breaches of human rights to date, they could be mandated with a broader role in relation to corporations, if the States involved so chose. As Ruggie has emphasised, and in line with the approach taken by Wälde, effective remedies for victims of human rights and effective mechanisms for holding corporations accountable do not need to reflect traditional court-based sanctions. Various stakeholders have requested the development of procedures for mediation and compromise.95 Ensuring that all options including market-based sanctions and alternative forms of dispute resolution are explored will be an important aspect of the “remedies” pillar of Ruggie’s framework. Wälde’s observations on the influence of soft law standards on international arbitral tribunals are interesting in 93

Available at http://www.achpr.org/english/_info/court_en.html. Available at http://www.echr.coe.int/nr/rdonlyres/d5cc24a7-dc13-4318-b457-5c90149 16d7a/0/englishanglais.pdf. 95 See http://fletcher.tufts.edu/faculty/salacuse/pubs/mediation.html. 94

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this regard.96 Although Wälde’s observations did not focus on victims (as Ruggie did), strengthening legal processes that deter companies from breaching international standards in the first place is an important aspect of any remedy framework. Court-based remedies should also not be forgotten. The value of introducing a statute modelled on the Alien Tort Statute in the United States in other States is often debated. However, this statute has been criticised by some for its extra-territorial effect and the fact that the US may be seen as acting as a “global policeman”.97 Moreover, most cases against companies have been dismissed for jurisdictional reasons or are still ongoing after many years of litigation. In this sense, the Alien Tort Statute model may not be particularly favoured by either victims or corporations. In addition, capacity building (which might involve, for example, training on negotiation techniques or the provision of international legal assistance to work with local lawyers) from developed States to developing States is an important component of assisting such States to establish judicial regimes capable of providing effective remedies within a host State. Introducing international guidelines to assist both companies and governments in developing countries when negotiating investment agreements is one idea currently being explored by Ruggie.98 Such guidelines (or “markers”) would highlight human rights issues that should be taken into account during such negotiations, without being overly prescriptive. Considering new ways of ensuring transparency and taking advantage of the power of “naming and shaming” as a tool for changing behaviour is also important. The UN Global Compact uses a form of this tool by rejecting members who breach the principles of the Compact. However, this mechanism could be stronger and could even become a wider UN initiative where certain companies that engage in egregious human rights violations are “black listed”. Such “naming and shaming” techniques could also be linked to the National Contact Points [NCPs] maintained under the OECD Guidelines where determinations can be made that a company was in breach of a guideline (NCPs are national appointees that can consider complaints against corporations regarding breaches of the OECD Guidelines). Although formal sanctions are not imposed through this mechanism, NCPs do have

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Wälde, T.W., supra n. 9, pp. 5–12. See, for example, the amicus curiae breif submitted by the Governments of the United Kingdom, Switzerland and Australia in the case of Sosa v. Alvarez-Machain et al., 542 U.S. 692 (2004). 98 Information on the “Responsible Contracting” Project can be found at http://www .reports-and-materials.org/Report-on-Ruggie-responsible-contracting-workshop-25-26Jun-2009.pdf. 97


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the power to bring publicity to an issue which is potentially highly damaging to a company’s reputation. There are also many international standards that currently exist that could be developed further so as to encourage broader use by companies. The ISO 26000 standard99 that is currently being developed is an example of the type of standard that could be effectively promoted as “soft law”.100 This standard, which is a multi-stakeholder initiative, attempts to define and clarify the concept of “corporate social responsibility” to make it applicable to all business entities—regardless of size or location. It is written to be consistent with the Ruggie framework and sets out principles and recommendations consistent with international human rights law. Just as existing standards should be used and built upon, so too should existing practice by corporations. There are many TNCs and other companies that have already embraced human rights concepts and incorporated them into their daily activities. Such companies could act as models for others and share their experiences to help build a pool of knowledge that could assist smaller companies that are only just embarking on this journey. Industry forums and best practice assistance should therefore be encouraged. Finally, it is suggested that, while this chapter has concentrated on violations of human rights by corporations, the positive contribution of corporations to local economies must not be forgotten. Therefore, any regulatory framework must balance the need for businesses to operate effectively ensuring that, in doing so, a business should not harm human rights. Both Wälde and Ruggie have been cognizant of maintaining this balance. The requisite tools to regulate corporations in the area of human rights exist, but they must be applied effectively. Codes of conduct and international soft law standards are important elements of the overall toolbox, but need to be complemented by other measures, including traditional regulation by the State. It is now generally accepted that this issue needs to be addressed in the short term and therefore a new international treaty is not on the current agenda (given the time-consuming and complex nature of drafting such treaties). As a result, soft law is crucial both at the company level and at the broader international level. Both Ruggie and Wälde have demonstrated how effective such soft law can be and how it can lay the ground work for a “hardening” of the law (either formally or informally) at a later date—it is through a combination of hard and soft law that the most effective regulation is likely to be achieved. The

99 See the ISO 26 000 standard project on http://www.afnor.org/profils/centre-d-interet/ developpement-durable/dossier-special-iso-26000/la-norme-iso-26000-en-quelques-mots. 100 See http://www.iso.org/iso/pressrelease.htm?refid=Ref1299.

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influence that such standards can have on the decisions of courts and international tribunals is also evidence of a hardening of soft law and it will be interesting to see how arbitral tribunals in particular deal with human rights standards in investment treaty arbitration in the future. It is certainly possible that they could be taken into account more directly than in the past and may even be used to set aside contracts that do not contain safeguards for fundamental human rights (this has already occurred in the case of contracts obtained through corruption).101 This is an issue that international lawyers must be cognizant of when advising their clients (as Wälde warned). The business and human rights debate is certainly a “space to watch”. The signs are encouraging and forward-looking companies are embracing the debate, rather than rejecting it. The next few years are likely to see the fruition of this debate and the implementation of a preliminary framework that will form the basis of a further concretisation of corporate human rights responsibilities in the twenty-first century.

101 World Duty Free Company Ltd v. The Republic of Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006.

POSITIVISM, NEW HAVEN JURISPRUDENCE, AND THE FRAGMENTATION OF INTERNATIONAL LAW Tai-Heng Cheng1 I. Introduction Thomas W. Wälde worked tirelessly in the field of international law, serving in various capacities as an esteemed scholar, honored practitioner, and admired professor. Philip Andrews-Speed, who is the current Director of the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, Professor Wälde’s former position, has said of Wälde: [H]is reach and influence has been global. . . . [H]is aim in life was to understand “what lay underneath the emperor’s clothes” and to reveal and explain this truth, however unpalatable it might be to listeners. [. . .] But at the same time, his objective was to support coherent and just policy making for the good of all, and to support those who wished to deepen their understanding of . . . challenging issues.2

It seems appropriate that this contribution to Wälde’s festschrift should address the fragmentation of legal theories in international law by attempting “to reveal and explain” perceived contradictions in international legal theory, as one step towards “coherent and just policy making for the good of all” in the development of international law. The fragmentation of international law and legal theory is an age old issue that has vexed jurists, philosophers and decision-makers in international problems. Although this problem is not new, it is today magnified because of broader and deeper international interactions that all require regulation, and which are not fully coordinated in part because international law remains fragmented. For centuries, there have been diverse viewpoints on what international law is and how it works (and, relatedly, whether international law

1

Visiting Associate Professor of Law, Vanderbilt Law School. This article expands upon a presentation delivered at the 2009 American Society of International Law Annual Meeting. See Tai-Heng Cheng, The Idea of Law, Proceedings of the 2009 Am. Soc’y Int’l L. Annual Mtg. (forthcoming 2010). The thesis of this Article is to be further developed, in turn, in Tai-Heng Cheng, International Law as Commitment (Oxford University Press, forthcoming 2011). Raymond Girnys and Christopher Harrison provided research assistance. 2 Philip Andrews-Speed, CEPMLP-Staff-Professor Thomas W. Wälde, Centre for Energy, Petroleum and Mineral Law and Policy, http://www.dundee.ac.uk/cepmlp/staff/twalde.php (last visited Jan. 12, 2010).

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even law and whether it works at all).3 However, the problem of fragmentation has now become acute as different conceptions of international law have proliferated and some have become more entrenched.4 Without agreement on what international law is, who it binds, and how it may control actions, governments may identify and follow contradictory purported international legal rules. National courts and international tribunals may prescribe conflicting legal principles that lead to inconsistent outcomes with potentially destructive consequences for world order. Corporations and individuals may be left uncertain about their legal protections in their international activities. This Article proposes that fragmentation can begin to be addressed by going behind each concept of international law to examine their respective pre-concept commitments that may divide international legal theories. It examines two leading and apparently diametrically opposed theories: positivism, which views law as a corpus of rules created largely by states and identified in accord with sources of law, and policy-oriented jurisprudence, which views law as a dynamic process of decision-making in which rules might play only one part in determining the outcomes in international problems. The Article suggests that although the two theories are conceptually different and, in some senses, incompatible, their differences are not meaningful conceptual differences.5 Instead, the differences are actually disagreements about pre-concept commitments of a normative and ontological nature that are anterior to conceptualizing about law. By identifying pre-concept commitments, and adjusting semantics to clarify what jurists respectively mean when they use the term “law,” jurists may better engage each other—meaningfully agreeing and disagreeing—to address international problems more effectively, or at the very least, with less confusion. The Article concludes by

3

See Harold Lasswell & Myres S. McDougal, Jurisprudence for a Free Society (1992); Mary Ellen O’Connell, The Power and Purpose of International Law (2008); Anne Marie Slaughter, A New World Order (2004); Jack Goldsmith & Eric Posner, The Limits of International Law 3 (2005); James Crawford, The Creation of States in International Law (2007); Martti Koskenniemi, From Apology to Utopia: The Structure of International Legal Arguments (2006); Hans Kelsen, Principles of International Law (Robert W. Tucker ed., 2d. rev. ed. 1966); Abram Chayes, Thomas Ehrlich & Andreas F. Lowenfeld, International Legal Process (1968); Hilary Charlesworth, Christine Chinkin & Shelley Wright, Feminist Approaches to International Law, 85 Am. J. Int’l L. 613 (1991). For a good discussion of the major theories of international law, see generally Methods in International Law (S. Ratner & A. Slaughter eds., 2004). 4 See Richard H. Steinberg & Jonathan M. Zasloff, Power and International Law, 100 Am. J. Int’l L. 64, 64–65 (2006) (discussing fragmentation of international law theory). 5 There are of course many other important theories of international law. See supra n. 2. Due to constraints of space, the theoretical moves proposed in this Article will have to be tested against the other theories in future scholarship. See generally Tai-Heng Cheng, International Law as Commitment (forthcoming, Oxford University Press, 2010).

fragmentation of international law

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hypothesizing that differences among other international legal theories may similarly be clarified by examining their pre-concept commitments, a process that could help international actors understand and bridge their respective perspectives on international law. An entry point into the fragmentation of international law vis-à-vis positivism and policy-oriented jurisprudence is the criticism that proponents of the former have made of the latter. Ever since the policy-oriented jurisprudence was developed in the 1930s, positivists have criticized it for apparently “conflating law, political science and politics plain and simple.”6 Yet, policyoriented lawyers have long participated in decision-making in international legal problems alongside positivists,7 confounding attempts at unifying international law behind one theoretical orientation. Before positivism and policy-oriented jurisprudence can be reconciled to reduce the fragmentation of international law, the positivist critique needs to be carefully examined and addressed. This essay will unpack what key positivist criticisms could be, how they might be justified, as well as addressed, and, importantly, whether it is possible to find ways for positivists and New Haven jurists to understand and engage each other even more effectively. There are at least three different but related versions of the general critique that policy-oriented jurisprudence conflates law, policy and politics.8 The first version is that policy-oriented jurisprudence conflates law with politics. This essay will argue that this claim is conceptually inaccurate because the policy 6 Bruno Simma & Andreas L. Paulus, The Responsibility of Individuals for Human Rights Abuses in Internal Conflicts: A Positivist View, 93 Am. J. Int’l L. 302, 305 (1999); see Oscar Schachter, Panel Remarks, McDougal’s Jurisprudence: Utility, Influence, Controversy, (April 26, 1985) in 79 Am. Soc’y Int’l L. Proc. 266, 267 (1985) [Hereinafter McDougal’s Jurisprudence: Utility, Influence, Controversy] (“Above all, the complaint charges that by subordinating law to policy, the McDougal approach virtually dissolves the restraints of rules and opens the way for partisan or subjective policies disguised as law.”). Law and Economics scholars tend also to adopt the positivist concept of law as a system of rules, see generally Jack L. Goldsmith & Eric Posner, The Limits of International Law parts I & II (2005); Andrew T. Guzman, How International Law Works chs. 4 & 5 (2007), and have leveled similar criticisms of the New Haven School. See Jeffrey Dunoff & Joel P. Trachtman, The Law and Economics of Humanitarian Law Violations in Internal Conflict, 93 Am. J. Int’l L. 394, 408 (1999) (criticizing the “school’s failure to distinguish clearly between law and politics,” and observing that “many leading New Haven theorists have tended to merge law into policy.”). 7 See Methanex v. United States (NAFTA/UNCITRAL, Aug. 3, 2005), slip op. (Arbitrators: V.V. Veeder; W. Michael Reisman, William Rowley). Dame Rosalyn Higgins, the Former President of International Court of Justice, and Judge Florentino Feliciano, the Chairman of the Appellate Body of the World Trade Organization and President of the Philippines Supreme Court, were both schooled in policy-oriented jurisprudence. Policy-oriented jurisprudence has also been applied in national courts. See, e.g., De Los Santos Mora v. N.Y., 524 F.3d 183, 190 n. 9 (2d Cir. 2008), cert. denied 2008 U.S Dist. LEXIS 7724 (Oct. 14, 2008); United States v. Corey, 232 F.3d 1166, 1177 (9th Cir. 2000); Mortimer v. Fed. Rep. Germany, 1:05-cv-10669, Order Denying Amendment (S.D.N.Y. Apr. 9, 2008), slip op. at 2. 8 Supra note 5.

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oriented concept of law explicitly excludes purely political considerations. It is impossible to examine every past application of policy oriented jurisprudence to determine conclusively whether politics was injected into the mix. But even if it were possible, that would not conclusively establish that policy oriented jurisprudence as a conceptual matter conflates law with politics. Just as positivists may apply politics to law in error without inserting politics into the positivist concept of law, policy oriented jurists could apply politics to law in error without injecting politics into the policy oriented concept of law. The second version of the critique is that the policy oriented concept of law wrongly incorporates policy into law. This criticism cannot be made by soft positivists, whose concept of law accepts that criteria for legal validity could, but need not, include policy or normative heuristics. The incorporation of policy as a criterion for legal validity under the policy oriented concept of law is therefore consistent with the soft positivist concept of law. Hard positivists, whose concept of law excludes normative considerations from the criteria for legal validity, can make the second version of the critique described above. This essay will argue that hard positivism does not accord with the semantic usage of the term international law, or, in the alternative, does not accord with a functional usage of the term. The third version of the critique is that the extent to which the policy oriented concept of law incorporates policy is wrong, or at least different from the soft positivist concept of law. Although soft positivists might agree with policy oriented jurists that the concept of law could refer to normative criteria for legality, soft positivists might charge that the policy oriented concept gives excessive weight to policy, or is insufficiently determinate in its application of policy. A key intellectual task in policy oriented jurisprudence is the clarification of standpoints. Undertaking this task brings into focus points of agreement and disagreement about whether the policy oriented concept of law excessively or indeterminately incorporates policy into law. When the policy oriented jurist serves as a judge, arbitrator, or counsel, in the normal case, his references to policy in identifying and applying the applicable laws tend to go only as far as permitted by the same secondary legal rules that positivists apply. When the policy oriented jurist steps into the role of a legal scholar recommending alternative visions of what the law could be, he is less constrained in imagining the law. The scholarly application of the policy oriented concept of law appears incompatible with the positivist concept of law. Policy oriented jurisprudence conceives of law as an authoritative and controlling process of decision-making to maximize human dignity. Legal rules do not


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matter solely because of their formal legal pedigree. It also matters whether they are accompanied by expectations of compliance, the extent to which they are in fact controlling, and whether their prescriptions promote world values. Conversely, practices without formal legal pedigree are relevant if they institutionalize expectations of compliance and accord with human dignity. In contrast, positivism conceives of law very differently. At the risk of being overly reductive, at least for the moment, it conceives of law as a body of rules derived from secondary rules identifying formal legal sources. This essay will argue that although the policy oriented and positivist concepts of law are incompatible in this regard, this is not a meaningful conceptual disagreement because the disagreement arises from commitments of that are anterior to conceptualizing law. These commitments, which I call pre-concept commitments, in my view, are not of a conceptual nature. They are instead commitments that are ontological, political, normative,9 and/or semantic. Because of their different respective pre-concept commitments, positivists and policy-oriented jurists have undertaken different intellectual tasks concerning different systems under their respective inquiries. Without agreement on pre-concept commitments, it is difficult to have meaningful conceptual disagreements. The disagreements as to pre-concept commitments are meaningful normative or political disagreements. From a pragmatic point of view, however, it is mostly unnecessary to resolve these disagreements. With an adjustment of semantics, positivists and policy oriented jurists should be able to choose either concept of law without causing confusion. They may even subsequently accept renvoi to the other concept if the situation requires. I hope that this attempt to deepen our understanding of the nature of the philosophical differences between positivists and policy-oriented jurists may be a useful contribution to scholarship because it begins to fill the interstices between international legal theory and conceptual jurisprudence. International law scholars are familiar with different concepts of international law,10 but only a few international law scholars have appraised international law theory through the lens of conceptual jurisprudence.11 Legal philosophers

9 “Normative” is used here in contrast to “descriptive” or “conceptual.” See Jeremy Waldron, Normative (or Ethical) Positivism, in Hart’s Postscript 411, 411 (J. Coleman ed., 2001) [hereinafter Hart’s Postscript] (discussing meanings of normativity and using normative in the same sense as it is used here). 10 See Mary Ellen O’Connell, The Power and Purpose of International Law 17–151 (2008); Richard H. Steinberg & Jonathan M. Zasloff, Power and International Law, 100 Am. J. Int’l L. 64 (2006). 11 See Douglas M. Johnston, The Historical Foundations of World Order 120 (2008); Benedict Kingsbury, The Concept of Compliance as a Function of Competing

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have discussed the concept of law, but many have not fully considered international law.12 There is much work to be done in the philosophy of international law.13 Each version of the positivist critique is examined below in turn. II. Does the New Haven Concept of Law Conflate Law and Politics? Myres S. McDougal and Harold D. Lasswell began working on the policyoriented approach to law at Yale University over sixty years ago.14 As the policy-oriented approach developed, observers conferred upon it the alternate appellation, “the New Haven School,” in recognition of its geographical and intellectual locus and its worldwide epistemic community of adherents. From its inception, the New Haven School has provoked strong responses from positivists.15 This may have been due in part to McDougal’s iconoclastic persona.16 But it was also possibly due to perceptions that the New Haven concept of law was diametrically opposed to the positivist concept of law.17

Conceptions of International Law, 19 Mich. J. Int’l L. 345 (1998) [hereinafter Kingsbury, The Concept of Compliance]. 12 See John Finnis, Natural Law and Natural Rights 238–45 (2d ed. 1986); Ronald Dworkin, Law’s Empire 71 (1986) (not discussing international law); cf., H.L.A. Hart, The Concept of Law 213–37 (2d ed. 1997) [hereinafter Hart, The Concept of Law]. Although Hart considers international law at length, international law has continued to evolve since The Concept of Law was published. 13 Cf., Kingsbury, The Concept of Compliance, supra note 10, at 368 (suggesting a research agenda on the philosophy of compliance in international law). 14 See generally Harold D. Lasswell & Myres S. McDougal, Legal Education and Public Policy: Professional Training in the Public Interest, 52 Yale L. J. 203 (1943). 15 See David J. Bederman, Appraising a Century of Scholarship in the American Journal of International Law, 100 Am. J. Int’l L. 20, 41 (2006) (“So powerful was this new approach—and generally unprecedented and subversive—that it naturally started to draw sharp critiques.”). 16 See W. Michael Reisman, Theory About Law: Jurisprudence for a Free Society, 108 Yale L. J. 935, 939 (1999) [hereinafter Reisman, Theory About Law] (“McDougal’s image . . . in the collective mind of the academy and the profession [was that of an] enfant terrible and destroyer of the law.”). 17 See Harold Hongju Koh, Is there a “New” New Haven School of International Law?, 32 Yale J. Int’l L. 559, 561 (2007) (“The New Haven School expressly intended to criticize both legal formalism and legal positivism in international law.”); Rosalyn Higgins, Diverging Anglo-American Attitudes to International Law: Introductory Statement, 2 Ga. J. Int’l & Comp. L. 1 (1972) (recording Rosalyn Higgin’s observations about skepticism of British scholars towards mixing policy with legal rules); Julien Cantegreil, Legal Formalism Meets Policy-Oriented Jurisprudence: A More European Approach to Frame the War on Terror, 60 Me. L. Rev. 97, 99 (2008) (noting that the policy-oriented approach is “diametrically opposed to the Kelsenian spirit”).


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Generally speaking, positivists conceive of law as a system of rules that regulate the conduct of those to whom the rules address.18 Ulrich Fastenrath has explained that legal validity in positivism is determined by “a lawcreating process, without affecting normative content.”19 In contrast, the New Haven School conceives of law as a global process of authoritative and controlling decision-making to address international problems and to maximize human dignity.20 Normative concerns are explicitly considered and included in the criteria for legal validity. Consequently, the New Haven concept of law has appeared to be incompatible with positivism. Some critics have charged that the New Haven concept of law confuses law with politics.21 Others have even gone so far as to charge that the New Haven School served U.S. foreign policy interests.22 In the author’s view, the charge that the New Haven concept of law confuses politics with law is conceptually inaccurate, because the School explicitly distinguishes policy from politics. To explain this point, a somewhat lengthy exposition of the New Haven concept of law is necessary. It is a Herculean task to summarize the New Haven approach. In 1992, McDougal and Lasswell, working with Andrew Willard, took over 1,500 pages to set out the New Haven approach after decades of developing it.23 Professor W. Michael Reisman, the leading contemporary scholar from the New Haven School, and his associates have continued to apply and refine

18 See Simma & Paulus, supra note 5, at 304 (“Law is regarded as a unified system of rules[.]”); Ulrich Fastenrath, Relative Normativity in International Law, 4 Eur. J. Int’l L. 305, 307 (1993) (“Legal positivism identifies law with legal propositions (Rechtssätze), i.e., the wording of positive rules[.]”). 19 Fastenrath, supra note 17, at 307. Fastenrath’s exposition seems a little simplistic, because it does not account for the soft positivist conception of law; see infra, Part II; see also generally, Benedict Kingsbury, Legal Positivism as Normative Politics: International Society, Balance of Power and Lassa Oppenheim’s Positive International Law, 13 Eur. J. Int’l L. 401 (2002) (explaining normative positivism). 20 See Siegfried Wiessner & Andrew R. Williard, Policy-Oriented Jurisprudence & Human Rights Abuse in Internal Conflict: Toward a World Public Order of Human Dignity, 93 Am. J. Int’l L. 316, 319 (1999) (“First, law is conceived of as an ongoing process of authoritative and controlling decision.”). 21 See supra note 5. 22 Hari M. Osofsky, A Law and Geography Perspective on the New Haven School, 32 Yale J. Int’l L. 421, 424 (2007) (“The School has been accused of . . . serving as apologists for U.S. foreign policy.”); O’Connell, supra note 9, at 70 (“The harsher criticism of the New Haven School was aimed at McDougal’s evident promotion of United States policy.”); Reisman, Theory About Law, supra note 15, at 939 (noting that critics have accused policy-oriented jurisprudence of promoting American values). 23 Myres S. McDougal & Harold Lasswell, Jurisprudence for a Free Society (1992).

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the approach.24 Nonetheless, bearing in mind Reisman’s admonition that the scholar is the “ultimate instrument of perception and appraisal,”25 an attempt will be made here to describe the features of the New Haven concept of law salient to the present discussion.26 The New Haven School is principally interested in guiding decisionmakers about how to act in an international problem or situation. It is less interested in only identifying and applying rules that the world community might ordinarily term “laws.”27 Thus, the New Haven School conceives of law not just as a body of laws identified by reference to past decisions (whether judicial, legislative, executive) that have been designated by a secondary rule of identification as a law. Law is instead conceived of as an authoritative and controlling process of decision-making to address problems and secure maximum human dignity. This formulation might seem inaccessible to lawyers unfamiliar with New Haven syntax and vocabulary,28 so each element is explained in turn below. In its ordinary semantic usage, “laws” often refer to rules, commands or prescriptions that have been designated as “legal” because they have been identified in the past in a court or legislature or executive decision. In the international context, a past decision includes accepted sources and secondary rules of identification, such as treaties.29 To the New Haven scholar, however, the identification of a law according to predetermined secondary rules fails to provide adequate guidance to relevant actors about appropriate conduct. The actor will want to know how the rule is communicated, to whom, and with what effect. The actor will also want to know whether the rule reflects his interests and, whether it is good policy. To the extent that the actor’s interests deviate from good policies 24 See, e.g., W. Michael Reisman, Testing a Theory About Law, Wissenschaftskolleg 104, 104 (Jahrbuch, 1989/90) [hereinafter Testing a Theory About Law]; Wiessner & Willard, supra note 19, at 316; Cantegreil, supra note 16, at 99; Osofsky, supra note 21, at 422–26. 25 W. Michael Reisman, Preface in Douglas M. Johnston, The Historical Foundations of World Order vii, vii (2008) [hereinafter Johnston Preface]. 26 For other expositions of the New Haven concept of law, see Johnston, supra note 10, at 115–18; Cantegreil, supra note 16, at 99. 27 Eisuke Suzuki, The New Haven School of International Law: An Invitation to PolicyOriented Jurisprudence, 1 Yale Stud. World Pub. Ord. 1, 30 (1974) (“[I]nternational law is most realistically observed, not as a mere rigid set of rules, but as the whole process of authoritative decision in which patterns of authority and patterns of control are appropriately conjoined.”). 28 See Burns H. Weston, McDougal’s Jurisprudence: Utility, Influence, Controversy, supra note 5, at 266 (noting that some audiences find New Haven vocabulary inaccessible). The author intentionally describes the New Haven conceptualization prosaically in an effort to address this criticism. 29 See Statute of the International Court of Justice, art. 38(1), June 26, 1945, 59 Stat. 1055; cf., Rosalyn Higgins, Problems and Process: International Law and How We Use It 3 (1994) (“[R]ules are just accumulated past decisions.”).


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for the community at large, the New Haven scholar may take an external perspective and try to persuade the actor to set aside its parochial interests in favor of shared world values.30 Because identifying a rule as a law through past decisions could obscure the intellectual tasks described here, the New Haven School resists characterizing rules, standing alone, as law. An example might make this point clearer. The New Haven scholar would accept that the Genocide Convention contains rules prohibiting genocide,31 as defined under the convention.32 But the New Haven scholar would not stop there in studying the international legal system. He would want to know how the Genocide Convention is communicated to potential and actual genocidal regimes and with what effect. He would want to know when and why genocide occurs and when it does not. He would study prior incidents in which genocide took place, genocide was prevented, or genocide was stopped. Based on the information he collects, the New Haven scholar would make recommendations to relevant actors, including state officials, courts, and non-governmental organizations. These recommendations are intended to coordinate their strategies in an authoritative and controlling fashion to prevent genocide from occurring, to stop it when it occurs, and to take remedial actions to ameliorate its consequences. The New Haven scholar is concerned with the entire process in which relevant actors, such as states, officials, courts, non-governmental organizations, international organizations, and corporations communicate past decisions to each other about the issue at hand; how they interact and address problems; and how good outcomes may be secured in the present and future. To count as law, as opposed to random or unlawful processes, the process of interaction must be authoritative and controlling. By “authority,” the New Haven School means “expectations of appropriate conduct” at each stage of the process in which problems are addressed.33 These expectations come from a combination of factors. Each of these factors can be explained and illustrated with a hypothetical arbitration between two states concerning sovereignty over a disputed territory.34 30 For an excellent discussion of how legal advisors should, and in fact do, balance the interests of their government with broader ethical and policy concerns, see Johnston, supra note 10, at 66–70. 31 See Convention on the Prevention and Punishment of the Crime of Genocide, Dec. 9, 1948, 102 Stat. 3045, 78 U.N.T.S. 277. 32 Id. at art. 2. 33 Myres S. McDougal, Harold D. Lasswell & W. Michael Reisman, The World Constitutive Process of Authoritative Decision, 19 J. Legal Educ. 253, 256 (1966). 34 Although this example is constructed hypothetically, Professor Reisman has served as arbitrator and as counsel in at least two actual territorial disputes. See Eritrea-Ethiopia Boundary Commission Decision (Eri. v. Eth.) (Apr. 13, 2000), slip op.; Case Concerning Land Reclamation by Singapore in and Around the Straits of Johor (Malay. v. Sing.), Request for

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The first factor is whether the decision-maker has been properly endowed with decision-making power, such as an arbitrator selected by two states to resolve their dispute over whether a disputed territory should be restored to one or the other state.35 The second factor is whether the decision-maker is pursuing proper objectives, such as the reduction of conflict, rather than unacceptable personal goals, such as the pursuit of bribes.36 The third factor is whether the decision supports relevant world values. So, an arbitral award that purports to authorize a state to recapture the invaded territory through any means, including genocide, would be unlawful. This is because permitting genocide is bad policy, and strong international decisions have been made, in the form of the Genocide Convention and analogous jus cogens, to reject this policy. The fourth factor is whether the decision was made in a proper physical, temporal and institutional context. Continuing our arbitration example, this includes requirements that the arbitral award should be rendered after a hearing, while the dispute is still alive and of a legal nature, and in accord with the rules of the arbitration center designed by the arbitration agreement.37 By “controlling,” the New Haven School means decisions and processes that actually direct outcomes. Whereas “authority” has normative and factual elements, “control” is purely a question of fact. So, an arbitral award is controlling if it causes the disputing states to follow the decision, or to oppose it in ways that were contemplated in advance as acceptable and appropriate, such as by challenging enforcement in a national court, seeking annulment before a review committee, or settling the dispute. If law is a process of authoritative and controlling decisions, is a decision that is authoritative but not controlling still law? In the arbitration example, if the award is effectively ignored by the losing party, is it still law? The New Haven School would resist designating the award as not law simply because it is not controlling for a period of time. Few international processes are fully authoritative and fully controlling. Law is not a binary concept in which the

Provisional Measures, ITLOS/PV.03/05 (Int’l Trib. For the Law of the Sea, Sept. 27, 2003) Hearing Tr. 28:16–33:27. 35 See W. Michael Reisman, The Breakdown of the Control Mechanism in ICSID Arbitration, 1989 Duke L.J. 739, 745 (1989). 36 See generally, Jason N. Summerfield, The Corruption Defense in Investment Disputes, 6:1 Transnat’l Disp. Mgmt. (Mar. 2009) (appraising corruption in arbitration from a New Haven perspective). 37 See McDougal, Lasswell & Reisman, supra note 32, at 266 (making the same points).


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process is most usefully designated as either lawful or not lawful.38 There can be shades of grey in an international process that addresses problems. Depending on how authoritative and controlling it is, it may be more or less like law. Because law is seen as the entire process of decision-making, the New Haven School would not necessarily characterize the ignored award as not law in the first instance. Instead, it would focus on whether and how the award could be implemented in the face of a losing party that seems, at least for the moment, intent on and able to ignore the award. If, however, the award were never complied with, and indeed a majority of the awards rendered under the arbitral institution are effectively ignored over a significant time period, the New Haven School might explain that although the arbitral institution and awards had the formal appearance of law, in substance they had ceased to function as law because of the utter lack of control. Over time, the awards may not even be authoritative in the sense that parties in arbitration may not have any expectation that the appropriate conduct is to comply with the award. If it became the situation that most arbitrations under the arbitral institution were reduced to kabuki, New Haven scholars might characterize the arbitration proceedings as a “myth system” in which awards were rendered and supposedly “lawful” in the ordinary semantic usage of that word. This myth system would exist alongside an “operational code” in which the world community understands that the award would be effectively ignored. From the functional New Haven perspective, an ignored award from an arbitral institution that is broken could not be considered law even if it is designated as such by formal sources.39 An international decision that is controlling but not authoritative may also seem less like law. At the extreme, if a decision is made with such power that it controls outcomes, but is otherwise not authoritative, that decision may not be lawful. So a rogue state, or a powerful state (take your pick), that uses conventional weapons or weapons of mass destruction unprovoked, or under an artificial fig leaf of self-defense, may well control at least one outcome—the destruction of the state attacked. But the act of aggression would not be lawful. From the New Haven perspective, the designation of the act as

38 Cf. Tai-Heng Cheng, The Central Case Approach to Human Rights, 13 Pac. Rim L. & Pol’y J. 257 (2004) (rejecting binary approach to human rights in favor of a central case approach). 39 See generally W. Michael Reisman, Myth System and Operational Code, 3 Yale J. World Pub. Ord. 229 (1976–1977). Reisman’s separation of law into a myth system and operational code may be conceptually incompatible with some forms of positivism, because it can be accommodated within a sophisticated rendering of the rule of recognition that allows the community to distinguish between rhetorical claims and actual prescriptions that are followed.

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unlawful is insufficient. The New Haven scholar is interested in also making recommendations to relevant actors in the global community to respond in an appropriate process to restore world order. There is one more element of the New Haven concept of law that needs explanation. The ideas of authority and law are intrinsically entwined with the goal to which the process of law is directed. The New Haven School has designated the promotion of human dignity to be the preeminent goal. The normativity of law comes in part from the values it promotes. These values are designated in short hand form by the phrase, “human dignity.” This capacious term includes values such as affection, respect and well-being.40 At its margins, scholars may debate whether a value is intrinsic to human dignity, such as an overly expansive or idiosyncratic notion of democracy. But there are clear instances in which an otherwise authoritative and controlling decision would not be law because the decision is abhorrent to human dignity. If an award purported to authorize a state to commit genocide as a self-help measure to reclaim its territory, the award would not be regarded as lawful. Its lawless nature would not be due only to the Genocide Convention and jus cogens prohibiting genocide. It would also be due to the self-evident policy against genocide. In summary, the New Haven School conceives of law not just as a static body of rules, but as an authoritative and controlling process through which social ends are constantly negotiated, adjusted and secured.41 The New Haven concept is part descriptive, for it describes the international process involved in preventing and resolving international problems. It is in part normative, for it identifies social goals to not only direct the process but also to serve as a heuristic for the legality of the process. It is also in part prescriptive, because it makes recommendations to a wide range of decision-makers about appropriate actions and responses. But, perhaps ironically to some observers, it is not dogmatic. As an instrumentalist conception of law, it is open to making recommendations to decision-makers to use whatever tools are necessary or legitimate to achieve the social goals. These tools include, but are not necessarily limited to, legal rules. Nothing in the foregoing exposition of the New Haven concept of law incorporates politics into the criteria for law. Yet, critics have contended that “policy” functions as a code word for “politics.”42 Perceptions that McDougal 40

McDougal & Lasswell, Jurisprudence for a Free Society, supra note 22, at 375–

590. 41 See Harold Hongju Koh, A World Transformed, 20 Yale J. Int’l L. ix, xii–xiii (1995) (explaining that the New Haven School seeks to “Develop a functional critique of international law in terms of social ends . . . that shall conceive of the legal order as process and not as a condition.” (quoting Roscoe Pound, Philosophical Theory and International Law, 1 Bibliotheca Visseriana 73, 89 (1932))). 42 See Johnston, supra note 10, at 121 (attributing this view to Richard Falk).


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used the New Haven concept of law to advance American interests may have fueled this suspicion.43 Space constraints here make it impossible to determine whether each of McDougal’s interventions injected politics into law, or whether they simply reflected the promotion of universal human values.44 In any event, such an exercise would not get us very far in determining whether the New Haven concept of law conflates law with policy. Just as positivists may legitimately disagree with each other about the correct application of a rule to facts without necessarily indicating that the positivist concept of law conflates interests with rules, New Haven jurists may take controversial positions in an international problem without necessarily indicating that the New Haven concept of law folds law into politics. Even if in a particular problem a New Haven jurist incorporated law into politics, that may simply be a misapplication of the New Haven concept of law, just as positivists may apply a wrong rule of law without undermining the concept of law itself. Any appraisal of the New Haven concept of law should not be transfixed on its applications to problems that occurred decades ago. In historical and contemporary applications, New Haven jurists have taken positions contrary to prevailing U.S. national policies or interests.45 Following the U.S. invasion of Iraq in 2003, Reisman devoted his speech accepting the American Society of International Law’s Manley O. Hudson medal—its highest honor—to a careful critique of regime change. He concluded: [L]et the strongest and best-intentioned government contemplating or being pressed to undertake regime change remember that not everything noble is lawful; not everything noble and lawful is feasible; and not everything noble, lawful, and feasible is wise.46

43 Id. at 119 (“McDougal himself was seen as an unabashed advocate of US foreign policy.”); Edward McWhinney, Book Review, 87 Am. J. Int’l L. 335, 338–9 (1993) (reviewing Harold D. Laswell & Myres S. McDougal, Jurisprudence for a Free Society (1992)). 44 Reisman, Theory About Law, supra note 15, at 939 (noting Eisuke Suziki’s argument that the commitment to human dignity, which is core to New Haven jurisprudence, was a universal value, not an American value). 45 See Rosalyn Higgins, The Benign First Mate, in Law in the Service of Human Dignity: Essays in Honour of Florentino Feliciano 11 (S. Charnovitz et al. eds. 2005) [hereinafter Feliciano Festschrift] (“Feliciano’s life in the law is a silent rebuttal to those who contend that a policy-oriented approach to law is but a façade for politics,. . . .”); Tai-Heng Cheng, Power and Authority in International Investment Law, 20 Am. U. Int’l L. Rev. 465, 508–512 (2005) (criticizing the Loewen award for refusing to find jurisdiction over NAFTA dispute arising from lack of due process in Mississippi courts); Julien Cantegreil, The Final Award in Mondev International v. United States of America, in The Reasons Requirement in International Investment Arbitration 33, 50–57 (M. Reisman & G.A. Alverez eds. 2008) [hereinafter The Reasons Requirement] (criticizing the Mondev Award for finding in favor of the United States based on inadequate reasoning). 46 W. Michael Reisman, The Manley O. Hudson Lecture: Why Regime Change Is (Almost Always) A Bad Idea, 98 Am. J. Int’l L. 516, 525 (2004).

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In response to the Bush doctrine of preemptive force, Reisman wrote a Centennial Essay in the American Journal of International Law warning that the Bush doctrine could pose a threat to world order, because it encouraged other states to claim similar preemptive rights.47 These appraisals contradict the claim that New Haven jurisprudence blindly promotes U.S. foreign policies. Further, Reisman’s scholarship explicitly disavows not just biases towards U.S. interests, but the injection of politics into the New Haven concept of law. In Jurisprudence, he wrote: A . . . point of importance is the need to observe yourself as the instrument of observation and choice. . . . [T]he responsible decision maker or appraiser should develop methods of scrutinizing the self-system and determining the extent to which emotional tendencies, sub-group parochialisms or institutional biases are distorting or skewing observation and choice.48

Thus, whatever the truth or falsity of the factual claim that some appliers of the New Haven jurisprudence might have injected politics into their appraisals (just as scholars and advocates using any concept of law may do so intentionally or inadvertently), the New Haven concept of law does not incorporate partisan politics as a criteria for policy choices and legal validity. III. Does the New Haven Concept of Law Wrongly Conflate Law and Policy? The second version of the positivist critique of the New Haven concept of law is that it wrongly conflates law and policy. Soft positivists, who accept that legal validity can have normative or policy criteria, cannot make this criticism. Hard positivists, however, can make this criticism. They contend that the concept of law cannot admit normative criteria for legal validity, which must be confined to social facts. Yet, if this is true, this hard positivist critique of the New Haven concept of law applies with equal force to their critique of soft positivists. The incorporation of policy content into law would not be a unique failing of New Haven jurisprudence. In any event, the hard positivist concept of law does not accord with the ordinary understanding of the term international law and how it functions.

47 See generally W. Michael Reisman & Andrea Armstrong, The Past and Future of the Claim of Pre-emptive Self-Defense, 100 Am. J. Int’l L. 525 (2006). 48 W. Michael Reisman & Aaron M. Schreiber, Jurisprudence: Understanding and Shaping Law 13 (1987) [hereinafter Reisman & Schreiber, Jurisprudence].


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An excursion into positivism will help explain these points. It is perhaps an impossible task to adequately convey the sophistication of positivism here, but nonetheless an attempt will be made. Positivism as a legal philosophy provides the conceptual framework for positivism in international law. The key intellectual goal of positivism, according to its preeminent philosophers, H.L.A. Hart and Hans Kelsen, is to describe the concept of law by reference to a central case or ideal type legal system.49 This descriptive enterprise is “morally neutral and has no justifactory aims.”50 Hart’s ideal type was domestic legal orders, in particular England. Kelsen’s ideal types were positive laws from domestic legal orders, such as the United States or France, or, importantly for international law positivists, international law. Regardless of the legal system, Kelsen included within his field of inquiry only “positive law.”51 At its core, positivism conceives of law as a body of rules identified as laws by reference to past decisions acknowledged as providing the rules with legal pedigree. Law is therefore a social fact.52 Kelsen conceptualized his “pure theory of law” as a body of rules ultimately emanating from a grundnorm, or basic validating norm, such as the very first constitution in a legal order.53 For many Anglo-American legal philosophers, Hart developed an enduring version of positivism. According to Hart, a legal system exists if two social facts exist. First, officials accept secondary rules, the most important of which is a second rule of recognition, prescribing the validity of primary rules. Second, there is a general acceptance by the community, to whom rules are addressed, of primary rules identified as valid by secondary rules and

49 See Hart, The Concept of Law, supra note 11, at 239 (stating that The Concept of Law “seeks to give an explanatory and clarifying account of law as a complex social and political institution with a rule-governed (and in that sense “normative”) aspect”); id. at 100 (focusing on “the salient features of a modern municipal legal system”). 50 See Hart, The Concept of Law, supra note 11, at 240 (“My account is descriptive in that it is morally neutral and has no justificatory aims: it does not seek to justify or commend on moral or other grounds the forms and structures which appear in my general account of law[.]”); Hans Kelsen, General Theory of Law and State xiii (A. Wedberg trans., 1945), reprinted in Reisman & Schreiber, Jurisprudence, supra note 47 at 381 (1987) (“the aim of this general theory of law is to enable the jurist concerned with a particular legal order . . . to understand and describe as exactly as possible his own positive law.”). 51 Kelsen, supra note 49, at xiii–xviii (“[T]he pure theory of law seeks to attain its results exclusively from an analysis of positive law.”). 52 In an earlier version of positivism, Austin stated: “Laws proper, or properly so called, are commands; laws which are not commands, are laws improper or improperly so called.” John Austin, The Province of Jurisprudence Determined 1–3 (1832). But see Hart, The Concept of Law, supra note 11, at 79 (criticizing Austin’s concept of law for failing to distinguish law from orders issued at gunpoint). 53 Kelsen, supra note 49, at xiii–xviii, 110–36, 175.

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the rule of recognition.54 The rule of recognition is a social rule or custom constituted by a regular pattern of conduct and by a “distinctive normative attitude” accepting the rule of recognition. This normative attitude is the rule of recognition’s “internal aspect.”55 After Ronald Dworkin launched a stinging attack on Hart’s concept of law,56 Hart clarified in his postscript to The Concept of Law that he did not exclude from his conceptualization of law the possibility that a rule of recognition could, although it need not, prescribe moral or normative criteria (or, in New Haven speak, policy criteria) for the validity of primary rules. This version of positivism has become know as soft, or inclusive, positivism.57 Soft positivism contrasts against hard, or exclusive, positivism. Joseph Raz, perhaps the leading hard positivist, argues that a conceptualization of law cannot include policy or moral criteria for the validity of law, because that would undermine law’s unique claim to authority and render it contingent upon morality.58 Positivists in international law share some key postulates with their cousins in legal philosophy. The function of their conceptualization of law is to identify laws. Unlike New Haven jurists, positivists see their conceptual function as “not to facilitate the decision-makers dilemma between law and politics (and, occasionally, law and morals), but to clarify the legal side of things.”59 Their ideal type of international law is the rules or norms governing international relations. Prosper Weil has asserted that “the aggregate of the legal norms governing international relations” is “as an uncontroversial starting point.”60 Arising from their observation of this ideal type, Bruno Simma and Andreas L. Paulus have stated that all international law positivists are committed to the conceptualization of law in the following terms:

54 Hart, The Concept of Law, supra note 11, at 100–23; see also Stephen Perry, Hart’s Methodological Positivism, in Hart’s Postscript, supra note 8, at 319. 55 Hart, The Concept of Law, supra note 11, at 56. 56 See Dworkin, supra note 11 at 45–46. 57 Hart, The Concept of Law, supra note 11, at 250–54; see Jules Coleman, Negative and Positive Positivism, 11 J. Legal Stud. 139 (1982). 58 See generally Joseph Raz, The Authority of Law: Essays on Law and Morality (1979); see also Jules Coleman, Incorporationism, Conventionality, and the Practical Difference Thesis, in Hart’s Postscript 99, 102, Brian Leiter, Legal Realism, Hard Positivism, and the Limits of Conceptual Analysis, in Hart’s Postscript 355, 355 (both discussing hard and soft positivism). 59 Simma & Paulus, supra note 5, at 307. 60 Prosper Weil, Towards Relative Normativity in International Law?, 77 Am. J. Int’l L. 413, 413 (1983).


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Law is regarded as a unified system of rules that, according to most variants, emanate from state will. This system of rules is an “objective” reality and needs to be distinguished from law “as it should be.”61

In the language of legal philosophy, international law positivists accept, as do their jurisprudence counterparts, what Brian Leiter has termed the Separation Thesis (what law is and what law ought to be are separate questions), and the Social Thesis (what counts as law is fundamentally a question of social fact).62 Where “classical” and “modern” positivists part company is in their criteria for validity of international laws. Simma and Paulus explain that classical positivism demands rigorous tests for legal validity. Extralegal arguments, e.g., arguments that have no textual, systemic or historical basis, are deemed irrelevant to legal analysis; there is only hard law, no soft law.63

Their insistence on a precise rule of recognition could necessitate, or at least explain, classical international law positivists’ rejection of normative or policy criteria for legal validity. Ambiguities in normative criteria would render the rule of recognition uncertain and undermine the concept of law as social fact. In general jurisprudence, this is Dworkin’s Conventionality Thesis.64 Brigitte Stern additionally echos Raz’s argument that law’s distinctive authority or normatively must be internally defined without reference to external values and policies.65 In comparison, modern international law positivists seem more like soft positivists. They acknowledge that “soft law” may be a sort of law even though their criteria for validity is more open textured.66 They also appear to accept the introduction of policy as long as it is prescribed as a relevant consideration by a law. Simma and Paulus state that in circumstances where there does not appear to be only one correct legal answer, the positivist may derive a legal answer by injecting his “ethical standpoint,” for instance through the

61

Simma & Paulus, supra note 5, at 304. Leiter, supra note 57, at 358. 63 Simma & Paulus, supra note 5, at 304. 64 Dworkin, supra note 11, at 114–150; see also Coleman, Incorporationism, Conventionality, and the Practical Difference Thesis, supra note 57, at 99, 102 (noting that Dworkin’s reason for excluding moral criteria is that such criteria are uncertain and undermine law’s conventionality). 65 Brigitte Stern, Custom at the Heart of International Law, 11 Duke J. Comp. & Int’l L. 89, 93–94 (2001) (refusing to “refer to an extra-legal element justifying the passage from fact into law in the customary phenomenon as an approach which is foreign to a veritable legal science” and concluding “law is nothing but a particular factual modality, a legal order that can define itself as a factual order considered as law, without anything needing to be added to this definition.”). 66 Simma & Paulus, supra note 5, at 306. 62

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application of “general principles of law,” or in so far as “global values . . . find sufficient expression in legal form.”67 The critique that the New Haven concept of law improperly incorporates policy as a criterion for legal validity is not one that can be made by positivists of all stripes. Because soft positivists and “modern” international law positivists accept that legal validity could turn on more than just social facts, the references of the New Haven School to policy in determining appropriate laws is compatible with the soft positivist’s concept of law. Hard positivists and “classical” international law positivists could, and indeed must, criticize the New Haven concept of law as wrongly incorporating policy into the criteria for legal validity. Raz is thoroughly rigorous in arguing that law which is contingent on morality or—in the closely-related New Haven vernacular, policy—does not have unique legal authority. Nonetheless, there may be some doubt as to whether law that turns on policy could be both normatively and legally authoritative. But that is a longer debate for another essay. This essay’s response is narrower. Hard positivism may not sit comfortably with international law for at least two other reasons. The first reason turns on the semantic usage of the term. This essay is not committed to this argument for reasons that will become apparent in Part IV of this essay. Nonetheless, he will make it for those who are committed to the value of semantics. The term “international law” in its ordinary semantic usage among international law professionals is often applied to determine the legality of conduct at least in part by normative, moral or policy criteria. For example, customary international law and countless bilateral investment treaties often require host states to accord foreign investments “fair and equitable treatment.” Numerous arbitral awards have confirmed that this standard includes normative criteria such as “legitimate expectations,” and policy criteria, such as whether, in fact-specific contexts, the conduct of the host state promotes business stability and foreign investments.68 An UNCTAD report states that “meaning of [the fair and equitable standard] has not been precisely defined.”69 Under the hard positivist concept of law, the fair and equitable treatment standard could not be law, because the reference to policy is inherently controversial, so it undermines clarity in the 67

Id. at 316. See Wiessner & Willard, supra note 19; see also, Hart, The Concept of Law, supra note 11, at 304; Johnston, supra note 10 (citing the soft positivist Hart in support of their conception of classical positivism). 68 See Tai-Heng Cheng, Precedent and Control in Investment Treaty Arbitration, 30 Fordham J. Int’l L. 1014, 1031–37 (2007) (discussing the fair and equitable treatment standard). 69 See U.N. Conference on Trade and Development (“UNCTAD”), Bilateral Investment Treaties in the Mid-1990s, at 53, U.N. Doc. UNCTAD/ITE/IIT/7, U.N. Sales No. E.98.II.D.8 (1998).


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law and Dworkin’s Conventionality Thesis. Yet, international lawyers, scholars and arbitrators all regard the fair and equitable treatment standard as law. Put another way, the term “international law” includes, as a matter of common usage, imprecise legal rules and standards that contain policy and normative content as essential components. To the extent that conceptual jurisprudence is meant to explain international law as the term is ordinarily used, the inclusion of laws with ambiguous normative and policy criteria within the term international law poses difficulties for the hard positivist’ account of international law. There is a second related, but distinct reason, for doubting the hard positivist concept of law as applied to international law. If a purpose of conceptual jurisprudence is to explain the phenomenon of law and how it makes a practical difference “in the structure and content of deliberation and action,”70 then a concept of law must account for laws that can and do affect how relevant actors think and behave. Returning to the example of the fair and equitable treatment standard, it is beyond doubt that host states and investors regard the fair and equitable treatment standard as functioning as law. They have spent millions of dollars in legal fees disputing whether the standard was breached in investment disputes, and host states have honored awards finding breaches of the standard.71 Because inherently ambiguous and normative international legal rules have affected behavior and decisionmaking in profound ways, it behooves jurists to conceive of law in a way that accounts for such rules. IV. Does the New Haven Concept of Law Meaningfully Differ from Soft Positivism about How and to What Extent Policy is Incorporated into Law? Although soft positivists cannot object to the incorporation of policy per se into the New Haven concept of law, they can object to the manner and extent that policy is incorporated. While it is conceptually possible for the rule of recognition to refer to normative or policy criteria for validity, soft positivists may charge that the rule of recognition under the New Haven concept of law contains wrong policy criteria or excessively favors policy criteria.

70 Coleman, Incorporationism, Conventionality, and the Practical Difference Thesis, supra note 57, at 101 (describing this as the practical difference thesis). 71 ADF Group Inc. v. United States of America, 4 Asper Rev. Int’l Bus. & Trade L. 293 (2004) (ICSID Jan. 9, 2003); Waste Management, Inc. v. United Mexican States, 40 I.L.M. 56 (ICSID June 02, 2000); American Mfg. & Trading, Inc. v. Republic of aire, 36 I.L.M. 1535 (1997) (ICSID Feb. 21, 1997).

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Two contrasting examples clarify this point. A modern international law positivist might accept renvoi to policy considerations where a legal rule explicitly contains policy considerations, such as the rule requiring host states to accord foreign investors fair and equitable treatment. If a New Haven jurist referred to the policy of promoting foreign investments in determining if a host state was fair and equitable, the soft positivist would not quarrel with this application of the New Haven concept of law. In contrast, the modern international law positivist would not accept renvoi to policy considerations without reference to a legal rule that incorporates normative or policy criteria for legality. Consider Articles 2(4) and 51 of the U.N. Charter, which prohibit the use of military force except against an armed attack.72 In addressing the question of whether these articles prohibit preemptive military force against a putative enemy, which may acquire the capability to launch a devastating attack in the future, a soft positivist would be constrained by the plain and ordinary language of the Articles in light of the object and purpose of the UN Charter, as required by Article 31(1) of the Vienna Convention on the Law of Treaties of 1969.73 The soft positivist may also consider subsequent state practices on the use of force to interpret Articles 2(4) and 51 of the U.N. Charter, as mandated by Article 31(3) of the Vienna Convention. But the soft positivist would not countenance determining the meaning of Articles 2(4) and 51, or more broadly, the legality of preemptive force, by appraising policy concerns thoroughly divorced from canons of treaty interpretation. Imagine if a New Haven jurist interpreted Articles 2(4) and 51 without referring to formal rules of treaty interpretation, but instead turned to relevant world policies, such as the protection of human lives, the maintenance of world order, and the potential for abuse in unilateral assessments of future risk. A soft positivist may well charge that the New Haven concept of law incorporated policy in a mistaken manner because it did not identify any secondary rule permitting such references to policy.

72 U.N. Charter art. 2, para. 4. (“All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations.”); U.N. Charter art. 51 (“Nothing in the present Charter shall impair the inherent right of individual or collective self-defense if an armed attack occurs against a Member of the United Nations, until the Security Council has taken the measures necessary to maintain international peace and security. Measures taken by Members in the exercise of this right of self-defense shall be immediately reported to the Security Council and shall not in any way affect the authority and responsibility of the Security Council under the present Charter to take at any time such action as it deems necessary in order to maintain or restore international peace and security.”). 73 United Nations Vienna Convention on the Law of Treaties art. 31, May 23, 1969, 1155 U.N.T.S. 331.


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The charge that the New Haven concept of law incorporates policy into law differently than soft positivism is only partially correct. An intellectual task of the New Haven School is the clarification of standpoint. The manner in which one discerns international law is guided by one’s role and standpoint. From several of these standpoints, the application of New Haven concept of law is practically similar in some ways similar to positivism. As a judge or arbitrator, the New Haven jurist is concerned about reaching a normatively desirable outcome, but, he is also constrained by formal secondary rules guiding the interpretation of laws and their application to facts to reach judicial decisions.74 There are strong policy reasons for this practice. It is good policy to generally follow a method of legal reasoning accepted as legitimate by the community, and the applicable primary and secondary rules often secure relevant community values.75 Thus, Reisman has written that when deciding arbitral disputes, “identification of the major principle and a pellucid logical exercise would appear to be a minimum requirement.”76 This reliance on secondary rules to derive applicable laws and their logical application to relevant facts is aligned with positivism,77 even if the New Haven School and positivists discharge their respective judging duties in this manner for different reasons. However, in other circumstances where applying prior judicial decisions to novel circumstances would lead to manifestly absurd results, “an adaptation or even an innovation in policy” is required. Here, “a purported exercise in logical derivation, far from explaining what is being done, can only conceal what is being done.”78 This rejection of the apparently applicable secondary rules to determine laws and legal outcomes may seem to depart from positivism, and may provoke claims that the New Haven concept of law overly infuses law with policy.

74 For a detailed discussion of judging from the New Haven perspective, see W. Michael Reisman, A Judge’s Judge: Florentino P. Feliciano’s Philosophy of the Judicial Function, in Law in the Service of Humanity Dignity: Essays in Honour of Florentino Feliciano 3, 3–10 (S. Charnovitz ed. 2005). 75 See id. at 7. Reisman has explained his decisions in accord with these two policies. See, e.g., Dispute Concerning Access to Information under Article 9 of the OSPAR Convention (Ir. v. UK), Final Award (Ospar Arb. Trib. July 2, 2003) slip op. at 61, Decl. of W. Michael Reisman, available at http://www.pca-cpa.org. (proposing “plain reading of [a treaty provision because it] appears to both reflect its objects and purposes and to produce a reasonable economic means for implementing [the obligations in the provision].”) (emphasis added). 76 W. Michael Reisman & Guillermo Aguilar Alvarez, How Well are Investment Awards Reasoned, in The Reasons Requirement, supra note 44, at 1, 31. 77 See, e.g., Dispute Concerning Access to Information under Article 9 of the OSPAR Convention (Ir. v. UK), Final Award (Ospar Arb. Trib. July 2, 2003), Decl. of W. Michael Reisman, available at http://www.pca-cpa.org. 78 Id.

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It may come as a surprise that Dworkin takes roughly the same position as the New Haven School on this issue. Dworkin explains that Conventionalism does permit a court to depart from binding precedent where the prior decision was “especially immoral,” such as where the U.S. Supreme Court in Brown v. Board of Education departed from Plessy v. Ferguson,79 which had held that racial segregation did not violate the Equal Protection clause of the U.S. Constitution. Conventionalists would insist that in such a case, “the Court should have made plain to the public the exceptional nature of its decision, that it should have admitted it was changing the law for nonlegal reasons.”80 This is similar to Reisman’s suggestion that where prior decisions would lead to grossly suboptimal outcomes in contemporary contexts, a judicial decision to reach a different outcome is permissible but should be explained in policy terms rather than in seemingly logical extensions of prior decisions. From a scholarly standpoint, the New Haven School and positivism do part ways. As a scholar, the New Haven jurist is unfettered by judicial constraints. The scholar may imagine alternative visions of law that better promote relevant policies and social goals, and recommend to decision-makers methods to achieve those visions.81 In order to imagine alternate configurations of world order that better promote community values, the New Haven School conceives law as an authoritative and controlling process of decision-making to address problems and to secure maximum human dignity. So conceived, laws that do not secure compliance, or which are not accompanied by expectations of compliance by the world community to which they are addressed, do not adequately describe the relevant legal system. Conversely, norms, customs, or practices that lack formal legal pedigree but which are either accompanied by expectations of compliance by the world community or which in fact secure compliance may be studied as part of the legal system. In contrast, positivism conceives law as a system of rules, in which their legality turns on their formal legal pedigree even if—as is the case in international law—this pedigree is often unaccompanied by expectations of compliance. From the scholar’s standpoint, these two concepts of law appear to be conceptually incompatible. Yet, the claim that the New Haven and positivist concepts of law are conceptually incompatible is not really a meaningful conceptual disagreement because the two concepts are respectively predicated upon different pre-

79 80 81

Brown v. Bd. of Ed. of Topeka, 347 U.S. 483 (1954). See Dworkin, supra note 11, at 119. See McDougal & Lasswell, Jurisprudence for a Free Society, supra note 22, at 38.


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concept commitments. Pre-concept commitments are ontological, normative, political or social choices that must be made to develop or describe a concept. These commitments or choices include: the function of inquiry; the ideal type to observe; and the value of semantics. If two parties disagree on any one of these pre-concept commitments, their disagreements about conceptualizations of their respective objects under inquiry may be meaningless. An illustration of these points will be useful here. Suppose that the concept of a table is the subject of philosophical inquiry. Philosopher A is interested in putting forth the best interpretation of a table to enable carpenters to build dining tables, whereas Philosopher B is interested in describing criteria for a table as it exists in its various forms. A’s concept of a table may well specify that tables must be large enough to seat at least two persons and strong enough to bear the weight of china and silverware. B’s concept of a table may specify that a table simply needs to be a piece of furniture in which a flat surface is elevated about four feet from the ground by one or more vertical legs. It is not possible for A and B to meaningfully disagree on their concepts of a table because their function of inquiries are different. They may certainly debate their preferred purposes of philosophizing, but this is not a conceptual debate. Philosopher C enters into a debate with B. B’s ideal type of a table is extrapolated from the salient characteristics common among tables in his home. C, however, comes from a different culture in which people sit cross legged on the floor and designate as a table what we might ordinarily call a tray. C’s concept of a table will be radically different than B’s concept because their ideal types, or the representative data they observed to conceptualize, are different. Again, to assert then that B and C disagree about the concept of a table is not meaningful, because they are simply speaking about different things. C leaves in a huff, and in comes D. D is a scientist with aesthetic pretensions. He has invented a stable platform that is suspended in the air by magnetic fields created by a machine installed beneath floorboards. B, who is committed to the semantic usage of the word “table” insists that the concept of a table cannot be extrapolated from the floating platform because no one in the community would use the word “table” in that way. D, however, does not share the same commitment to semantic usage of words. In his view, what matters more is whether the platform serves the same function as a table. Because it is a stable flat surface parallel to the ground on which a person could eat, read and write, the concept of a table must include his platform. The point here about disagreements over commitments to the value of semantics is different from Dworkin’s semantic sting argument. Dworkin argues that philosophers must agree on roughly the same criteria for a

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concept denoted by a word before they can have a meaningful disagreement on that concept. So, according to Dworkin, if you do not count his copy of Moby Dick as a book because in your view novels are not books, “any agreement is bound to be senseless” because you and Dworkin are using the word “book” in completely different ways.82 Raz disagrees with Dworkin. In Raz’s view, in the ordinary course of human interaction, you would not insist that Moby Dick is not a book and you would apologize for your mistake.83 According to Raz, “criterial explanations of concepts are consistent with the fact that people who use the rules setting out these criteria may make mistakes about which criteria are set by the rules.”84 Although Raz is correct that people can make mistakes about semantic criteria without invalidating criterial explanations, he seems to miss Dworkin’s point. If a person is committed to different semantic criteria, then it is impossible to engage in a meaningful disagreement with him about the concept denoted by the word being used. Take for example, the word “consideration.” A person committed to the semantics of its ordinary usage may say the concept of consideration entails deliberately thinking about an idea. A lawyer, who does not share those semantics, but is committed to the specialized semantics of his profession, asserts that the concept of consideration is a bargained for exchange of something of legal value. The lay person and the lawyer may disagree about their concepts of consideration, but they are speaking past each other. In any event, the point about the value of semantics does not stand or fall on whether Dworkin or Raz is correct, because it makes a slightly different point. The point is that for there to be meaningful conceptual disagreement, the disagreeing parties must share roughly the same pre-concept commitment to the value of semantics in conceptualizing. Without this commitment, a philosopher may determine a concept by the functions ascribed to it by the community, rather than by its ordinary semantic meaning of the word representing the concept. This concept could be quite different from the concept shackled to the semantic usage of the word representing the concept. So, Philosopher D is not committed to semantics about how an object appears, but instead focuses on how an object functions, so he designates his platform as a table. B, who is committed to semantics, does not believe the word table and its associated concept includes platforms. Yet D and B can-

82

See Dworkin, supra note 11, at 45. Joseph Raz, Two Views on the Nature of the Theory of Law, in Hart’s Postscript, supra note 8, at 1, 17 (making the point with reference to a disagreement about tables and sideboards). 84 Id. at 1, 18–19. 83


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not have a meaningful conceptual disagreement. They could certainly have a meaningful disagreement about semantic commitments, but this would be anterior to conceptual debate. We can now apply our discussion about pre-concept commitments to the apparent conceptual incompatibility between the New Haven School and positivists. It is difficult for New Haven jurists and positivists to engage each other about conceptual differences because they disagree about all three preconcept commitments. As regards the function of jurisprudence, the New Haven School seeks to provide guidance to decision-makers about what to do to authoritatively secure maximum human dignity. International law positivists see the function of jurisprudence as describing rules they designate as legal by reference to secondary rules about the pedigree of prior decisions and sources of law. Modern international law positivists explicitly eschew providing guidance on policy, except in so far as the rule of recognition incorporates policy into the criteria for legal validity. Not surprisingly, the New Haven School conceptualizes law as the process of decision-making, whereas positivists conceptualize law as a body of rules. As regards the ideal type of law, because the New Haven School is committed to offering practical guidance to decision-makers, it selects as its ideal type the entire global decision-making process in which power and authority are diffused rather than concentrated in elite law-makers. Claims and norms may be, to varying degrees, authoritatively controlling. Formal legal rules may not tell the whole story about the actions and deliberations of relevant actors.85 In contrast, international law positivists designate as their ideal type the international legal norms concerning international relations that are legally validated by reference to limited sources specified in an international rule of recognition. With such different ideal types, it is unavoidable that the New Haven School and positivists will identify different salient characteristics of their respective concepts of law. As regards the value of semantics, it follows from the New Haven School’s commitment to offering functional guidance that it draws into its scope of inquiry factors that affect international conduct, even if those factors would not in ordinary usage be termed as law. Reisman has explained that [a]rrangements and processes which may not have been assigned the sobriquet, “international law,” by the people who fashioned them; yet from the perspective of the disengaged observer, it will be apparent that these processes and

85 See Reisman, McDougal’s Jurisprudence: Utility, Influence, Controversy, supra note 5, at 274.

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This rejection of descriptive semantics in favor of functional criteria is an anathema to positivists, who are committed to describing those phenomena that ordinarily would fall within the normal usage of the word “law.” These normative disagreements as to the purpose of jurisprudence, the ideal type of international law, and the relevance of semantics cannot be properly addressed at the conceptual level. The resultant differences between the New Haven School and positivists respective concepts of law are accordingly not really conceptual disagreements. They are, more fundamentally, normative disagreements about pre-concept commitments. V. The Choice of Law This essay has argued that although New Haven and positivist concepts of law are different, this difference is not a very meaningful conceptual dispute. The meaningful disagreement is over pre-concept commitments that are not of a conceptual nature, but of an ontological and normative nature. It may be possible to bridge the apparent normative gulf by recognizing the respective pre-concept commitments of the New Haven School and positivists. It might even be possible to have a meaningful conversation about law once jurists and scholars accept that the word law can denote two often nonmutually exclusive concepts, which shall be called Law1 and Law2.87 Law1 refers to the positivist concept of law, a body of legal rules derived from secondary rules governing legal pedigree. Some scholars have variously referred to this as a “legal regime,”88 or a “theory of law.”89 Law2 refers to the New Haven concept of law, the process of authoritative and controlling decisionmaking. Some scholars have variously referred to this as a “legal order,”90 a “theory about law,”91 or, “World Order.”92

86 Reisman, Johnston Preface, supra note 24, at vii; see also generally W. Michael Reisman, Law in Brief Encounters (1999). 87 Janet Halley made a similar semantic move in explaining various feminist theories. Janet Halley, Split Decisions 23–25 (2006). 88 Symposium, Comparative Visions of Global Public Order, 46 Harv. Int’l L. J. 387, 387 (2005) (distinguishing between legal regime and legal order). 89 Johnston, supra note 10, at 113. 90 See Symposium, Comparative Visions of Global Public Order, supra note 83, at 387. 91 See Reisman, Testing a Theory About Law, supra note 23, at 104; Johnston, supra note 10, at 113; see also Myres S. McDougal, Harold D. Lasswell & W. Michael Reisman, Theories about International Law: Prologue to a Configurative Jurisprudence, 8 Va. J. Int’l L. 188 (1968). 92 W. Michael Reisman’s international law course at Yale Law School is titled “Public Order of the World Community.” Douglas Johnston’s final opus is titled “The Historical


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With this distinction, it is possible for a positivist to assert that there is a Law1 rule against preemptive military force without claiming that this rule is also Law2, if the Law1 rule slavishly applied to every situation may lead to a suboptimal policy outcome for the world community. Conversely, a New Haven jurist may assert that Law2 permits preemptive military force in certain contexts in which such force would promote world order and maximize human well-being, broadly speaking, while accepting that a Law1 rule against preemptive force exists on the books and entails a strong, albeit not necessarily overwhelming, expectation of compliance. The distinction between Law1 and Law2 can be useful to legal advisors in foreign ministries as well. A legal advisor with a policy bent may counsel her foreign minister that Law1 prohibits preemptive force, but because the threat of destruction from a particular putative enemy seeking nuclear weapons is so great, her government should consider military preemption from a Law2 perspective, even at the cost of flouting the Law1 rule. Alternatively, a legal advisor with a strict positivist orientation may decide to advise his foreign minister of the Law1 rule against preemptive force, and explicitly leave considerations of Law2 to other policy advisors. Differentiating between Law1 and Law2 also helps to explain how a New Haven jurist performing a judicial function can appraise a dispute before him under Law2, but nonetheless recognize that he is bound in his role to decide the dispute in accordance with Law1 and ultimately follow Law1. It is also possible for a positivist sitting as a judge to recognize that the applicable Law1 rules would lead to such a terrible outcome in Law2 terms that it would unacceptably shock the conscience, and as a result to issue a decision that departs from Law1 and explains its reasons using Law2, as Dworkin and Reisman both recommend.93 The problems of fragmentation of international law and international legal theory are wider and deeper than the disagreements between positivists and policy-oriented jurists. This Article has demonstrated that apparent conceptual differences between positivism and policy-oriented jurisprudence are more meaningfully understood as differences about normative and ontological pre-concept commitments. However, work remains to be done to test whether disagreements among other concepts of international law could also be understood and ameliorated by studying their respective preconcept commitments. Then, a new vocabulary—beyond Law1 and Law2— could be constructed to enable proponents of various theories to fully engage each other. Difficult questions will also need to be addressed, such as how

Foundations of World Order,” rather than “The Historical Foundations of International Law.” Johnston, supra note 10. 93 Supra, Part III.

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to resolve conflicts about when jurists disagree about whether Law1, Law2, Law3, Law4, . . . should prevail in an international problem. These issues will need to be addressed in future scholarly works. For now, the theoretical innovation of this Article concerning pre-concept commitments suggests that there may be a fertile field of research in international legal philosophy that may ultimately help develop international law and achieve its goals of promoting human dignity and world order. If a concept of law is contingent upon its pre-concept commitments, proponents of different concepts of law may eventually find better ways to work together— meaningfully agreeing and disagreeing with each other—by being aware of their respective pre-concept commitments and the extent to which they are not always mutually exclusive.

BEYOND FRAGMENTATION Andrea K. Bjorklund and Sophie Nappert I. Introduction* Thomas Wälde called the international investment arbitration regime “one of the most successful institutional reforms on the plane of international law.”1 As one of international law’s most dynamic creations, investment arbitration also encapsulates its current tensions. This is nowhere more evident than in the role played by investment arbitration in the phenomenon called—rightly or wrongly—the ‘fragmentation’ of international law: the successive development of specialized international and transnational regulatory orders2 with neither hierarchy, nor stated relationship to each other, nor indeed to general principles of international law as traditionally conceived. “A central, and increasingly difficult task of the jurist consists in allocating authority in a system composed of both elements of hierarchical unity and multiple network structures in diverse issue areas”.3 The international investment regime, characterized by more than 2,600 investment agreements, mostly bilateral in nature and governed by international law, confers significant rights on private investors vis-à-vis host States, including the unilateral right to take host States to arbitration for alleged breaches of investment protection provisions.4 The regime thus creates a plethora of ad hoc, independent arbitration tribunals, unrestricted by precedent, unsupervised by any superior instance or authority, whose decisions bind States and affect their citizens.

* We would like to thank Timothy Miller, UC Davis law student, for exemplary assistance with research, formatting, and cite-checking. 1 Wälde, T.W., ‘Improving the Mechanisms for Treaty Negotiation and Investment Disputes: Competition and Choice as the Path to Quality and Legitimacy’, 1 Y.B. Int’l Invest. L. & Pol’y (2008–09) 505, at p. 506. 2 These orders may, or may not, amount to self-contained legal regimes. Self-contained regimes properly so called are currently considered by leading commentators to comprise those subsystems “that embrace a full, exhaustive and definitive, set of secondary rules” [Emphasis added]: Simma, B., Pulkowski, D., ‘Of Planets and the Universe: Self-Contained Regimes in International Law’, 17 Eur. J. Int’l L. (2006) 483, at p. 493 [hereinafter Simma & Pulkowski, ‘Self-Contained Regimes’]. 3 Simma & Pulkowski, ‘Self-Contained Regimes’, supra note 2, at p. 484. 4 UNCTAD, Recent developments in international investment agreements (2008–June 2009), 3 July 2009, IIA Monitor No. 3 (2009), UNCTAD/WEB/DIAE/IA/2009/8.

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The International Law Commission [ILC] formed a Study Group, headed by Prof Martti Koskenniemi, tasked with examining the fragmentation phenomenon. In his Report, Prof Koskenniemi noted that the phenomenon is not new; more than fifty years ago, Wilfried Jenks predicted that successful treaty-making would result in the formation of separate systems of law that needed rules, perhaps analogous to rules of private international law, to govern their interrelationship, and to govern the legal effects of revision of existing treaties.5 Fifty-five years hence, Jenks’s prescience is being recognized by the ILC and international lawyers attempting to come to terms with the limits of traditional public international law theory and in particular with its shortcomings in providing a suitable framework for the multiple realities of current international law practice.6 The term fragmentation bears a negative connotation, conjuring up images of a workable, unified whole breaking apart in an undesirable manner.7 It is true that public international law did seem more homogeneous when States were the only recognized actors and international tribunals heard primarily disputes that had been clearly defined and narrowed before they were submitted to adjudication. Yet sustaining that order required the implementation of principles such as diplomatic protection, which was founded on the questionable assumption that an injury to a State’s national constituted an injury to the State itself, thus elevating the dispute to the international plane.8 Moreover, States were less publicly accountable then, and many multifaceted disputes were resolved politically, diplomatically, or even violently, which permitted States to decide the relative importance of competing legal obligations by reference to political as well as legal considerations.9 The background legal assumptions were still important—principles such as lex specialis and

5 Report of the Study Group of the ILC, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, 13 April 2006, UN Doc. A/CN/4/L.682, paras. 5, 6 (finalized by Koskenniemi, M.) [hereinafter Koskenniemi, Fragmentation of International Law] (quoting Jenks, C.W., ‘The Conflict of Law-Making Treaties’, 30 Brit. Y.B. Int’l L. (1953) 401, at p. 403)). 6 A stark illustration of these limitations can be found in the difficulties of the law of treaties, traditionally conceived as contract-like in nature (and therefore binary, so to speak) in coming to terms with the changing nature of international law. Klabbers, J., ‘Re-Inventing the Law of Treaties: The Contribution of the EC Courts’, 30 Neth. Y.B. Int’l L. (1999) 45, at p. 46. 7 HE Judge Bruno Simma is one of the few authorities to have recognized this implication. Simma, B., ‘Universality of International Law from the Perspective of a Practitioner’, 20 Eur. J. Int’l L. (2009) 265, at pp. 269–270 [hereinafter Simma, ‘Universality of International Law’]. 8 See Bjorklund, A.K., ‘Reconciling State Sovereignty and Investor Protection in Denial of Justice Claims’, 45 Va. J. Int’l L. (2005) 809, at pp. 821–825. 9 This process, it is now argued, is being carried out, to a degree, by ‘soft organizations’. Klabbers, J., ‘Institutional Ambivalence by Design: Soft Organizations in International Law’, 70 Nordic J. Int’l L. (2001) 403 [hereinafter Klabbers, ‘Soft Organizations’].

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lex posterior could be significant bargaining chips—but the situation differed from that of a judicial decision-maker resolving conflicts between apparently opposing legal obligations by referring to legal principles only. The proliferation10 of international legal regimes might thus be viewed as a re-ordering of the traditional system in a manner seeking to accommodate those actors and norms that had not hitherto been recognized as a formal part of the international legal order. ‘Fragmentation’ and ‘proliferation’, however, are not the only prisms through which the current phenomena reshaping international law can be viewed. Thomas Wälde suggested that the term “fragmentation” be replaced with “specialization”, and recognized that by doing so “it would no longer be imperative to harmonise the different areas into which international law has branched out.”11 Judge Buergenthal has made a similar point.12 Steven Ratner, too, has warned against an overly quick relinquishment of the value specialization can bring.13 This contribution seeks to build on this insight: specialization, a.k.a. the positive aspect of fragmentation, is not bad per se. That does not mean that decision-makers should be ignorant of cognate principles and parallel legal systems. Thus we put forward an alternative perspective, which we contend is more conducive to preserving the relevance and importance of international law in modern times than the status quo of fragmentation.

10 This is another term loaded with undesirable undertones. Simma, ‘Universality of International Law’, supra note 7, at p. 278. 11 Gaffney, J.P., ‘Going to Pieces without Falling Apart: Wälde’s Defence of ‘Specialisation’ in the Interpretation of Investment Treaties’, in: Werner, J., Ali, A.H., [Eds.], A Liber Amicorum: Thomas Wälde, CMP Publishing (2009) 55, at p. 56. See also Wälde, T.W., ‘Interpreting Investment Treaties, Experiences and Examples’, in: Binder, C., Kriebaum, U., Reinisch, A., Wittich, S., [Eds.], International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, OUP (2009) 724, at pp. 769–777. 12 Judge Buergenthal has spoken of the proliferation of international courts and tribunals as “on the whole, good for international law.” My simplistic view on this subject is that the growth of international judicial and quasijudicial dispute mechanisms, particularly courts, whether regional or universal, leads to a creative interaction among such courts, helping to transform international law into a more vibrant and more relevant legal system than it has been in the past. I grant, of course, that there may be some fragmentation, but that is unavoidable and inherent in the interpretation or application of legal norms by different courts to different problems and at times even to the same problems. In this connection, I wonder whether fragmentation is the right word to describe this phenomenon. Might one not speak instead of the growing inclusiveness of international law or the broadening of the concept of international law? Buergenthal, T., ‘The Proliferation of Disputes, Dispute Settlement Procedures and Respect for the Rule of Law’, 3:5 TDM (December 2006), at p. 7. 13 Ratner, S.R., ‘Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law’, 102 Am. J. Int’l L. (2008) 475. Professor Ratner suggested that an alternative title for his paper might be “How I Learned to Stop Worrying and Love Fragmentation.” Id. at 475, footnote *.

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andrea k. bjorklund and sophie nappert A. Why Now: The Challenges Facing International Law

Why speak of fragmentation now, when international law, poetically described as “a tapestry of lacunae with occasional densities of normativity”,14 was arguably never an organized whole to begin with? One answer to this question must reside in the unprecedented challenge presented to international law by modern times: that of the complex web of emerging interests and actors in a domain formerly reserved exclusively to States. Consider the following: 1. The active participation of non-State actors International law is perplexed by the foothold gained by non-State actors in the previously limited Westphalian order. For example, so-called ‘soft organizations’, those bodies of various shapes and contours devoid of legal personality, from the International Organization for Standardization (ISO) to Europol to the Berne Union to the Banking Commission of the International Chamber of Commerce, “harbour and accommodate executive power, untrammeled, unimpeded, and unchecked.”15 Private investors have standing to submit claims to arbitration against host States under the auspices of bilateral investment agreements and to obtain money damages. NGOs have more and more opportunities to influence the decision-making of international tribunals as they gain access to investor-State arbitrations.16 2. The standing of regional organizations The international legal order is also struggling to accommodate regional organizations. Though World Trade Organization [WTO] Members are expressly permitted by Article XXIV of the General Agreement on Tariffs and Trade [GATT] to form regional associations, the proliferation of those entities strains the effectiveness of the WTO. In the investment realm, where there is no multilateral agreement, a similar challenge is posed by the European

14 Carty, A., ‘Critical International Law: Recent Trends in the Theory of International Law’, 2 Eur. J. Int’l L. (1991) 1, at p. 25. 15 Klabbers, ‘Soft Organizations’, supra note 9, at p. 407. See also Ku, C., ‘Forging a Multilayered System of Global Governance’, in: Macdonald, R.S.J., Johnston, D.M., [Eds.], Towards World Constitutionalism, Nijhoff (2005) 631, at pp. 642–644; Levit, J.K., ‘A Bottom-Up Approach to International Lawmaking: The Tale of Three Trade Finance Instruments’, 30 Yale J. Int’l L. (2005) 125, at pp. 133–156. 16 In the context of investor-State arbitration, they have done this primarily by seeking and being granted amicus curiae status: Stern, B., ‘Civil Society’s Voice in the Settlement of International Economic Disputes’, 22 ICSID Rev.—Foreign Invest. L. J. (2007) 280, at pp. 338–348; Bjorklund, A.K., ‘The Promise and Peril of Arbitral Precedent: the Case of Amicus Curiae’, in: A.K. Hoffman [ed.], ASA Bulletin Special Series No. 34 (May 2010) 165.


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Union [EU]. By the Treaty of Lisbon,17 foreign direct investment has become subject to exclusive EU competence. Currently there is a great deal of uncertainty over the standing of the EU, which has unsettled legal personality, to participate in investor-State arbitration proceedings and to become a party to international investment agreements alongside its Member States.18 Matters are not helped by the ‘prudent dualism’ of the European Court of Justice, and its “tendency to keep as much distance between EU law and international law as it possibly can”.19 3. The influence of tribunal pronouncements Judges and arbitrators sitting on international tribunals, whether ad hoc or more permanent, are developing an ever-greater influence on the formulation of transnational legal norms. Notwithstanding the subordinate position of the decisions of international courts and tribunals in Article 38 of the Statute of the International Court of Justice, it cannot be denied that those

17

Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community (signed on 13 December 2007, entered into force on 1 December 2009) OJ 2007/306. The Treaty of Lisbon, and the loss of Member States’ competence in matters of foreign investment, prompts a new look at sovereignty, which some argue is in need of ‘democratic recalibration’. See Kemmerer, A., ‘The Crack in Everything: Sovereignty in a European Union of States, Peoples and Citizens’, in: Høibraaten, H., Hille, J., [Eds.], Northern Europe and the Future of the EU, Berliner Wissenschafts-Verlag (forthcoming). The official position of the European Union is that Member States “remain independent sovereign nations, but they pool their sovereignty in order to gain a strength and world influence none of them could have on their own”. EU institutions and other bodies, http://europa. eu/institutions/index_en.htm (last checked 11 June 2010). 18 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” COM (2010) 343, 7 July 2010. This is also notable under the Energy Charter Treaty. See Nappert, S., ‘EU-Russia Relations in the Energy Field: The Continuing Role of International Law’, in: Talus, K., Fratini, P.L., [Eds.] EU-Russia Energy Relations, Legal and Political Issues, Euroconfidentiel/OGEL Joint publication (2009) 103, at p. 107. See also Burgstaller, M., ‘Les Aspects Procéduraux de l’Arbitrage—Qui est Partie? Le Rôle de la Commission Européenne’, in: Kessedjian, C., Leben, C., Le droit européen et l’investissement, Editions Panthéon-Assas (2009) 123, at p. 126; Nappert, S., ‘Le droit dérivé et les investissements’, in: Kessedjian, C., Leben, C., Le droit européen et l’investissement, Editions Panthéon-Assas (2009) 89; Wehland, H., ‘Intra-EU Investment Agreements and Arbitration: Is European Community Law an Obstacle?’, 58 ICLQ 297 (2009); Tietje, C., ‘The Applicability of the Energy Charter Treaty in ICSID Arbitration of EU Nationals vs. EU Member States’, 6:1 TDM (March 2009). 19 See Klabbers, J., Treaty Conflict and the European Union, CUP (2009), pp. 15–16: “[A]t least from the perspective of the international lawyer the attitude of the EC courts has not so much been open and receptive, but rather protective of the European project. The courts have tended to protect EC law and European integration, if necessary at the expense of international law considerations.” See also Ott, A., ‘New Institutional Actors in EU External Relations: Trapped in a Legal Minefield Between European and International Law’, 13 Eur. Foreign Aff. Rev. (2008) 515.

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decisions have a law-creating element.20 More recently, reports of the WTO Appellate Body have had a significant—and often welcomed—influence on the development of legal norms in the WTO Agreements.21 Decisions of arbitrators in investment arbitrations have influenced the development of both substantive and procedural norms in investment law.22 In parallel, formal international lawmaking is fast being superseded by more informal networks among State actors, who sometimes work cooperatively even in the absence of treaty obligations.23 For example, the Transatlantic Business Dialogue started as an informal network comprising businesses from the United States and the European Union and government representatives that have come to common positions on certain matters, including standards and regulatory policy, business facilitation, global issues, small and medium-sized enterprises, and electronic commerce.24 Eventually agreements on those matters might be implemented formally. The new actors and developments outlined above will not disappear. Ignoring them presents the risk that traditional international law may increasingly be sidelined as an obsolete irrelevance if it persists in a rigidity unsuited to the willful fluidity with which these new actors go about their business. No wonder there is blowing with increasing insistence a wind urging neatness and order amongst the bric à brac25 and talk of the attraction of the

20 Zimmermann, A., Tomuschat, C., Oellers-Frahm, K., [Eds.], The Statute of the International Court of Justice: A Commentary, OUP (2006), pp. 1244–1245. 21 Bhala, R., ‘The Myth About Stare Decisis and International Trade Law (Part One of a Trilogy)’, 14 Am. U. Int’l L. Rev. (1999) 845, at pp. 849–932 (discussing the de facto precedential value accorded to General Agreement on Tariffs and Trade panels and WTO panel and appellate body decisions). 22 See, e.g., Bjorklund, A.K., ‘Investment Treaty Arbitral Decisions as Jurisprudence Constante’, in: Picker. C., Bunn, I., Arner, D., [Eds.], International Economic Law: The State and Future of the Discipline, Hart Publishing (2008) 265, at pp. 266–70; Paulsson, J., ‘Awards— and Awards’, in: Bjorklund, A., Laird, I., Ripinsky, S., [Eds.], Investment Treaty Law: Current Issues III, Brit. Inst. of Int’l & Comparative Law (2009) 95, at p. 97; Kaufmann-Kohler, G., ‘Arbitral Precedent: Dream, Necessity, or Excuse?’, 23 Arb. Int’l (2007) 357; Schreuer, C., ‘Diversity and Harmonisation of Treaty Interpretation in Investment Arbitration’, 3:2 TDM (April 2006) at pp. 11–16; Nappert, S., ‘ “By Wit or Fortune Led”: Thoughts on Precedent in Investment Arbitration’, 5:3 TDM (May 2008), at pp. 4–9. 23 See, e.g., Slaughter, A., ‘Global Government Networks, Global Information Agencies, and Disaggregated Democracy’, 24 Mich. J. Int’l L. (2003) 1041, at pp. 1046–1048; Howse, R., ‘Transatlantic Regulatory Cooperation and the Problem of Democracy’, in: Bermann, G.A., Herdegen, M. & Lindseth, P. [Eds.], Transatlantic Regulatory Cooperation: Legal Problems and Political Prospects, OUP (2000) 469. 24 See, e.g., Engel, H., ‘The Transatlantic Business Dialogue: the perspective of the European chemical industry’: in Bermann, G.A., Herdegen, M. & Lindseth, P. [Eds], Transatlantic Regulatory Cooperation: Legal Problems and Political Prospects, OUP (2000) 39, at p. 40. 25 This phrase has already been used by Jean Combacau to describe the state of ‘traditional’ international law. Simma & Pulkowski, ‘Self-Contained Regimes’, supra note 2, at p. 497 (cit-


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‘constitutionalization’ of international law, designed to “imbue international law with some of the orderliness and hierarchy which constitutions create in most of our countries”.26 In seeking a practical, orderly way forward past fragmentation, we look at international law along essentially two models: the first model, which we call the nuclei model, recognizes the existence of fragmentation, but views the ‘fragmented’ components of international law as the many parts of a whole; the second model, the constitutionalisation model, works by imposing a hierarchy of norms. Neither model is without significant difficulties of practical implementation. Thus we propose a ‘third way’, the inter-nuclei communication model, whereby international tribunals look to each other’s decisions, in appropriate cases, for influence and guidance in areas of international law involving similar concepts. We are mindful here of pointing out that this is not a ‘borrowing’ concept, nor a version of judicial precedent. Rather it translates as a willful awareness by tribunals in one sphere of international law of what goes on in other related spheres, and an exercise of canvassing the views expressed by other tribunals in these related spheres for guidance to inform, or test, one’s own analysis. This is especially important for those areas of international law which, like investment law, have not fully matured. However, the inter-nuclei communication model is not restricted to developing fields. No less an authority than Dame Rosalyn Higgins, then President of the International Court of Justice [ICJ], said at the Opening of the Judicial Year of the European Court of Human Rights [ECtHR] in January 2009: The Georgia v. Russia case is significant for another reason—it is an example of the contemporary phenomenon of the same or similar legal questions surfacing in diverse fora. This is a consequence of the dispersal of responsibility for interpreting international law—especially human rights law—among different judicial and quasi-judicial bodies. [. . .] It has long been my view that the best way to avoid fragmentation of international law is for us all to keep ourselves well informed of each other’s decisions, to have open channels of communication, and to build on the cordial relationships that already exist among the courts in The Hague, Strasbourg, Luxembourg, Arusha and so on.27

This is welcome recognition that the reality of international law in present times does not sit comfortably with the rigid hierarchy of the sources

ing Combacau, J., ‘Le droit international: bric-à-brac ou système’, 31 Archives de philosophie du droit (1986) 85). 26 Simma, ‘Universality of International Law’, supra note 7. See also Ku, supra note 15. 27 Higgins, R., Speech on the Occasion of the Opening of the Judicial Year, 30 January 2009, European Court of Human Rights Annual Report 2009, January 2010.

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of international law as enshrined in the ICJ Statute, and that a more fluid plurality of sources would benefit the survival, and continuing relevance, of international law.28 Yet as Judge Higgins herself reminded us in Oil Platforms, Article 31(3)(c) of the Vienna Convention on the Law of Treaties does not authorise a tribunal to import wholesale all of international law into its interpretation of the treaty under consideration.29 B. The Models 1. The nuclei model This model builds on the reality of fragmentation and multiple stakeholders, and recognises the need for international law to accommodate more diversity. The concept likens the ‘fragmented’ morsels of international law to as many nuclei gravitating around a central body, which represents international law as traditionally conceived. Some of the nuclei have their genesis in the ‘traditional’ international law of State responsibility for injuries to aliens (e.g. international investment law), others cover subjects not traditionally considered at international law (e.g. the extension of human rights protection to citizens), still others are taking shape in a non-traditional manner (e.g. recognised principles of good governance, such as the Equator Principles,30 or the work of the Special Representative of the United Nations SecretaryGeneral on Business and Human Rights, Prof. John Ruggie).31 Together they make up a functioning whole, flexible enough to encompass non-State actors and legal obligations that do not fall neatly within Article 38 of the Statute of the International Court of Justice. The concern around fragmentation has resulted from a rigid, columnlike vision of the various components of international law as separated by unbridgeable chasms.32 This anxiety is exacerbated as the proliferation of international courts and tribunals leads to more columns and more chasms.

28 See Simma, ‘Universality of International Law’, supra note 7. See also Bjorklund, supra note 8, at p. 835. 29 Case Concerning Oil Platforms (Iran v. United States), Judgment, 6 November 2003, ICJ Reports 2003, p. 161, Separate Opinion by Judge Higgins, paras. 46–54. 30 The Equator Principles are a set of benchmarks “to ensure the projects [financed] are developed in a manner that is socially responsible and reflect sound environmental management practices.” Preamble, The “Equator Principles (July 2006), http://www.equator-principles .com/documents/Equator_Principles.pdf (last checked 13 June 2010). 31 Guiding Principles on Business and Human Rights. (2011), at 32 Teitel, R., Howse, R., ‘Cross-Judging: Tribunalization in a Fragmented but Interconnected Global Order’, 41 N.Y.U. J. Int’l L. & Pol. (2009) 959, at pp. 962–964 (discussing the “anxiety” underlying fragmentation).


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Given this complex universe comprising multiple cells circling round a centre but with the potential for lines of communication to be opened between all entities, the next step is to examine whether it would be desirable to impose a hierarchy on this model—to constitutionalise international law. 2. The constitutionalization model A perennial stumbling block to the “constitutionalization” of international law has been the lack of any hegemonic central authority to formulate a constitution. Indeed, there is no central authority even to formulate rules as to amendment of any primary customary rules of obligation.33 This decentralization seems virtually inimical to constitutionalizing the international legal order. Another barrier has been ascertaining a hierarchical ordering of norms, usually considered an essential part of a constitutional order. These impediments have not stopped theorists from dreaming about international constitutionalization and it is not impossible to identify some elements of international law consistent with a constitutional theory. Rudiments of hierarchy can be found in the current international order. The closest document to an international constitution is the Charter of the United Nations.34 Article 103 provides that, in the event of a conflict between the Charter and any other international agreement, the obligation found in the Charter should prevail. In the realm of customary law, ius cogens obligations have constitutional character, as do obligations erga omnes.35 There is not, however, widespread agreement as to the content of those types of obligations.36 Implementation of any constitutional-type principles has largely been entrusted to the judiciary due to the dearth of political bodies to develop international constitutional principles and hierarchy.37 This is not a new observation—Sir Hersch Lauterpacht observed many decades ago that impartial judges must play a part in formulating international law in order to avoid

33

See, e.g., Somek, A., ‘From the Rule of Law to the Constitutionalist Makeover: Changing European Conceptions of Public International Law’ (May 2009), at p. 19, (quoting Hart, H.L.A., The Concept of Law, Clarendon Press (1961), p. 90)), http://ssrn.com/abstract=1397249 (last checked 11 June 2010). 34 Professor Somek describes the Charter as having “originated from a constitutional moment” in the wake of the Second World War. Somek, supra note 33, at 24. See also Ackerman, B., We the People: Transformations, Belknap Press (1998), pp. 17–23. 35 In the Palestinian Wall case, the International Court of Justice described as erga omnes the right of peoples to self-determination and “a great many of the rules of humanitarian law applicable in armed conflict”. Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, Advisory Opinion, 9 July 2004, ICJ Reports 2004, p. 136, paras. 155–158. 36 Somek, supra note 33, at pp. 27–28. 37 Klabbers, J., ‘Straddling Law and Politics: Judicial Review in International Law’, in: Macdonald, R.S.J., Johnston, D.M., [Eds.], Towards World Constitutionalism, Issues in the Legal Ordering of the World Community, Martinus Nijhoff Publishers (2005) 809, at p. 816.

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States themselves from serving as judges in their own case—an otherwise inescapable function of the Westphalian model of law.38 What would constitutionalization mean for international investment law? The broadest type of constitutionalization would subsume investment law into a larger legal order with clear depictions of the relationship, and relative importance, of all international obligations to each other and to domestic legal obligations. One court would be entrusted with overseeing compliance with these norms and resolving disputes about their interrelationships. Given the political impediments to achieving such an overarching order, it seems more likely that investment law constitutionalization would involve a multilateral agreement that sets forth investment obligations, gives some direction about the relative importance the State parties assign them vis-àvis other international obligations, and contains the requisite exceptions for State actions effectuating those other obligations. One would posit a centralized dispute settlement mechanism, with a permanent appellate body to rein in errant tribunals and to create a harmonious body of decisions interpreting the constituent agreements. In short, it would look something like the World Trade Organisation.39 Yet constitutionalism seems out of reach. Even if a formal constitutional investment order could be achieved—and memories of the Multilateral Agreement on Investment [MAI] that failed only eleven years ago suggest that it could not—it is not clear that this would be an ideal solution. It would tend to create a self-contained order with the investment agreement as the constitutive document from which authority would emanate and to which primary allegiance would be given. Directing judges to consider other legal obligations might help to alleviate the splintering of investment obligations from other international law commitments, but WTO experience suggests that the dominant purpose of an investment agreement would likely influence the manner in which users of the agreement approached it. 3. The practical application model: Inter-nuclei communication In the absence of an Ackermanian constitutional moment, the task for international lawyers—and, for our purposes, for international investment lawyers—is to use existing tools and theories, and potentially to develop new ones, to help maintain some cohesion in international law. If one accepts that

38 See, e.g., Lauterpacht, H., The Development of Law by the International Court, Praeger (1958), p. 158. 39 For a description of the evolution of the WTO from the initial decentralised GATT system, see McRae, D.M., ‘The Legal Ordering of International Trade: From GATT to the WTO’, in: Macdonald, R.S.J., Johnston, D.M., [Eds.], Towards World Constitutionalism: Issues in the Legal Ordering of the World Community, Martinus Nijhoff Publishers (2005) 543.


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the different nuclei have some relationship to each other, one must identify when circumstances are such that one must navigate between legal regimes to make the requisite connections. Crucially, the nuclei model, with its various parts of a whole, offers the potential of more fluid communication, both amongst the nuclei and with the central body. Like the fragmented vision of international law, the nuclei model has a number of separate components. Unlike fragmentation, they are not disparate components; rather, they can be inter-related by cross-fertilisation and some common references. Recent claims by investors importing concepts developed by the European Court of Human Rights (moral damages, proportionality)40 show that the nuclei model may have workability. This model presents a number of challenges, chief amongst which is resisting more traditional isolationist views in order to promote communication between the nuclei through the appropriate channels. It is no easy task, and possibly premature, to identify what these channels might be. Yet it seems singularly parochial, and at odds with the harmonious development of this area of the law, to refuse to draw inspiration from some of the well-established principles developed by WTO adjudicatory bodies in areas that overlap with investment law.41 To identify theories facilitating such navigation it is useful to identify the reasons for going outside the clearly applicable regime. The first is to give content to existing norms in a treaty—e.g., what does the “fair and equitable” treatment obligation mean? The second is to fill lacunae—e.g., do treaties that lack essential security clauses nonetheless import the customary international law defence of necessity? The third is to juxtapose investment law with other investment obligations—e.g., how do obligations to further human rights protection or to limit environmental damage interact? These three questions can overlap, but by breaking down the typologies one can identify theories to facilitate interaction between various nuclei.

40 Desert Line Projects LLP v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, paras. 9–10. See also the Notice of Arbitration filed by Chevron against the Republic of Ecuador, Chevron Corporation and Texaco Petroleum Company v. Ecuador, UNCITRAL, Claimants’ Notice of Arbitration, 23 September 2009, para. 76(7). See generally Kingsbury, B., Schill, S., ‘Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law’, N.Y. Univ. Sch. of Law, Pub. Law & Legal Theory Research Paper Series, Working Paper No. 09–46 (September 2009), http://ssrn.com/ abstract=1466980 (last checked 11 June 2010). 41 It is not always easy to know when WTO law will prove illuminating and when it will lead one down the garden path. See, e.g., Kurtz, J., ‘The Use and Abuse of WTO Law in Investor-State Arbitration: Competition and its Discontents’, 20 Eur. J. Int’l L. (2009) 749; Howse, R., Chalamish, E., ‘The Use and Abuse of WTO Law in Investor-State Arbitration: A Reply to Jürgen Kurtz’, 20 Eur. J. Int’l L. (2009) 1087.

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The first involves a judge-made approach to the development of legal principles. Many have written about this, sometimes stylizing it as de facto precedent, sometimes as the development of a jurisprudence constante.42 Although new to investment law, this is not new to international law: Sir Hersch Lauterpacht wrote about the law-making function of decisions of the ICJ (and other international tribunals) in the middle part of the last century, while acknowledging that the practice fell short of “the rigidity of the formal doctrine of precedent.”43 Yet referring to decisions of international tribunals other than the ICJ was more rare. This is one of the biggest issues in investment arbitration: how broadly should cross-tribunal borrowing go, and under what circumstances? Is it appropriate, for example, to import from the European Court of Human Rights an implied proportionality test in the consideration of obligations such as the duty to provide fair and equitable treatment?44 The second reason—filling lacunae—involves basic principles of treaty interpretation, as well as more straightforward gap-filling by tribunals. One interpretive principle is that parties not be deemed to waive provisions of customary international law, including defences such as necessity, in the absence of an explicit textual provision suggesting the parties had done so.45 In specific cases tribunals have articulated standards of investor conduct not explicitly found in the treaties themselves.46 This approach is slowly estab-

42 See, e.g., Bjorklund, supra note 22; Paulsson, supra note 22; Kaufmann-Kohler, supra note 22; Schreuer, supra note 22; Nappert, supra note 22. 43 Lauterpacht, supra note 38, at pp. 13–14; See generally id., at pp. 13–22. 44 Kriebaum, U., ‘Privatizing Human Rights: The Interface between International Investment Protection and Human Rights’, in: Reinisch. A., Kriebaum, U., [Eds.], The Law of International Relations: Liber Amicorum HanspeterNeuhold, Utrecht: Eleven International Publishing (2007) 165, at pp. 182–184; Muchlinski, P., ‘‘Caveat Investor’?: The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’, 55 ICLQ (2006) 527, at p. 535; see generally Sweet, A.S., Mathews, J., ‘Proportionality Balancing and Global Constitutionalism’, 47 Columbia J. Transnat’l L. (2008) 72, at p. 73. 45 For example, in the ELSI case, the Chamber of the International Court of Justice dismissed U.S. arguments that the Treaty of Friendship, Commerce, and Navigation had waived the exhaustion of local remedies rule: “Yet the Chamber finds itself unable to accept that an important principle of customary international law should be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so.” Case Concerning Elettronica Sicula (U.S. v. Italy), Judgment, 20 July 1989, ICJ Reports 1989, p. 15, para. 50; see also McLachlan, C. et al., International Investment Arbitration: Substantive Principles, OUP (2007), p. 67; Dolzer, R., Schreuer, C., Principles of International Investment Law, OUP (2008), p. 167 (noting that “in a number of treaties concluded by European countries, the parties decided not to include any provision on extraordinary events and periods, thus tacitly accepting the applicability of the rules of customary international law”). 46 For example, in Plama v. Bulgaria the tribunal held that the claimant had obtained its contract by fraudulent misrepresentations and that it was thus unenforceable under the general principle of good faith found in both Bulgarian and international law. Moreover, the claimant could not invoke the substantive protections of the Energy Charter Treaty. Plama Consortium Ltd v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, paras. 130–


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lishing a more reciprocal relationship between States and investors than can be found in the usually asymmetric investment treaties. Tribunals have been called upon to fill gaps in procedural rules as well. For example, the Methanex and the UPS tribunals concluded that they had the authority to permit amici curiae to participate in investor-State dispute settlement prior to any express endorsement of such an approach by State parties47 or by a relevant arbitral institution.48 The third reason is to ascertain the relationship between the investment regime and other regimes. One approach has been to permit States to assert counterclaims closely related to the alleged investment treaty breach.49 The other main avenue for an interpretation of investment obligations that permits consideration of public interest obligations is found in the Vienna Convention on the Law of Treaties, which provides that treaty provisions be interpreted according to their ordinary meaning, taken in context and in light of their object and purpose, and that tribunals take into account “any relevant rules of international law applicable to the relations between the parties.”50 That context can include other provisions of the treaty that direct consideration of such matters as “health, safety, the environment, sustainable development, and labour rights”.51 Relevant rules of international law include

146. In Europe Cement, the tribunal recognized the possibility of finding an abuse of the investor-state arbitral process by the claimant, though it did not award any damages in the case. Europe Cement Investment & Trade S.A. v. Turkey, ICSID Case No. ARB(AF)/07/2, Award, 13 August 2009, paras. 146–181. In World Duty Free, the tribunal found that international public policy—in this case an agreed condemnation of bribery and influence-peddling—prevented a claimant from pressing any claim for recovery under a contract obtained by such means. World Duty Free Co. Ltd v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, paras. 138–157. 47 On October 7, 2003, the NAFTA Parties issued a Statement on non-dispute-party participation in NAFTA Chapter 11 cases, which stipulated that nothing in NAFTA prevented such participation and which set out recommended procedures for a tribunal to follow when non-disputing parties sought access. Kinnear, M., Bjorklund, A.K., Hannaford, J., Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11, Kluwer (2009 Update), pp. 1120.65–1120.69. 48 The ICSID Rules were amended in April 10, 2006. Among the changes was the addition of Rule 37(2), which permits non-disputing-party participation in appropriate circumstances. 49 See e.g. Saluka Investments B.V. v. The Czech Republic, UNCITRAL, Decision on Jurisdiction over the Czech Republic’s Counterclaim, 7 May 2004, paras. 37–39. See also Crawford, J., ‘Treaty and Contract in Investment Arbitration’, 24 Arb. Int’l (2008) 351, at pp. 365–366; Hoffmann, A.K., ‘Counterclaims by the respondent state in investment Arbitrations’, 6 SchiedsVZ (2006) 317, at pp. 319–320; Bjorklund, A.K., ‘Mandatory Rules in International Investment Law’, 18 Am. Rev. Int’l Arb. (2008) 175, at pp. 176–177. 50 Vienna Convention on the Law of Treaties (signed on 23 May 1969; entered into force on 27 January 1980) 1155 UNTS 331, at p. 340. See also McLachlan, C., ‘The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention’, 54 ICLQ (2005) 279. 51 Brower, C.H., II, ‘Obstacles and Pathways to Consideration of the Public Interest in Investment Treaty Disputes’, 1 Y.B. Int’l Investment L. & Pol’y (2008/2009) 31, at pp. 373–377; McLachlan, supra note 50, at pp. 295–309.

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other obligations undertaken by the parties, such as those found in environmental or human rights treaties.52 Yet given the concern expressed by Judge Higgins in the Oil Platforms case—the risk that treaty interpretation will be invoked to displace the applicable law53—one is mindful of Thomas Wälde’s admonition that one take “a more cautious, but not closed” approach to the assessment and importation of principles from other legal regimes.54 a. The inter-nuclei communication model: A methodology Having identified a suitable context, what methodology should a tribunal (or counsel) adopt in looking outside investment law? The following steps could apply: First, is there is a similar or related issue/body of law in another system? Second, in what context does the issue arise? Is it sufficiently similar to have relevance? This step is particularly important to avoid the hazard of faux amis—similar or identical words whose use out of context could lead to results contrary to the aim and purpose of the treaty under primary consideration.55 Third, what kind of authority and legitimacy does the other tribunal have? This may be a constitutional model-type ‘gloss’ in recognising a hierarchy of tribunals, albeit not necessarily along the lines of the traditional hierarchy of the Statute of the ICJ, but along the lines of the fourth factor below. Fourth, is the analytical approach of that other tribunal persuasive? Has it a proven track record? For how long has it been looked at as authoritative in the other system?56

52 See, e.g., Brower, supra note 51, at 374–375; McLachlan, supra note 50, at pp. 313–315; van Aaken, A., ‘Fragmentation of International Law: The Case of International Investment Protection’, 19 Finnish Y.B. Int’l L. (2008) 128. 53 “The Court has, however, not interpreted Article XX, paragraph 1 (d), by reference to the rules on treaty interpretation. It has rather invoked the concept of treaty interpretation to displace the applicable law.” Case Concerning Oil Platforms (Iran v. United States), Judgment, 6 November 2003, ICJ Reports 2003, p. 161, Separate Opinion by Judge Higgins, para. 49. 54 Wälde, supra note 11, at pp. 774–775. He recommended that Article 31(3)(c) be taken into account “with its three qualifications: first, that international law shall only be ‘taken into account’ (rather than to be ‘applied’), second, that the rules must be ‘relevant’, and third, that they must be ‘applicable in the relations between the parties’.” Id. 55 See, e.g., Gaffney, supra note 11, at p. 61. 56 This does not mean, however, that an investment tribunal need defer to the other tribunal just because it is “senior” or well-established. Rather, “the purpose of interpreting by reference to ‘relevant rules’ is, normally, not to defer the provisions being interpreted to the scope and effect of those ‘relevant rules’, but to clarify the content of the former by referring to the latter.” Orakhelashivili, quoted in Gaffney, supra note 11, at p. 67.


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b. Inter-nuclei communication: A two-way street? This leads to the thought that the ‘communication’ or guidance might go both ways. At present the focus is on borrowing from other more established systems, but a likely natural progression would be that other systems will eventually borrow from investment law. Taking as an example the denial of justice cases below, and their natural ‘link’ to human rights cases, what about the European Court Human of Rights [ECtHR]? In its examination of Article 6(1) ECHR cases, could it eventually look to investment tribunals for guidance in denial of justice claims? In other words, ought the inter-nuclei communication model to factor in a hierarchical component, whereby reference is made along lines of authority or establishment (e.g., investment tribunals, which are ad hoc bodies, look to the ICJ or the ECtHR, permanent judicial institutions, not the other way around), or should the channels allow for two-way communication, regardless of provenance? It may be premature to view the question in these terms, such is the established nature of the ICJ and the ECtHR as institutions, in comparison with the more transient nature of investment arbitration tribunals. In due course, as the field matures, and a more ascertainable definition can emerge of what footprint international investment law can claim as its own within international law generally, an argument might be made in favour of a multi-lateral awareness of decisions in various fora on closely-related issues. Below we explore these ideas in more detail by reference to problems posed by various investment cases. Many areas of investment law could be up for scrutiny. In keeping with the scope of this paper, we have chosen to concentrate on two areas: cases where denial of justice is raised by the Claimant; and cases where the Respondent raised the defence of necessity. II. Denial of Justice Denial of justice is enjoying a renaissance in investment arbitration. Described by one tribunal as ‘a concept of State responsibility afflicted by imprecision’,57 it features regularly in the arsenal of Claimants, regardless of the existence, or absence, of precise treaty wording. In the absence of specific treaty wording, it is put forward as a component of the Fair and Equitable Treatment provision, or the minimum standard of treatment provided at Article 1105

57

Limited Liability Company AMTO v. Ukraine, SCC 080/2005, Award, 26 March 2008, para. 75 [hereinafter AMTO Award].

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of the North American Free Trade Agreement [NAFTA].58 In the (rarer) case where specific treaty wording is found, such as pursuant to Art 10(12) of the Energy Charter Treaty [ECT],59 it is invoked as a substantive protection in its own right. Doctrinal writings confirm that, although the concept of denial of justice is established as a violation of customary international law, its contours remain elusive.60 The International Law Commission does not mention denial of justice in its draft Articles, nor do post-Second World War instruments such as the UN Universal Declaration on Human Rights and the European Convention on Human Rights. A ‘settled core’ appears to be recognised, to the effect that ‘a State incurs responsibility if it administers justice to aliens in a fundamentally unfair manner’.61 What constitutes unfairness, and whether it answers to an internationally recognised norm, remains unclear. Do unreasonable delays in proceedings constitute unfairness, or does it require wilful interference by the State? Does the concept cover gross misapplication of the law? Small wonder, then, that investment arbitration tribunals are struggling and that claimants in investor-State cases, aware of the protean nature of the concept, are currently trying it out à toutes les sauces. This state of affairs constitutes a prime landscape for fragmentation. Notable pronouncements on denial of justice in the investor-State context are not legion. In considering the potential of the application of our internuclei communication model, we have chosen as notable cases Mondev v USA, Loewen v USA, Petrobart v Kyrgyz Republic, and AMTO v Ukraine. It is worth pausing here to consider that this list comprises two cases decided pursuant to the NAFTA (Mondev, Loewen) and two pursuant to the ECT (Petrobart, AMTO). Both the NAFTA and the ECT are multilateral trea58

Article 1105: Minimum Standard of Treatment 1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. 2. Without prejudice to paragraph 1 and notwithstanding Article 1108(7)(b), each Party shall accord to investors of another Party, and to investments of investors of another Party, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife. 3. Paragraph 2 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 1102 but for Article 1108(7)(b). North American Free Trade Agreement (United States/Canada/Mexico 1992) (signed on 17 December 1992; entered into force on 1 January 1994) 32 ILM 605, at pp. 639–640. 59 Article 10(12) reads: “Each Contracting Party shall ensure that its domestic law provides effective means for the assertion of claims and the enforcement of rights with respect to Investments, investment agreements, and investment authorizations.” The Energy Charter Treaty (with annexes) (signed on 17 December 1994, entered into force on 16 April 1998) 2080 UNTS 95, at p. 110. 60 Paulsson, J., Denial of Justice in International Law, CUP (2005) p. 10. See also Bjorklund, supra note 8, at pp. 842–843. 61 Paulsson, supra note 60, at p. 4.


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ties, and contain wording not generally found in bilateral investment treaties. As mentioned above, the ECT provides that a Contracting Party’s domestic law must allow ‘effective means for the assertion of claims and the enforcement of rights’, whereas the NAFTA refers more generally to the ‘minimum standard of treatment at international law’. Nevertheless, the above cases are referred to as persuasive authority on denial of justice by tribunals constituted pursuant to BITs.62 Does this matter? In view of the lack of consensus on the concept, and the paucity of investment protection-specific authority, it is perhaps understandable that BIT tribunals would seek to look to any other investment tribunals for guidance, regardless of the bilateral or multilateral context of the underlying treaty. If that is the case, it would appear sensible to include in that guidance the views of international tribunals that have grappled with similar or related issues for far longer than have investment arbitration tribunals. In the context of denial of justice claims, the jurisprudence of the ECtHR on Article 6(1) comes naturally to mind.63 Although Article 6 does not refer to ‘denial of justice’ in terms, it does encapsulate the concept, hence the idea of looking to the ECtHR on these issues. This is not to suggest that investment treaty tribunals follow blindly in the footsteps of human rights courts, but simply, in the process of informing the investment tribunal’s own analysis, canvass the available judicial wisdom on what is, pursuant to Article 6(1) European Convention on Human Rights [ECHR], a concept akin to denial of justice at customary international law. Yet most investment tribunals, without explanation, simply make no reference to it, instead advancing blind, or reinventing the wheel, sometimes with mixed results. This is an approach that can only contribute to fragmentation, and to the protean nature of the concept of denial of justice in international law.64

62 See, e.g., the references to AMTO and Article 10(12) ECT in the Partial Award on the Merits in the case of Chevron Corporation and Texaco Petroleum Company v. Ecuador, UNCITRAL, Partial Award on the Merits, 30 March 2010, paras. 225–226, 242–247 [hereinafter Chevron/Texaco Award], in the context of a claim based on Article II (7) of the US-Ecuador BIT, which reads as follows: “Each Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations.” 63 Article 6(1) reads: “In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgement shall be pronounced publicly by the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice.” 64 See also Bjorklund, supra note 8, at 861–862, “Investor-State tribunals have only rarely turned to the guidance that might be provided by the human rights tribunals, a regrettable failure to use all available resources and to commence a dialogue among the bodies that make

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Mondev Of the above four cases, Mondev is arguably the most eloquent example of a successful application of the inter-nuclei communication model, referring as it does to the reasons of the Chamber of the International Court of Justice in the ELSI Case65 for guidance in enunciating the applicable standard for a denial of justice, as well as to decisions of the ECtHR on Article 6(1) in its analysis of the immunity of public authorities, the Respondent’s invocation of which was argued by the Claimant to constitute a breach of the full protection and security standard. In Mondev, the Canadian Claimant had been involved in a failed land development project in Boston. Litigation ensued in the Massachusetts Supreme Judicial Court (SJC) concerning contractual claims by a Massachusetts limited partnership owned by Mondev. Before the NAFTA tribunal, Mondev claimed that the SJC’s decision was arbitrary and capricious and amounted to a denial of justice. Mondev also alleged that Massachusetts law granting statutory immunity to State agencies (in this case the Boston Redevelopment Authority (BRA), the city’s planning and economic development agency) was incompatible with international law. Mondev’s claims were rejected by the tribunal. In articulating what has become the oft-quoted standard for denial of justice in investment treaty cases (‘clearly improper and discreditable’), the Mondev tribunal explained how it found it appropriate to look to the ELSI case for assistance: In the ELSI case, a Chamber of the Court [the ICJ] described as arbitrary conduct that which displays “a willful disregard of due process of law, . . . which shocks, or at least surprises, a sense of judicial propriety”. It is true that the question there was whether certain administrative conduct was “arbitrary”, contrary to the provisions of an FCN [Friendship, Commerce, and Navigation] treaty. Nonetheless (and without otherwise commenting on the soundness of the decision itself ) the Tribunal regards the Chamber’s criterion as useful also in the context of denial of justice, and it has been applied in that context, as the Claimant pointed out.66

important decisions about the standards for a functioning judicial system. The European Court of Human Rights’ jurisprudence offers guidance to a tribunal for measuring a nation’s practices against the standards contained in an international treaty while showing deference to the rights of those countries to maintain individually structured judicial systems. Given the similarity between the European Convention’s language and the customary international law views of denial of justice, the Court’s decisions may also help to illuminate the modern content of denial of justice.” 65 Elettronica Sicula S.p.A. ELSI (United States v. Italy), 1989 ICJ Rep. 15 (20 July). 66 Mondev Int’l Ltd v. United States, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 127 [hereinafter Mondev Award].


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It is worth noting here that the ELSI case had been invoked by at least one of the parties in Mondev. Thus one of the practical glosses on the application of the inter-nuclei communication model might be that the parties raise the further afield cases to be considered, or at least be given an opportunity to comment on them. ELSI had also been cited with approval in Pope & Talbot v Canada67 in relation to the minimum standard of treatment (albeit, importantly, not in the context of the review of a judicial process as in Mondev, but in reviewing administrative actions on the part of the Government of Canada).68 The tribunal then considered ECtHR cases in two contexts: first, on the Claimant’s allegation that the SJC had failed to consider whether the allegedly new rule it was applying to government contracts should be applied retrospectively, thereby violating its own standards for judicial law-making; second, in assessing whether BRA should enjoy statutory immunity. In both cases the tribunal carefully pointed out the differences in context between the ECtHR cases and the case before it, thereby circumscribing the level of guidance afforded by the human rights decisions: In any event, once again it is normally a matter for local courts to determine whether and in what circumstances to apply new decisional law retrospectively. (. . .) The European Court of Human Rights has given some guidance on this question under Article 7 of the European Convention in the context of criminal proceedings, where the effect of a new judicial decision is to impose a criminal liability which did not, or arguably did not, exist when the crime was committed. If there is any analogy at all, it is much fainter in civil cases. Assuming, for the sake of argument, that standards of this kind might be applicable under Article 1105(1), in the Tribunal’s view there was no contravention of any such standards in the present case.69

Then on whether BRA could enjoy statutory immunity: These decisions concern the “right to a court”, an aspect of the human rights conferred on all persons by the major human rights conventions and interpreted by the European Court in an evolutionary way. They emanate from a different region, and are not concerned, as Article 1105(1) of NAFTA is concerned, specifically with investment protection. At most, they provide guidance by analogy as to the possible scope of NAFTA’s guarantee of “treatment in accordance with international law, including fair and equitable treatment and full protection and security”.70

67 68 69 70

Pope & Talbot Inc. v. Canada, UNCITRAL, Award in Respect of Damages, 31 May 2002. Kinnear, Bjorklund & Hannaford, supra note 47, at p. 32.1105. Mondev Award, supra note 66, paras. 137–138. Id., para. 144.

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At this stage, it might be argued that the inter-nuclei communication model is of limited practical relevance, as the influence of the decisions of other international tribunals on the tribunal’s own reasoning in this case is clearly peripheral. However it is submitted that the purpose of the inter-nuclei communication model is precisely not to influence in cases where it is inappropriate, or irrelevant, to do so, a determination which lies within the judgment of the tribunal. What the application of the model achieves, as demonstrated to great effect in Mondev, is a level of comfort and authority that the reasoning and subsequent decision of the tribunal, on a novel or difficult question in the investment treaty context, has not been taken in vacuo, and a degree of order and consistency between similar concepts in different areas of international law. Mondev’s subsequent stature in the area of denial of justice is testimony that this proposal must be right. Loewen The Loewen case, possibly one of the most famous investor-State cases on account of its spectacular facts, also presented allegations of denial of justice. However it is important to recall that the tribunal’s pronouncements on this question are obiter: the corporate Claimant’s claim was dismissed on the ground that, its claims having been assigned to an entity owned and controlled by a US corporation, the corporate Claimant failed the test of continuous nationality and could no longer avail itself of NAFTA protection. The individual Claimant, Raymond Loewen, remained a Canadian citizen; however, the tribunal dismissed his claim on the ground that he had failed to show a breach of Article 1105 of the NAFTA as the Mississippi court findings were not final acts of the Mississippi court system. Nevertheless, the authority of the arbitrators, and their characterisation of the treatment of Mr Loewen in the courts of Mississippi as ‘a disgrace’,71 is such that the case cannot be ignored on the topic of denial of justice. The Claimants were a Canadian funeral home company doing business in Mississippi. They faced a USD 500 million award of damages against them as a result of a civil suit by a local competitor. Before the NAFTA tribunal, the Loewen Group and Raymond Loewen alleged that they were subjected to grossly unfair and discriminatory treatment during the trial, and notably that the judge had allowed issues relating to race and nationality to influence the proceedings and the jury. In its analysis of the Claimant’s denial of justice claim, the tribunal referred to Pope & Talbot and the ELSI standard.72 It also cited with approval the

71 The Loewen Group Inc & Raymond L. Loewen v. United States, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003, para. 119 [hereinafter Loewen Award]. 72 Id., para. 131.


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Mondev test.73 An important part of the Loewen case concerned the argument put forward by the United States that, distinguishing international wrongs based on the acts of courts from international wrongs based on the acts of other government agencies, a judicial act cannot give rise to a NAFTA claim unless and until it is the final act of a court of last resort. Here the tribunal cited the international authorities put before it by the parties’ experts: the ICJ, the United States-Mexican Claims Tribunal, the Iran-US Claims Tribunal, and the European Commission on Human Rights.74 The tribunal found that, by electing to enter into a settlement agreement, Raymond Loewen had precluded the attainment of judicial finality, and thus fell short of showing a violation of international law for which the Respondent was responsible.75 The Loewen case amounts to a straightforward application of the internuclei communication model, although it did not turn on the application of denial of justice. It does, however, portray that the reaction of an experienced and authoritative tribunal, faced with a difficult case, is naturally to apply the inter-nuclei communication model by choosing to canvass wisdom in fora further afield, without even pausing to explain its rationale for doing so. Toto In making the case for a more systematic application of the inter-nuclei communication model, one is greatly helped by the fact that Mondev came early in the chronology of cases dealing with allegations of denial of justice in the investment arbitration context, and that it became a landmark case. The approach adopted in Mondev may be contrasted with that in the recent Decision on Jurisdiction in the case of Toto Costruzioni Generali S.P.A. v The Republic of Lebanon,76 decided under the auspices of the BIT between Italy and Lebanon. Toto had undertaken to build a section of the Arab Highway linking Beirut to Damascus by virtue of a Contract with The Lebanese Republic—Conseil Exécutif des Grands Projets. Between 1997 and 2003, various claims arose under the Contract between the parties. Toto filed two claims before the Lebanese Conseil d’Etat. Before the tribunal, Toto claimed, inter alia, that the abnormally slow processing of its contractual claims against the State before the Lebanese Conseil d’Etat amounted to a denial of justice that entailed the responsibility of Lebanon. Toto referred to Article 6(1) of the ECHR, and to the ECtHR’s cases on 73

Id., para. 133. Id., paras. 151–155, 165. 75 Bjorklund, supra, note 8, at p. 855 & footnote 187. 76 Toto Costruzioni Generali S.P.A v. Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009 [hereinafter Toto Decision]. 74

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due process. Toto also referred to the 1966 International Covenant on Civil and Political Rights (‘ICCPR’), Article 14 of which grants a right to every person to an equitable trial: “All persons shall be equal before the courts and tribunals. In the determination of . . . his rights and obligations in a suit of law, everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law . . .”. Lebanon countered by objecting to the tribunal’s jurisdiction to decide on denial of justice, in the absence of prima facie evidence of “scandalous behaviour and bad faith on the part of the court”.77 In its analysis of jurisdiction, the tribunal conceded “that international law has no strict standards to assess whether court delays are a denial of justice”.78 It then considered Article 6 of the ECHR: Article 6 of the ECHR certainly covers the question to which extent lengthy court proceedings are a breach of the right to due process and to a fair and equitable trial. This matter has been extensively subject [sic] of decisions from domestic courts and from the European Court of Human Rights. However, as Lebanon is not a party to the ECHR and lies outside the territorial scope of the ECHR, these decisions are not relevant in this case.79

On the other hand, the tribunal continued, Lebanon was a party to the ICCPR. The ICCPR contains an Optional Protocol whereby a State may accept that individuals file a complaint against the State before the ICCPR Commission, which then provides an opinion. Lebanon had not ratified the Optional Protocol. Nevertheless, the tribunal found that the ICCPR Commission decisions on delayed proceedings were relevant to its analysis of the requirement that the procedure before national tribunals be conducted expeditiously. In its examination of whether judicial delays constituted a breach of the fair hearing requirement pursuant to the ICCPR, the Commission considered the complexity of the matter, whether the Claimants availed themselves of the possibility of accelerating the proceedings, and whether the Claimants suffered from the delay.80 In the instant case, the tribunal found that what it termed “indeed a very long delay” of six years in the Conseil d’Etat proceedings “in itself, however, does not constitute a breach of Article 3.1 of the Treaty.”81 The decisive factor to the tribunal was that it “has not seen evidence that Toto made use of local remedies to speed up the proceedings before the Conseil d’Etat”.82 The

77 78 79 80 81 82

Id., para. 151. Id., para. 155. Id., para. 157. Id., para. 160. Id., para. 165. Id., para. 167.


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tribunal then went on to concede, in a footnote to the Decision,83 that in the absence of ‘a specific regulated remedy with respect to denial of justice in administrative courts’ under Lebanese law, recourse ought to have been had to general procedural law in order to speed up proceedings. This statement may come as a surprise to civil lawyers accustomed to the hermetic separation between the procedure before administrative courts and that applicable to general civil courts. What justification is there for casting aside the ECtHR jurisprudence, which the Claimant had raised, particularly in favour of findings from a Commission instance that was specifically not adopted by Lebanon? In Mondev, the fact that the USA was similarly not party to the ECHR simply did not feature, because the purpose of the inter-nuclei communication model is not to impose ECtHR findings outside of its specific remit, but to assist in informing the investment tribunal in perhaps less familiar territory. Looking at the ICCPR alongside the ECtHR decisions would have made for more complete and compelling reasoning in this developing area of the law. For the time being, there is scant indication how the ECtHR might view investment cases as part of its own analyses. In Kohlhofer and Minarik v Czech Republic,84 the Court found that the Czech Republic violated the right to a fair hearing owed to three foreign investors in enacting legislation that prevented minority shareholders from participating in court proceedings regarding a resolution to wind up the company and transfer its assets to the majority. The Court considered that the limitation on the rights of minority shareholders was disproportional in relation to the Government’s policy of promoting stability and prevention of abusive challenges. The fact that the applicants could later challenge compensation was found insufficient to meet fair hearing requirements. The Claimants also invoked the German-Czech and Austrian-Czech BITs. The Court noted that no allegations were made of specific breach under the BITs. It considered that it had no jurisdiction to hear claims arising under any other treaties apart from the ECHR itself. AMTO The Energy Charter Treaty is notable for containing an express reference, heretofore little examined, to the effectiveness of a Contracting Party’s domestic law regarding the assertion of claims and enforcement of rights

83

Id., footnote 52. Kohlhofer and Minarik v. Czech Republic, Judgment, 15 October 2009, App. Nos. 32921/03, 28464/04 and 5344/05, Eur. Ct. H.R., http://cmiskp.echr.coe.int/tkp197/view.asp ?action=html&documentId=856197&portal=hbkm&source=externalbydocnumber&table= F69A27FD8FB86142BF01C1166DEA398649 (last checked 11 June 2010). 84

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with respect to the investment. AMTO’s claim for denial of justice, based on both Articles 10(1) and 10(12) ECT, was examined at some length by the tribunal before being dismissed with only cursory analysis. AMTO, a Latvian investment company, bought over 65% of the shares in EYUM-10, a Ukrainian joint stock company involved in electrical and construction work. EYUM-10 entered into a series of contracts with Energoatom, a company owned by the Respondent, with respect to works to be carried out at a nuclear power plant in Ukraine. In 2002–2003, EYUM-10 commenced proceedings before the Ukrainian courts in respect of amounts due pursuant to eleven contracts between EYUM-10 and Energoatom. EYUM-10 was successful in its claims, which were upheld on appeal and cassation was denied. EYUM-10 sought execution on the basis of its judgments. Execution was stayed for over five years due to multiple bankruptcy proceedings against Energoatom. AMTO claimed that these circumstances amounted to a denial of justice under the terms of the ECT. This was a case in which the tribunal, faced with a little-interpreted, novel provision, did not look to other pronouncements, and only referred to Mondev. This was despite the tribunal’s recognition that the concept of denial of justice was ‘afflicted by imprecision’.85 The tribunal considered that denial of justice was related to the administration of justice, and comprised both judicial failure and legislative failure. The latter could be measured against the express standard of Art 10(12), which required that States ensure that domestic law provides ‘an effective means’ for the assertion of claims and the enforcement of rights. The former was linked to Art 10(1), along the lines set out in Mondev v USA: “the impugned decision is clearly improper and discreditable, with the result that the investment has been subject to unfair and inequitable treatment.”86 Article 10(1) was invoked to the effect that AMTO’s investment had been accorded treatment less favourable than that required by international law, in that: (i) EYUM-10 was not provided with effective means to enforce its bankruptcy claim against Energoatom; (ii) the Government of Ukraine interfered in the bankruptcy proceedings against Energoatom; and (iii) the Ukrainian courts wrongfully dismissed EYUM-10’s bankruptcy claim and wrongfully prevented it from participating in other claims. The Tribunal noted, in language reminiscent of the Loewen case, but without citing it, that the available means within the host State’s legal system to address errors or injustices, and whether or not they were exercised, are relevant to the assessment of the propriety of the outcome. The Investor that fails to exercise his

85 86

AMTO Award, supra note 57, para. 75. Mondev Award, supra note 66, para. 127.


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rights within a legal system, or exercises them unwisely, cannot pass his own responsibility for the outcome to the administration of justice, and from there to the host State in international law.87

The Ukrainian Courts The allegations of denial of justice pertained to six bankruptcy proceedings against Energoatom, commenced between March 2002 and December 2003. EYUM-10 was the initiating creditor in the fourth and fifth proceedings, and a creditor in the sixth. It complained of delay, error and tolerance of procedural abuse by the Ukrainian courts. It also claimed that it was prevented from participating in the first three proceedings due to the courts’ failure publicly to announce the opening of the bankruptcy cases. The tribunal took a global view of the entirety of the relevant proceedings. The Claimant’s involvement with the Ukrainian courts began with eleven cases of contractual non-payment against Energoatom.88 The Claimant was successful in all of these cases, and no allegations were made in relation to these before the tribunal. On the first three bankruptcy proceedings, the tribunal accepted the State’s submission that the Claimant had not adequately proven allegations of irregularities. The duty to publicise the proceedings rested with the applicant, not with the court itself, and there was no basis to impute a failure by a private creditor to the Ukrainian courts. The loss of opportunity to participate in the first three proceedings could be remedied by the Claimant starting its own bankruptcy proceedings, which in the event it did, in the fourth proceedings. On the fourth proceedings, the Tribunal found that the alleged dilatory procedural irregularities were insignificant, and accepted the Respondent’s submission that they could be explained by the interaction of the Bankruptcy Law, the Code of Economic Procedure of the Ukraine, and the procedural steps taken by the debtor. Having examined the relevant decisions by the Ukrainian courts, and reminded itself that it did not sit in appeal thereof, the Tribunal found that the decisions responded to the legal and procedural issues raised in the proceedings, were delivered without undue delay and there was no indication that the parties were not properly heard. The courts’ formalistic approach to the requirements of bankruptcy law, and uncertainty over the procedural treatment of Energoatom’s debts, were considered to fall short of impropriety. The tribunal made the same finding for the fifth and sixth proceedings. It noted that the Claimant’s frustration with the procedure over a number of years denoted unrealistic expectations of a simple and

87 88

AMTO Award, supra note 57, para. 76. Id., para. 21.

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rapid result in a juridical structure coping with many competing interests. The courts’ formalistic approach could not amount to denial of justice where a technical subject-matter was at issue, and the law appeared to have been applied. The Mondev test was therefore not met. The New Bankruptcy Law In formulating a test for the application of Article 10(12), the Tribunal started by asserting that Article 10(12) was both a rule of law standard and also a qualitative standard, whereby the quality of the legislation must meet minimum international law standards. The Tribunal then considered the criteria by which to assess the effectiveness of the legislation and rules called into question under that standard. It found that ‘effective’ in Article 10(12) meant a standard that was: (a) Systematic: The State must provide an effective framework or system for the enforcement of rights, but need not offer guarantees in individual cases. Individual failures may evidence systematic inadequacies, but in and of themselves are not a breach of Article 10(12); (b) Comparative: Compliance with international standards indicates that imperfections in the law might result from the complexities of the subject-matter, rather than inadequacies in the legislation; (c) Progressive: Legislation must be modernised and adapted from time to time, and results might not be immediate. Progress should be taken into account in assessing effectiveness; and (d) Practical: Some areas of law, or the application of legislation in certain circumstances, raise practical difficulties which should also be taken into account.89 Having set out the criteria in some detail, it was somewhat anti-climactic to see the Tribunal summarily dismissing the Claimant’s assertions in one paragraph. It found the bankruptcy law to have imported new concepts into Ukrainian law, requiring training programmes. Its application presented certain difficulties, still unresolved, including the matters complained of by the Claimant, such as initiation of process, notice to creditors, and insufficient sanctions for non-compliance, according to the Respondent’s own expert witness quoting from a report of the EBRD. However the tribunal, whilst recognising the frustration that these circumstances caused EYUM-10, felt that it could not come to the conclusion that the law was ineffective in the enforcement of rights within the meaning of Art 10(12).90 The Claimant’s claim for denial of justice pursuant to Article 10(12) was therefore dismissed.

89 90

Id., para. 88. Id., para. 89.


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A High Threshold What evils then must be perpetrated by the host State in order to fall foul of Article 10(12)? Pronouncements on this topic are not legion, however it is instructive to look at the Award in Petrobart v Kyrgyz Republic, which found the Respondent State to be in breach of Article 10(12) on the following grounds: (i) the Republic’s direct and capricious intervention in its own court procedures by the Vice Prime Minister’s letter of 11 February 1999 requesting the stay of execution of a valid judgment and the willingness of the Bishkek Court to readily accord the requested stay of execution; (ii) Presidential Decree No. 282 and its subsequent implementation by the Government, which resulted in the transfer of KGM’s assets to two other Stateowned companies prior to the formal declaration of KGM’s bankruptcy, and (iii) the Republic’s attempt to restrict the definition of investment in its Foreign Investment Law by promulgating the Foreign Investment Interpretation Law and to seek a judicial confirmation thereof.91

Similarly, Thomas Wälde and Walid Ben Hamida expressed the view that ‘[t]he reliance on—or exploitation of—a discretionary blocking power explicitly intended to block a foreign tender can therefore be seen as the type of abuse of government regulatory powers that Article 10(12) intended to prohibit.’92 It is striking that Petrobart applied Article 10(12) to judicial failure, whereas the AMTO tribunal confined it to legislative failure, and applied the more general Art 10(1) standard to judicial failure. The current scope of application of Article 10(12) therefore remains unsettled. AMTO was referred to in the Chevron/Texaco v Ecuador Partial Award93 in the context of a claim based on Article II (7) of the US-Ecuador BIT, which contains wording similar to Article 10(12) ECT. The Claimant made numerous references to the decisions of other international tribunals, notably human rights tribunals. The tribunal was at pains to point out, in a separate section headed “Treaty Interpretation and the Relevance of Decisions of other Tribunals”, that the “supplementary means of interpretation” of Article 32 VCLT: include the preparatory work of the treaty and the circumstances of its conclusion. (. . .) It is not evident whether and if so to what extent arbitral awards are of relevance to the Tribunal’s task. It is in any event clear that the decisions of

91

Petrobart Ltd v. Kyrgyz Republic, SCC 126/2003, Award, 29 March 2005, at pp. 28–29. Wälde, T.W., Hamida, W.B., ‘The Energy Charter Treaty and Corporate Acquisition’, in: Coop, G., Ribeiro, C., [Eds.], Investment Protection and the Energy Charter Treaty, JurisNet LLC (2008) 157, at p. 203. 93 Chevron/Texaco Award, supra note 62. 92

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andrea k. bjorklund and sophie nappert other tribunals are not binding on this Tribunal. (. . .) However, this does not preclude the Tribunal from considering arbitral decisions and the arguments of the Parties based upon them, to the extent that it may find that they shed any useful light on the issues that arise for decision in this case.94

The tribunal came to the conclusion that Ecuador failed to meet the threshold of effectiveness of Article II (7) (‘effective means of enforcing claims and asserting rights’) and thus found it unnecessary to express a view on the Claimant’s separate claim for denial of justice under customary international law. In coming to its conclusion, the tribunal derived comfort from the findings in AMTO on Article 10(12) ECT. The tribunal’s references to AMTO were made without apparently questioning whether the AMTO analysis, made in the context of a multilateral treaty, could ‘shed any useful light’ in a BIT context. Conversely, in an application of the methodology we propose, the tribunal refused to draw inspiration from the human rights cases cited by the Claimant on the question of undue delay. The tribunal considered that the treaty-based standard of ‘reasonable time’ differed from the customary international law standard for undue delay applied in the human rights cases: “Human rights law is not analogous to the doctrine of State responsibility”.95 Finally, future tribunals grappling with denial of justice claims resulting from persistent non-enforcement might consider the ECtHR judgment in Regent Company v Ukraine,96 rendered more or less contemporaneously with AMTO. Ukraine was held to be in breach of Article 6(1) for its continued non-enforcement of an arbitration award rendered against a State-owned company that had declared bankruptcy in circumstances very similar to those faced by AMTO. Insolvency, said the ECtHR, whilst explaining the delay in enforcement, cannot serve as an excuse not to comply with Article 6(1). Application of the inter-nuclei communication model might therefore serve to guide tribunals in future on these difficult topics and prevent inconsistent findings. III. Necessity The doctrine of necessity was brought to the fore by the myriad cases filed against Argentina in the aftermath of that country’s fiscal crisis commencing in 2001. Faced with an economic crisis that threatened the stability of 94

Chevron/Texaco Award, supra note 62, paras. 162–164. Id., para. 182. 96 Regent Company v. Ukraine, Judgment, 3 April 2008, App. No. 773/03, Eur. Ct. H.R., http:// cmiskp.echr.coe.int/tkp197/view.asp?action=html&documentId=830486&portal=hbkm& source=externalbydocnumber&table=F69A27FD8FB86142BF01C1166DEA398649 (last checked 11 June 2010). 95


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Argentina’s government (the country had five presidents in the space of 13 days at the end of 2001)97 and rioting in the streets,98 Argentina declared emergency laws which, inter alia, required the “pesification” of the Argentine economy and mandated the renegotiation of all public services license contracts.99 Many companies with concession contracts or other business interests adversely affected by the emergency laws submitted claims to arbitration under applicable investment treaties. In response, Argentina raised the customary international law defence of necessity, in addition to arguing that the non-precluded-measures clause found in the Argentina—United States BIT excluded its culpability under the treaty because the measures had been taken to protect its essential security interests. That clause reads: “The Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligation with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.”100 The necessity cases (seven had been decided as of June 2010, two of which had resulted in annulment committee awards)101 have become famous for their divergent approaches to the relationship of the essential security clause in the treaty to the customary international law defence of necessity and 97 Resident De la Rúa resigned on 20 December 001. Ramón Puerta, Adolfo Rodríguez Saá, and Eduardo Camaño all served as President for one week or less. Finally, on 1 January 2002, senator Eduardo Duhalde was designed President by the General Assembly. He remained in office until President Néstor Kirchner was elected in the 2003 general elections. 98 See LG&E Energy Corp. et al. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 63 (describing “widespread discontent and public demonstrations, including violence that claimed tens of lives”). 99 Decree No. 293/2002. See Bjorklund, A.K., ‘Emergency Exceptions: State of Necessity and Force Majeure’, in: Muchlinski, P., Ortino, F., Schreuer, C., [Eds.], Oxford Handbook of International Investment Law, OUP (2008) 459, at pp. 478–479 [hereinafter Bjorklund, ‘Emergency Exceptions’]. 100 Agreement Between the United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment (Argentina/United States BIT) (signed on 14 November 1991, entered into force on 20 October 1994), art. XI, 31 ILM 124, at p. 135 [hereinafter Argentina-United States BIT]. 101 CMS Gas Transmission Co. v. The Argentine Republic, ICSID (W. Bank) Case No. ARB/01/8, Award, 12 May 2005 [hereinafter CMS Award]; LG&E Energy Corp et al. v. The Argentine Republic, ICSID (W. Bank) Case No. ARB/02/1, Decision on Liability, 3 October 2006 [hereinafter LG&E Award]; Enron Corp. et al. v. The Argentine Republic, ICSID (W. Bank) Case No. ARB/01/3, Award, 22 May 2007 [hereinafter Enron Award]; Sempra Energy Int’l v. Argentina, ICSID (W. Bank) Case No. ARB/02/16, Award, 28 September 2007 [hereinafter Sempra Award]; CMS Gas Transmission Co. v. The Argentine Republic, ICSID (W. Bank) Case No. ARB/01/8, Annulment Proceeding, 25 September 2007 [hereinafter CMS Annulment Proceeding]; BG Group Plc. v. Argentina, UNCITRAL, Final Award, 24 December 2007 [hereinafter BG Group Award]; Continental Casualty Co. v. Argentina, ICSID (W. Bank) Case No. ARB/03/9, Award, 5 September 2008 [hereinafter Continental Casualty Award]; National Grid Plc v. Argentina, UNCITRAL, Award, 3 November 2008 [hereinafter National Grid Award]; Sempra Energy Int’l v. Argentina, ICSID (W. Bank) Case No. ARB/02/16, Decision on the Argentine Republic’s Application for Annulment of the Award, 29 June 2010 [hereinafter Sempra Annulment Proceeding].

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for their differing assessments of whether the events in Argentina were sufficiently threatening to justify Argentina’s emergency measures. In addition, one tribunal took a novel approach as to whether a treaty provision developed in another legal order—the WTO Agreements—should inform the interpretation and application of the essential security clause found in the treaty. The necessity cases illustrate admirably two of the reasons for going outside the evidently applicable regime that we identified in the introduction. First, the tribunal in CMS, in particular, followed the guidance of the International Court of Justice in the Gabčikovo-Nagymaros Project case102 in interpreting the provisions of the necessity doctrine. Pointing to the decisions of other tribunals, and especially to one as influential as the International Court of Justice, to interpret principles borrowed from customary international law is not unusual, and is indeed altogether consistent with the International Law Commission’s suggested approach to combating fragmentation.103 In addition, the tribunals in CMS, Sempra, and Enron found that the essential security clause in the treaty incorporated by reference the customary international law doctrine of necessity. Using customary international law to inform the analogous and appropriate provisions of a BIT is also consistent with an anti-fragmentation approach.104 The tribunal in Continental Casualty, somewhat more controversially, as we will explain below, also borrowed from another legal order to interpret a provision in Article XI of the BIT. Second, the tribunals in cases brought under the Argentina—United Kingdom BIT used customary international law to fill lacunae in the treaty. A prime point of contention between different tribunals has been whether Article XI of the Argentina—US BIT should be read as incorporating the customary international law principle of necessity into the BIT, thereby making that the applicable standard for deciding whether the circumstances in question were severe enough to preclude wrongfulness. Three tribunals (CMS, Enron, and Sempra) have held that to be the correct approach.105 Two tribunals (LG&E and Continental Casualty)106 and the CMS and Sempra Annulment Committees107 have suggested that the treaty provision does

102 Case Concerning Gabčikovo-Nagymaros Project (Hungary v. Slovakia), Judgment, 25 September 1997, ICJ Reports 1997, p. 7 [hereinafter Gabčíkovo-Nagymaros Project Case]. 103 Koskenniemi, Fragmentation of International Law, supra note 5, paras. 410–480. 104 Id. 105 CMS Award, supra note 101, para. 355; Enron Award, supra note 101, paras. 333–334; Sempra Award, supra note 101, paras. 375–3376. 106 LG&E Award, supra note 101, para. 245; Continental Casualty Award, supra note 101, paras. 178–181. 107 CMS Annulment Proceeding, supra note 101, paras. 239–242; Sempra Annulment Proceeding, supra note 101, paras. 186–209.


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not incorporate by reference the customary international law of necessity. Scholarly commentary also diverges on this point.108 The customary international law defence of necessity is deliberately stringent because of its potential to excuse States from their binding legal obligations.109 The definition of necessity found in the International Law Commission’s Articles of State Responsibility has been widely accepted as customary international law on the topic.110 In 2001, the Commission adopted on its second reading the Draft Articles on the Responsibility of States for Internationally Wrongful Acts. 111 The final necessity Article, now Article 25, reads: 108 Compare Alvarez, J.E., Khamsi, K., ‘The Argentine Crisis and Foreign Investors’, 1 Y.B. Int’l Investment L. & Pol’y (2008/2009) 379; Alvarez, J.E., Brink, T., ‘Revisiting the Necessity Defense: Continental Casualty v. Argentina’, available at http://www.iilj.org/publications/ 2010–3.Alvarez-Brink.asp; Bjorklund, A.K., ‘Economic Security Defenses in International Investment Law’, 1 Y.B. Int’l Investment L. & Pol’y (2008/2009) 479 [hereinafter Bjorklund, ‘Economic Security Defenses’]; Dolzer R., Schreuer, C., Principles of International Investment Law, OUP (2008), p. 167; Reinisch, A., ‘Necessity in International Investment Arbitration— an Unnecessary Split of Opinions in Recent ICSID Cases?’, 8 J. World Investment & Trade (2007) 191, (pro conflation); and Burke-White, W., von Staden. A., ‘Investment Protection in Extraordinary Times: Interpreting Non-Precluded Measures Provisions’, 48 Va. J. Int’l L. (2007) 307; Kurtz, J.T., ‘Adjudging the Exceptional in International Law: Security, Public Order and Financial Crisis’, Jean Monnet Working Paper 06/08; Binder, C., ‘Changed Circumstances in Investment Law: Interfaces between the Law of Treaties and the Law of State Responsibility with a Special Focus on the Argentine Crisis’, in: Binder, C. et al., [Eds.], International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, OUP (2009) 608; Sweet, A.S., ‘Investor-State Arbitration: Proportionality’s New Frontier’, 4 Law & Ethics of Human Rights 1 (2010) 46; McLachlan, C., ‘Investment Treaties and General International Law’, 57 ICLQ 2 (2008) 361, at pp. 390–391 (anti-conflation). 109 Hugo Grotius described necessity as a doctrine that could be used “to justify actions which otherwise would appear to be outside the pale of the law.” Rodick, B.C., The Doctrine of Necessity in International Law, Columbia Univ. Press (1928), pp. 2–7. 110 Gabčíkovo-Nagymaros Project Case, supra note 102, at p. 40 (recognizing the predecessor of Article 25 as reflecting customary international law on necessity); CMS Award, supra note 101, para. 315; LG&E Award, supra note 101 , para. 245; Enron Award, supra note 101, para. 303; Sempra Award, supra note 101, para. 344; BG Group Award, supra note 101, paras. 407–412 (though it does not explicitly recognize the customary international law status of necessity, acceptance of that status is implicit in the tribunal’s award); National Grid Award, supra note 101, para. 256. Notwithstanding this apparent consensus, as recently as 1990 and 1991 two arbitral tribunals questioned the reach of the necessity doctrine. Libyan Arab Foreign Investment Company (LAFICO) and the Republic of Burundi, 96 Int’l L. Rep., 4 March 1991, 282, at p. 319; Rainbow Warrior (New Zealand v. France), 82 Int’l L. Rep., 30 April 1990, 500, at pp. 554–55. The claimant itself in BG Group did not dispute that Article 25 codified customary international law on necessity, but characterized the United Kingdom as a “persistent objector” to the necessity doctrine and thus argued that the defence was unavailable under the Argentina—U.K. BIT. BG Group Award, supra note 101, para. 400. For a thoughtful, and sometimes skeptical, analysis of the position of the ILC Articles generally vis-à-vis customary international law, see Caron, D.D., ‘The ILC Articles on State Responsibility: The Paradoxical Relationship Between Form and Authority’, 96 Am. J. Int’l L. (2002) 857. 111 Report of the International Law Commission on the work of its fifty-third session, 2001, UN Doc. A/56/10, para. 11, http://untreaty.un.org/ilc/sessions/53/53sess.htm (last checked 11 June 2010).

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andrea k. bjorklund and sophie nappert 1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) is the only means for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. 2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) the international obligation in question excludes the possibility of invoking necessity; or (b) the State has contributed to the situation of necessity.112

The Commission submitted the Articles to the General Assembly for approval, and suggested that the General Assembly consider convening an international conference that would seek to adopt a convention.113 The General Assembly has commended the Articles to the attention of States without prejudice to the question of their future adoption or other appropriate action, and has authorized the compilation of decisions of international courts and tribunals referring to the Articles.114 One advantage of conflating the treaty provision and the customary international law doctrine is that the latter can give content to the former.115 Necessity has developed over the course of more than 200 years, and its content is well accepted, although the requirements are difficult to satisfy.116 Yet a stringent necessity defence remains compatible with the object and purpose of an investment treaty, and diminishes the concern that Article XI negate the very protections for which the treaty was negotiated. Indeed, one of the strongest reasons for preferring a conflationary approach is that treating 112 Crawford, J., The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries, CUP (2002), p. 178. 113 Id. 114 UN General Assembly Res. 56/83, Responsibility of States for internationally wrongful acts, 28 January 2002, UN Doc. A/RES/56/83; UN General Assembly Res. 59/35, Responsibility of States for internationally wrongful acts, 16 December 2004, UN Doc. A/RES/59/35. 115 Bjorklund, ‘Economic Security Defenses’, supra note 108, at 495–498; Enron Award, supra note 101, para. 333 (concluding that the meaning of essential security “must be sought elsewhere”). 116 Bjorklund, ‘Emergency Exceptions’, supra note 99, at pp. 466–471. Even the stringent test found in customary international law might leave some room for maneuver; Professor Reinisch has suggested that in the case of economic crises the better approach would “incorporation considerations of adequacy and proportionality.” Reinisch, supra note 108, at p. 184. Bjorklund has suggested elsewhere the possibility of the conflationary approach and the discrete treaty provision approach moving nearer to each other, particularly if proportionality considers are introduced into the customary law approach. There are still likely to be differences of assumptions regarding the burden of proof. Bjorklund, ‘Economic Security Defenses’, supra note 108, at p. 498.


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Article XI as establishing a discrete, less onerous standard places the investor in a unfavourable position. “In general, such an emergency clause should not be construed in a manner that places the investor into a less favourable legal situation than that accorded under customary international law.”117 Moreover, a conflationary approach is compatible with the ILC’s “systemic integration” approach to the application of international law and the development of general rules of law that can apply across sub disciplines.118 The alternative position—that Article XI and the customary international law doctrine of necessity are discrete entities, has been taken by the LG&E and Continental Casualty tribunals, and by the CMS and Sempra annulment committees. The CMS annulment committee concluded that the treaty defence was distinct from the customary international law rule, and offered two ways to view the relationship between Article XI and necessity under customary international law. First, one could view necessity, whether under the treaty or at customary international law, as a primary rule of international law. If Argentina successfully invoked the principle, there would be no breach of the applicable treaty, and thus no breach of international law.119 As lex specialis, the treaty provision would be applied first and would operate to exclude any breach.120 Alternatively, the CMS annulment committee suggested that the doctrine of necessity under customary international law be treated as a secondary rule of international law. Under that approach, the customary international law defence of necessity would be assessed only if the treatybased defence were unsuccessful and a respondent sought relief from the unrelieved breach.121 This is the approach favoured by the International Law

117

Dolzer & Schreuer, supra note 108, at p. 169. Koskenniemi, Fragmentation of International Law, supra note 5, paras. 410–480. See also Bjorklund, ‘Economic Security Defenses’, supra note 108, at p. 496. 119 CMS Annulment Proceeding, supra note 101, para. 133. This distinction refers to the debate over whether denoting necessity and other defences “circumstances precluding wrongfulness” precludes there being any antecedent state responsibility. See Lowe, V., ‘Precluding Wrongfulness or Responsibility: A Plea for Excuses’, 10 Eur. J. Int’l L. (1999) 405; Bjorklund, ‘Emergency Exceptions’, supra note 99, at pp. 510–511 (noting effect of this choice on the award of compensation). For a general discussion of the CMS Annulment Committee’s decision, see Kurtz J.T., ‘ICSID Annulment Committee Rules on the Relationship between Customary and Treaty Exceptions on Necessity in Situations of Financial Crisis’, 11 ASIL Insight 30 (20 December 2007), http://www.asil.org/insights071220.cfm (last checked 11 June 2010); Binder, supra note 108, at pp. 615–617. 120 Yet it is possible that residual provisions of customary international law could apply, notwithstanding the finding of lex specialis. See Kurtz, supra note 119, at p. 3 & n. 26 (citing the Oil Platforms case, which said that the essential security provision of the applicable treaty of friendship, commerce and navigation should be interpreted by reference to customary international law). 121 CMS Annulment Proceeding, supra note 101, para. 134; Sempra Annulment Proceeding, supra note 101, para. 200. 118

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Commission in the State Responsibility Articles.122 Under either approach, however, the treaty-based provision would have primacy. If the customary international law standard of necessity does not inform the treaty provision, an important question arises about its meaning and application. The provision is quite vague, and provides only that a State can take “measures necessary [. . .] for the protection of its own essential security interests.” This lack of content has prompted scholars and one tribunal to look elsewhere to give meaning to the provision.123 Professor Kurtz has advocated the adoption of a least-restrictive-means test, reminiscent of the one employed by the WTO Dispute Settlement Body, while Professors BurkeWhite and van Staden have suggested looking to the “margin of appreciation” afforded by the European Court of Human Rights to Member States when it assesses the validity of measures they have taken.124 The LG&E tribunal did not tackle this difficulty head-on, but concluded rather cursorily that the measures in question were in fact necessary, and then “confirmed” its approach by reference to the customary international law of necessity. Thus, only one tribunal has looked to another treaty regime to inform the content of the essential security clause in the BIT—the Continental Casualty tribunal. First, the Continental Casualty tribunal concluded that Article XI was a primary obligation, the provisions of which, if met, would preclude the finding of any treaty breach.125 Necessity, as found in the State responsibility Articles, was thus inapplicable—and an inappropriate source from which to draw—because of its status as a secondary rule of law.126 The tribunal therefore needed to give content to the provision, and looked to Article XX of the GATT for guidance.127 That decision offers a number of lessons about when and how it is appropriate to borrow from other regimes. Though the Continental Casualty tribunal recognized the need to give content to Article XI of the treaty, it did not employ a Vienna Convention analysis to interpret the treaty language in the light of its object and purpose, or even by reference to relevant rules of applicable law as provided in Article

122

Id. The CMS Annulment Committee suggested that the treaty provision was distinct from the customary international law of necessity but did not address how the provision should be applied. 124 Kurtz, supra note 108, at pp. 43–49; Burke-White & von Staden, supra note 108, at pp. 368–370. 125 Continental Casualty Award, supra note 101, at paras. 164, 167. 126 The tribunal nonetheless, and somewhat confusingly, suggested that it would consult the international law doctrine of necessity “insofar as the concept there used assist [sic] in the interpretation of Article XI itself.” Id. para. 168. 127 Continental Casualty Award, supra note 101, para. 192. 123


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31(3)(c) of the Convention.128 Instead, by rather quick leaps of logic, it determined that Article XI of the BIT was the successor to the parallel clause found in earlier US treaties of friendship, commerce, and navigation, and that those treaties reflected the formulation of Article XX of the GATT.129 In fact, earlier treaties had one provision that combined some of the exceptions found in GATT Articles XX and XXI.130 GATT Article XXI is the provision that currently addresses essential security interests. Nonetheless, despite this imperfect genealogy, the Continental Casualty tribunal looked to Article XX of the GATT for guidance as to the interpretation of the word “necessary.” It stated specifically that it was looking to GATT and WTO case law “in the context of economic measures derogating [from] the obligations contained in GATT.”131 The tribunal had employed a Vienna Convention analysis to conclude that a measure falling under Article XI of the treaty would eliminate any wrongful act, therefore obviating the need for the secondary defence of necessity as a circumstance precluding wrongfulness. Yet it did not go through a similar analysis to determine whether the GATT provision occupied a similar place in the primary/secondary hierarchy embraced by the tribunal. In fact, Article XX of the GATT is treated as an exception which is invoked precisely because a State has taken an act incompatible with the rest of its treaty obligations.132 A WTO tribunal will first determine that an act violates a substantive provision of the GATT, and then determine whether the measure nonetheless falls under one of Article XX’s exceptions. A successful Article XX defence does not eliminate the wrongfulness of the measure, but rather excuses it.133 Even though Article XX itself says that “nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect public morals [. . .]”, language very similar to the measures-not-precluded language in Article XI, the measure in question is still considered to violate the other provisions of the treaty—the State is simply excused from the obligation to remove the measure in question.

128 Claussen, K., Note, ‘The Casualty of Investor Protection in Times of Crisis’, 118 Yale L. J. (2009) 1545, at pp. 1549–1552; Alvarez & Brink, supra note 108, at pp. 20–23. 129 Continental Casualty Award, supra note 101, para. 192. 130 Alvarez & Brink, supra note 108, at 23–24. 131 Continental Casualty Award, supra note 101, para. 192. 132 Guzman, A.T., Paulewyn, J.H.B., International Trade Law, Aspen Publishers (2009), p. 339 (“[When] there is no breach of the basic rules, we do not even need to turn to or rely on the exceptions.”). 133 This is an area in which the heading “measures precluding wrongfulness” in the ILC Articles leads to confusion. In fact, Vaughan Lowe wrote an article entitled Precluding Wrongfulness or Responsibility: A Plea for Excuses precisely because of the confusion that could result from that usage. See Lowe, supra note 119.

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The difference in available remedies is another important distinction between the WTO and the investment regimes. In the WTO the primary remedy is that a State remove its non-conforming measure. The WTO Agreements do not provide for the payment of money damages either to States or to private parties affected the offending measure.134 Most investment tribunals award money damages to private investors in payment for a breach of an obligation. The fact that a State’s measure meets the requirements of Article XI does not necessarily mean the State is not obliged to pay damages incurred by the investor.135 Professor Alvarez and Ms. Khamsi have argued forcefully that States did not intend a measures-not-precluded clause to afford blanket exoneration to an offending State.136 Furthermore, the tribunal’s choice of Article XX of the GATT as a reference point is rather odd. A key question to ask when borrowing from another regime is whether the context is similar. As a matter of fact, GATT Article XXI is an “essential security” clause; thus, to the extent the tribunal was interpreting the essential security clause in the treaty, one might have thought that the more appropriate provision from which to draw.137 There has been, however, remarkably little case law on Article XXI of the GATT. The only case before a WTO panel was a European Union challenge to the US Helms-Burton Act of 1996, but the two government entities entered into a memorandum of understanding about the case prior to any tribunal decision.138 The very few cases prior to the entry into force of the WTO Agreements, for various reasons, generally did not issue rulings on the merits of the disputes.139 This lack of interpretive guidance might explain why the tri-

134 See, Sykes, A.O., ‘Public v. Private Enforcement of International Economic Law: Standing and Remedy’, 34 J. Legal Stud. 2 (2005) 631, at pp. 641–642 (discussing puzzle that remedy in WTO is trade retaliation). Even under municipal laws implementing the WTO Agreements, which permit the levying of fines against foreign producers and importers who engage in unfair trade practices, the United States was found to have violated its WTO obligations when it passed a law requiring that countervailing or antidumping duties collect from importers would be paid to the complainants who initiated the unfair trade practices case. United States—Continued Dumping and Subsidy Offset Act of 2000 (adopted 27 January 2003) WT/ DS217/R/AB. 135 Bjorklund, ‘Emergency Exceptions’, supra note 99, at 510–516; Alvarez & Khamsi, supra note 108, at 455–460. 136 Alvarez & Khamsi, supra note 108, at pp. 417–426; 455–460. 137 Article XXI of the GATT provides “Nothing in this Agreement shall be construed . . . (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests . . . (iii) taken in time of war or other emergency in international relations. General Agreement on Tariffs and Trade (signed on 30 October 1947) 55 UNTS 194, at p. 266 [hereinafter GATT]. 138 European Union—United States, Memorandum of Understanding Concerning the U.S. Helms-Burton Act and the U.S. Iran and Libya Sanctions Act, 36 ILM (1997) 529. 139 Alexandroff, A.S., Sharma, R., ‘The National Security Provision—GATT Article XXI’, in: Macrory, P.F.J., Appleton, A.E., Plummer, M.G., [Eds.], The World Trade Organization: Legal, Economic and Political Analysis, Springer (2005) 1571, at pp. 1574–1577.


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bunal turned its attention to Article XX, rather than Article XXI. Yet the tribunal did not explain this step, or why Article XX was also an appropriate place from which to borrow. The primary attraction of Article XX is the extent to which the term “necessary” has been the subject of WTO panel interpretation. Some of the provisions in Article XX are permitted only when they are “necessary”, whereas other provisions, notably Article XX(g), require only that the measure “relat[e] to” the goal in question. Determining whether a measure is “necessary” involves “a weighing and balancing of facts, including: the contribution of the measure to the ends pursued [. . .], the importance of the common interests or values protected, and the impact of the measure on imports or exports.”140 It is clear that necessity does not mean absolutely necessary, but the more severe the limitation imposed the more important the measure must be in achieving the desired goal. Even a necessary measure will be weighed against possible alternatives. An alternative need not only exist, but must (1) be less trade restrictive, (2) permit the State to achieve its desired objective with the level of protection desired, and (3) be reasonably available, and not unduly burdensome.141 The Continental Casualty tribunal determined that the measures taken by Argentina were necessary because they were “in part inevitable, or unavoidable, in part indispensable and in any case material or decisive in order to react positively to the crisis [. . .]”142 The Continental Casualty tribunal did not address the impact of the measure on investment (the analogue to effect on exports and imports). It next turned to whether less restrictive alternatives were available. With one exception, the tribunal concluded that the measures were inevitable and without reasonable substitutes to achieve the same ends.143 The WTO Appellate Body has established that analysis of the exceptions in GATT Article XX requires two separate steps: first, a measure has to satisfy the specific exceptions—to be “necessary” to protect human animal or plant life or health, for example; second, a measure must satisfy the requirements of the chapeau—that it not “constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.”144 Article XI of the

140 Korea (Republic of )—Various Measures Affecting Imports of Fresh, Chilled and Frozen Beef (adopted 10 January 2001) WT/169/R/AB, paras. 161–164. 141 European Communities—Measures Affecting Asbestos and Asbestos-containing Products (12 March 2001) WT/DS135/R/AB, paras. 169–174; see generally Guzman & Paulewyn, supra note 132, at p. 349. 142 Continental Casualty Award, supra note 101, para. 197. 143 Id., paras. 201–222. 144 GATT, supra note 137, art. XX, at pp. 262, 264; United States—Import Prohibition of Certain Shrimp and Shrimp Products (adopted 6 November 1998) WT/DS58/R/AB, paras. 150–186.

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Argentina-United States BIT has no chapeau, and the Continental Casualty tribunal did not undertake any such analysis. Yet the chapeau in Article XX plays an essential role in any assessment of a government measure as against the general exceptions in Article XX. It is a safety valve used to ensure that any measure—even a “necessary” measure—is not a disguised restriction on trade, or not otherwise arbitrary or unjustifiable.145 The existence of the chapeau is integral to the rest of Article XX in that it provides a means of combating disguised protectionism. Thus, importing the interpretation of “necessary” from Article XX without also importing the chapeau ignores the careful balance struck by the GATT between the ability of States to regulate to protect important domestic interests and the overarching policy objectives of the treaty. Another feature of Article XX is that the defending State bears the burden of proving that the contentious measure satisfies both the requirements of the enumerated exceptions and the safeguard provisions of the chapeau.146 While the burden may shift, the defending party must nonetheless present a prima facie case. The Continental Casualty tribunal did not seem to employ a burden shifting approach. Although the tribunal rejected Argentina’s argument that the Article XI should be regarded as self-judging,147 it nonetheless held that Argentina enjoyed a “margin of appreciation” in its invocation of Article XI.148 The decision on the self-judging nature of the exception was not surprising; the tribunal cited to the well-known decision of the International Court of Justice in the Nicaragua case, in which the ICJ interpreted the identical clause in the Treaty of Friendship, Commerce and Navigation between the United States and Nicaragua as non self-judging.149 The “margin of appreciation” language is borrowed from the European Court of Human Rights, and was cited in Argentina’s counter-memorial.150 The tribunal did not explicitly ground its adoption of a “margin of appreciation” in the European Court’s jurisprudence, but also cited to hearings before the US Senate’s Committee on Foreign Relations about the Argentina—US BIT in which the scope and nature of Article XI were discussed.

145 United States—Import Prohibition of Certain Shrimp Products, supra note 144, paras. 157–160; cf. Brazil—Measures Affecting Imports of Retreaded Tyres (adopted 17 December 2007) WT/DS332/R/AB (suggesting discrimination test in the chapeau should be applied by assessing the legitimacy of the objectives asserted under the Article XX exception invoked). 146 Lester, S., Mercurio, B., with Davies, A., Leitner, K., World Trade Law: Text, Materials and Commentary, Hart Publishing (2008), p. 382. 147 Continental Casualty Award, supra note 101, paras. 187–189. 148 Id., paras. 181 & 187. 149 Id., para. 186. The Nicaragua decision famously caused the United States to withdraw from the compulsory jurisdiction of the ICJ. 150 Id. para. 181 & n. 270.


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The tribunal did not elaborate on its margin-of-appreciation reference; to some degree it is a distraction, albeit a germane one. It seems clear that affording a State a margin of appreciation with respect to the measures necessary to protect its essential security interests is not consistent with placing the burden of proof on the party invoking the exception. The necessity cases also illustrate the use of customary international law to fill lacunae in treaties. In the cases brought under the Argentina—United Kingdom BIT, there was no non-precluded-measures clause. Thus, the question put to those tribunals was whether Argentina could invoke the customary international law defence of necessity notwithstanding the absence of any reference in the treaty text to exceptions that might be deemed to encompass the traditional customary international law defences.151 The BG Group tribunal ultimately concluded that because Argentina did not meet the stringent standards of the customary international law defence, it did not have to decide whether or not the defence was available to Argentina. It also suggested, albeit in obiter, that Argentina might have had difficulty overcoming Article 25(2)(a)—the requirement that the obligation in question neither implicitly nor impliedly exclude reliance on necessity.152 Such an argument is certainly plausible—after all, one purpose of a BIT is to protect investors from measures taken in times of economic uncertainty.153 Yet there is also a well-established principle of treaty interpretation that a State not be deemed to have waived the availability of customary international law defences in the absence of a clear intent to do so.154 In another case based on the Argentina— UK BIT, the National Grid tribunal found that Argentina had not, merely by entering into the BIT with the United Kingdom “limit[ed] its powers that as

151 See generally the text accompanying notes 45 to 48, supra. The presence of the nonprecluded-measures clause in the cases brought under the Argentina—United States BIT, whether viewed as precluding liability in a manner that obviated the need for the customary international law necessity defence, or as importing those standards into the treaty, made it unnecessary for tribunals convened under that treaty to determine whether necessity was available to fill a lacuna in the treaty. 152 BG Group Award, supra note 101, para. 409. 153 This is particularly true of the Argentina—United States BIT, a treaty entered into after several similar economic crises had resulted in chaotic and uncertain conditions for foreign investors in Argentina. Alvarez and Khamsi, supra note 108, at pp. 411–417; see also Reinisch, A., ‘Necessity in International Investment Arbitration, An Unnecessary Split of Opinions in Recent ICSID Cases?’, 8 J. World Investment & Trade (2007) 191, at pp. 204–205. 154 In the ELSI case, the Chamber of the International Court of Justice dismissed U.S. arguments that the Treaty of Friendship, Commerce, and Navigation had waived the exhaustion of local remedies rule: “Yet the Chamber finds itself unable to accept that an important principle of customary international law should be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so.” Case Concerning Elettronica Sicula (United States v. Italy), Judgment, 20 July 1989, ICJ Reports 1989, p. 15 et seq., para. 50; see also McLachlan, C., Shore, L., Weiniger, M., International Investment Disputes: Substantive Issues, OUP (2007), p. 67.

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a sovereign it would have under international law except to the extent provided in the treaty.”155 As early as 1957 the International Law Commission’s work on State Responsibility had recognized that economic circumstances could trigger a plea of necessity.156 Even if one could argue that the necessity principle had not yet coalesced into customary international law as of the date the relevant BITs were signed, one could certainly argue that it had.157 Given that there have been only two tribunals to consider this particular issue, it is too early to say that any consistent interpretive approach has developed. Nonetheless, States wanting to preclude altogether the possibility of a necessity argument might consider including a clearer or more explicit exclusion of it (and like circumstances precluding wrongfulness, such as force majeure and countermeasures) as they negotiate their treaties. The necessity cases thus present interesting examples of inter-nuclei communication, and some of the risks when tribunals use other regimes without a full appreciation of the context in which specific principles develop. The object and purpose of the differing treaties might have some bearing on whether cross-regime borrowing is appropriate; the object and purpose of the imported treaty provision, and the position it occupies in the treaty, are especially likely to be relevant. Article XX of the GATT is a lengthy provision introduced by a protective chapeau that has been given a key protective function by tribunals charged with interpreting the treaty. Using some of Article XX’s provisions without recognizing the limiting function performed by the chapeau means that a relatively flexible approach to interpreting the word “necessary” is unaccompanied by any constraint. That malleable “necessary” thus makes it easier to find that a State’s acts were taken in response to essential security interests. This conclusion does not seem consistent with the overall object and purpose of the investment treaty. Without wishing to endorse one-dimensional descriptions of the goals of investment treaties as designed solely to protect foreign investors, it is nonetheless true that investor protection is one of the goals, and that by constructing an elaborate regime for the protection of foreign investors States are generally deemed to have conferred on them more, rather than fewer, benefits than they enjoyed under customary international law. Interpreting the essential security clause of a BIT to offer greater protection to a State’s regulatory interests than the State would enjoy absent the treaty seems contrary at least to one of its objects.

155

National Grid Award, supra note 101, para. 254. Bjorklund, ‘Emergency Exceptions’, supra note 99, at p. 468. 157 Many tribunals had recognized the defence of necessity and its related doctrine, force majeure, by the late 1950s. See, e.g., Bjorklund, ‘Emergency Exceptions’, supra note 99, at pp. 468–470 & n. 58 (collecting cases). The contours of the doctrine as set out by the International Law Commission changed little after the early 1980s, and changed very little with respect to core features. Bjorklund, ‘Economic Security Defenses’, supra note 108, at p. 16. 156


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The Continental Casualty tribunal also flirted with the European Court of Human Rights’ margin of appreciation, although it played a somewhat minor role in the decision. As illustrated above, it is not our contention that European Court of Human Rights jurisprudence can never be a source of guidance for investment tribunals; on the contrary. Yet a profligate borrowing from different regimes, and what one might call “sub-borrowing”—using ideas from one regime to replace pieces of an already—borrowed regime, is especially likely to lead to chaos. IV. Concluding Remarks The fragmentation of international law is in some ways an embarrassment of riches—multiple tribunals are resolving disputes, interpreting treaties, and—sometimes controversially—creating jurisprudence in particularized areas. This richness leads also to complexity and to the phenomenon that Marti Koskiennemi so accurately termed “fragmentation.” Our purpose in this essay is not to minimize the problems that the fragmentation phenomenon can and does present, but to look “beyond fragmentation” given that the status quo of multiple discrete nuclei developing in isolation from one another is unsatisfactory and, we argue, stands in the way of the continuing relevance of international law in modern times. We are unlikely to see a constitutionalization of the international order that brings unity to the field via a top-down hierarchy. This leaves open questions about fostering greater communication between the nuclei. The international investment arena, with its myriad ad hoc tribunals and legal doctrines enshrined in treaties that either codify or build on customary international law, with protections that often resemble the protections afforded in trade agreements and even in human rights treaties, offers an excellent laboratory in which to theorize about communication between the nuclei— and when such communication is appropriate. Investment tribunals are particularly apt to look outside the applicable regime of investment law in three situations. One is to give content to treaty norms that are inherently vague or otherwise need content. The second is to fill lacunae in treaties. The third is when investment treaty obligations meet others, such as environmental protections or human rights norms and there is an interpretive issue regarding the relationship between the investment norm and the apparently competing obligations. The latter dilemma has to some extent been addressed by the application—not without controversy—of Article 31(3)(c) of the Vienna Convention on the Law of Treaties.158 For the 158 Vienna Convention on the Law of Treaties, supra note 50, art. 31(3)(c), at p. 340; Wälde, supra note 11, at pp. 769–777.

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former two we have suggested an inter-nuclei communication model when a specialized jurisprudence in a particular area of the law could be utilized to guide a tribunal whose jurisprudence is at an earlier stage of development. This approach takes advantage of what we have suggested is the positive aspect of fragmentation—the development of specialized jurisprudence in particular areas of the law. It would seem perverse to suggest that tribunal expertise in relevant areas should be ignored simply because it is not the direct product of the treaty under review. Think of the criticism levelled at certain members of the US Supreme Court for their refusal to look to the law of other nations to inform decisions about US law and their insistence that the US Constitution in particular should be interpreted without reference to the external world.159 Yet this does not mean that all expertise is freely transferable. A specialized doctrine deeply embedded in a complex treaty might be a poor candidate for transfer to another regime in which the analogous doctrine operates in an altogether different context. For this reason we have suggested a methodology taking a cautious approach to inter-nuclei communication that guards against a-contextual borrowing but encourages a mindful appreciation of a developed expertise. It seems only fitting to close with Thomas Wälde, as ever prescient on this topic: Investment disputes are part of international public law and, I suggest, also part of a wider body of transnational law. They reflect the gradual transition from the 19th century model of the nation-State to a more open ‘market State’, exposed to and participating in a global economy. That requires the development of a cosmopolitan and global professional, academic, and adjudicatory culture, where an acceptable style of investment treaty interpretation emerges over time.160

It is with Thomas’s vision in mind that we propose the inter-nuclei communication model as a tool for the development of ‘an acceptable style of treaty interpretation’ that reflects the reality of our open, multi-polar world.

159 Compare Koh, H.H., The United States Constitution and International Law: International Law as Part of Our Law’, 98 Am. J. Int’l L. (2004) 43 with Roper v. Simmons, 543 U.S. 551, 622–28 (2005) (Scalia, J., dissenting). 160 Wälde, supra note 11, at p. 780.

APPENDICES: TRANSCRIPTS MEMORIAL SYMPOSIUM FOR PROFESSOR THOMAS WÄLDE

APPENDIX A: PART I Introduction by Todd Weiler The underlying idea of this Memorial Symposium is to discuss topics that Thomas Wälde found challenging; in other words, to create a conference which Thomas would have liked to attend. In that spirit, enthusiastic and numerous interventions are certainly encouraged as this is not meant to be a lecture, but rather a seminar. I will quickly introduce the three moderators for today: in reverse order, Timothy Nelson from Skadden Arps will be doing the last session, namely on the future of international arbitration. Further, Stéphane Brabant from Herbert Smith will be moderating a panel on the Work of the UN’s Special Representative on Business & Human Rights. The first panel is co-moderated by Arif Ali and Timothy McCrum from Crowell Moring and promises to raise an eclectic mix of international law and natural resources questions. 15 October 2009 09.00–10.15 Roundtable on Cross-Cutting Issues on Energy & Natural Resources and Development—Part 1 Moderators:

Arif Ali and Timothy McCrum

Contributors: William Fox, Elizabeth Bastida, Ibibia Worika, Christian Pielow, Andrey Konoplyanik, Borzu Sabahi and Graham Coop McCrum: It is an honour and privilege to be here at the Symposium for Professor Thomas Wälde as I had the privilege of working with him over the past few years. Professor Wälde would have wanted us here today in recognition of his life and work to have a rigorous intellectual debate and discussion. However, fellowship and camaraderie were quite important to him so he would have wanted us to be enjoying that as well. I will offer some opening remarks for our discussion this morning. There are two themes that are particularly important to the energy and mineral industry sectors as well as the legal principles underlying those sectors. The first theme is the continuing critical need for strong international expropriation protection for the mineral, energy, oil and gas exploration

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and development sectors, including protection against extraordinary government actions to block or take over projects, including actions in the name of environmental protection. Governments often take action in this area although environmental protection is not always their true motive and even when it is, it risks having a severe effect on mineral development projects. A second theme is the increasing need for strong protection of international mineral development projects against arbitrary government actions which deprive investors of fair and equitable treatment. World demand for minerals and energy is at a historic peak. Even in the face of the global economic crisis, our modern society is heavily dependent upon the production and use of mineral products, meaning the full range of energy, minerals, oil and gas, coal and base metals which are essential to sustain our modern standard of living. While pressures for production and use of these minerals continue at an all time high, the mineral sectors have become increasingly international in nature. The mineral deposits themselves are only located in economic extractable quantities in a few places in the world; yet they are needed by many more countries and people around the world. Why are these issues particularly important to, as recognized by the existence of, the Center for Energy and Mineral Law and Policy? These are not just interesting academic issues but they are vital to the continued survival of the world’s population. All of us traveled here by plane or car mostly using the products of the oil industry. Around the world, natural gas is increasingly used as a major energy source, particularly in the United States. Coal continues to supply a large amount of electricity and will continue doing so for quite some time into the future. Even when looking at alternative systems to reduce reliance on fossil fuels, we find that the mineral sectors are still vitally important. As hybrid cars become more in demand, there are increasing needs for copper and silver production for those sophisticated electronic engine systems. This is also true concerning other alternative energy systems, such as wind power. Wind turbine structures require the use of molybdenum and other metals in order to create strong steel necessary for their operation. The mineral industries are by no means merely industries of the past; they are very much involved in our modern way of living and this is likely to remain so for the indefinite future. Investment in these sectors requires a stable economic and regulatory environment in which investors can reasonably expect to be free from significant changes in the legislative framework regulating their projects. I have had the privilege of working with Professor Wälde on the recently decided Glamis Gold Ltd. vs. the United States arbitration under Chapter 11 of NAFTA. Working with us as an international law expert, Professor Wälde made a detailed review of the

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case and I will share some of his thoughts as I proceed. While the decision denied compensation for the investor, Glam is Gold, at least it did recognize the mineral investment as a property interest under the international expropriation protection and found that a 60 percent decrease in value was not sufficient to constitute an expropriation of the investment. While I would disagree with the specific factual determinations made by the tribunal, there was no suggestion that governments would be free to simply destroy a mineral investment. The decision recognized that the property interest in the mining claims, supported by millions of dollars of exploration development, was subject to expropriation protection. We are discussing cross-cutting and emerging issues in the mineral and energy sectors this morning. Being a student of history, as Professor Wälde was, he saw the importance of looking at the historical significance and context of certain principles. In Great Britain, the first efforts to impose the rule of law as a constraint on the actions of the sovereign were enshrined in the Magna Carta in 1215. Subsequently this principle influenced the adoption of the takings protection in the U.S. Constitution of 1787 and the Fifth Amendment in the Bill of Rights, being the specific protection that property cannot be taken without due process of law and just compensation. So, this principle has a long-standing historic basis and can presently be found in the international bilateral investment treaties that have been adopted by States in recent decades. Turning specifically to the mineral sector, and again adopting a historical perspective, I would like to refer to the treatise De Re Metallica written by a German, Georgius Agricola, in 1556. Agricola provided the following warnings relevant to the mineral investment sector: “[t]he miner should make careful and thorough investigation concerning the lord of the locality, whether he be a just and good man or a tyrant who oppresses men by the force of his authority and seizes their possessions for himself. The miner should not start mining operations in a district which is oppressed by a tyrant, but should consider carefully if the overlord there be friendly or inimical.” Today this would be seen as the political risk assessment to evaluate countries in a search where to invest. Agricola continued: “[i]f he be inimical the mine will be rendered unsafe through hostile attacks in which all of the gold or silver or other mineral products laboriously collected with much cost will be taken away from the owner and his workmen will be struck with terror, overcome by fear and they will hastily fly to free themselves from the danger to which they are exposed.” Even today Agricola’s observations are strikingly relevant for investments in the mineral sector that risk being blocked after years of exploration, if the host government takes arbitrary action towards the investor. The balance between environmental protection and resource development

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is often seen as an enlightened concept of modern society, but this balance has been recognised for quite some time. For example, in the United States, the first national park was established at Yellow stone in 1872. Even further back in time, Agricola’s 1556 treatise reports a very active debate about whether minerals should be produced for the benefit of society or whether land should simply be preserved for essentially environmental preservation purposes. Agricola stated, “[i]f we remove metals from the service of man, all methods of protecting and sustaining health and more carefully preserving the course of life are done away with. If there were no metals, men would experience a horrible and wretched existence in the midst of wild beasts.” Those observations remain true today: if our society had to make do without the benefits of mineral products, we would all be greatly at a loss for it. In his expert report in the Glamis case, Professor Wälde put forward general principles which are very relevant and warrant great consideration. He stated, “[t]he nature of mining investment includes a particular risk configuration which is quite specific for mining. One does usually not know beforehand what is in the ground or whether an economically viable mining project will emerge. Mineral exploration is therefore both costly and highly risky. Most exploration investment will end up as investment failure. It is therefore the very small percentage of successful mineral exploration efforts, i.e., those which produce a commercial discovery, which must subsidize many more failed efforts.” He continued, “[f ]or this reason the exploration investment is very fragile and highly vulnerable. The investor expects if he manages to achieve by skill and luck a commercial discovery, it will already own or readily acquire the right to develop the mine and extract the minerals. If the investor is not compensated for undertaking unsuccessful exploration but is likely to lose its right in the case of discovery, there is no incentive for mineral development.” He stated further, “[m]ining laws throughout the world and throughout history have reflected this innate vulnerability of the mineral investment process. In essence the mining laws or market economies with a strong rule of law provide mining tenure or security of title. The mining investor is either automatically entitled to develop the mine or has a very strong entitlement complimented by a process of permitting. In such processes, governmental discretion is reasonably circumscribed.” With observations similar to Agricola’s in years past, Professor Wälde wrote: “[i]f governments, bureaucracies, and political pressures were to have full say over the right to mine, there would be insufficient incentive to engage in mineral exploration. The key here is predictability and transparency of the standards that will be applied for mine-permitting. If such

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standards are sufficiently clear and predictable, an investor can properly decide whether or not it is worthwhile to engage in the risky process of mineral exploration. The worst outcome from an investor’s perspective is to engage in mineral exploration, lose out on many prospects and then see its few commercially viable prospects thwarted by an unpredictable permitting process wherein bureaucratic discretion and political pressures have free reign.” Those were some views of Thomas Wälde on this topic that I wished to share with you before opening up the panel discussion. Our first panelist is Dr. Borzu Sabahi. He has a master’s degree in law from Georgetown University Law Center and a law degree from the University of Tehran. He is international counsel with the law firm of Fulbright & Jaworski in Washington, D.C. and an adjunct professor of law in the area of international arbitration at the Georgetown University Law Center. He has widely published on international investment law, including a case book entitled “Investor State Arbitration,” published by Oxford in 2008. Sabahi: The topic assigned to me is the international investment law regime and the rule of law as a precondition for international development. Given the fact that this symposium is in the memory of Professor Wälde, it makes sense to review his writings so as to try to extract relevant themes for this particular topic. A couple of disclaimers before I begin: first of all, Thomas was a very prolific writer so it was impossible to read all of his writings. Secondly, I am somewhat out of my element talking about such a broad and doctrinal topic because I consider myself more of an expert on technical subjects such as damages. Having said that, I have enjoyed working on this topic and it is a work in progress so if anyone has any comments I would be very glad to consider them when finalizing this paper. The international investment law regime is not limited to investment treaties and investment arbitration. It encompasses other elements such as domestic laws and the body of soft law. My presentation is divided into six points and in each one of them the relationship between various elements of this regime, the rule of law and development will be explained. The first point deals with investment arbitration and good governance. Professor Wälde’s main approach towards the relationship between the international investment law regime and development was encapsulated in the title of one of his works: “Investment Arbitration as a Discipline for Good Governance”. Investment arbitration in Thomas’ work is an external discipline because it has its roots in international law rather than in the domestic laws of the host State. It is a discipline because it forces governments to change their conduct, particularly towards foreign investors, so

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as to be more in line with the modern notions of good governance. Good governance in turn could help to attract and mobilize both foreign and domestic investment, and ultimately create prosperity. The second point is the domestic law element of this rule of law regime and its relation to international investment law. Embedded in Thomas’ notion of a causal relationship between investment arbitration as external discipline and good governance, is a well-functioning domestic rule of law system. The rule of law insofar as domestic legislations are concerned, is not limited to specialized laws on protection of natural resources. More importantly, it includes the protection of property and contractual rights, which Thomas describes as “the two fundamental building blocks of capitalist law.” In order to reasonably rely on contractual and property rights, these rights must be supported by legal, fiscal, institutional and regulatory frameworks, all of which must be as predictable and as stable as possible. These are all major goals which are difficult to achieve because both the executive and the judicial branch of government have to support the implementation of the relevant legislation. This is easier said than done because most of the time, regulatory bureaucracies are prone to excess, due to their tendencies toward non-transparency, unfiltered discretion and economically insufficient collision with domestic pressure groups. In this context international investment agreements which are enforceable via international arbitration could play at least two roles. First, they could offset domestic pressure on States to use political power in order to escape from ‘inconvenient’ international commitments towards foreign investors. Second, international arbitration can also perform a positive carry-over effect influencing domestic law protection available to all investors. This is called the ‘signaling effect’ which occurs when international protection standards serve as a signal to domestic institutions indicating the acceptable standard for the treatment of investors. This then becomes a benchmark for good governance in this area. Elements of this good governance regime, as described by Professor Wälde in a joint paper with Todd Weiler, include transparency, the protection of legitimate expectations and non-discrimination. Professor Wälde recognised that the development of a strong domestic system would not be instantaneous. Trying to transplant the western system into an alien environment, through consultants, seminars, access to computers and the internet, or even by the abrupt duplication of the statutes, would not result in the establishment of a working system of investment protection. Rather, legislation would need to be accompanied by social and institutional change. In the interim, investment arbitration may be a useful tool to protect foreign investors. Finally, various branches of government and the domestic government function could support the rule of law system that will eventually foster

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development. Lawyers should be protected in these legal systems because they are the people who apply the law and if they lose their independence, the system would not work. There have been recent attempts in certain countries, including Iran, to take away the independence of bar associations and subject them to direct government supervision and regulation. If a lawyer is afraid of losing his license, how is he going to perform his function? The third point is the system of investment arbitration and I will be briefly addressing three issues, bearing Thomas’ views in mind. First issue: investment arbitration is auspicious for administrative law. Thomas regarded investment arbitration as an administrative mechanism for the review of government action because it involved a State and a private party. As an academic and as an advocate, Thomas felt that “the common principles of administrative law systems” should influence investment arbitration jurisprudence at least where this jurisprudence is not yet extensive. Thomas’ view of what administrative law is, was however much broader than a branch of domestic public law in the narrow sense. His notion of administrative law also included a legal value system such as international human rights, European administrative law and other systems. The impact of this doctrine is very much apparent in his writings, particularly in his treatment of the issue of damages which he described at length in his dissenting opinion in the Thunderbird case. The second issue in the context of the investment arbitration system relates to treaty protection standards such as fair and equitable treatment. Underlying this protection is, to use Thomas Wälde’s words, “something close to a general internationally sanctioned form of abuse of regulatory powers against foreign investors which were usually caused by local competitors in cahoots with the political administrative machinery”. These protection standards are treaty-based attempts to impose good governance and the rule of law on economic regulation hijacked by local interest. On the topic of fair and equitable treatment in particular, Thomas thought that treating foreign investors fairly and equitably goes hand in hand with the principle of good faith in general international law. In his dissenting opinion in Thunderbird, he found a widespread acceptance for including the protection of limited expectations as an aspect of fair and equitable treatment as a link to transparency and the rule of law necessary for good government. In a similar reign the role of MFN treatment is to promote good governance preventing a government from abusing its power. Thomas’ paper on umbrella clauses depicts the relation between international investment law and the domestic rule of law insofar as the protection of contractual rights is concerned. The basic principle of respect for contracts and property rights supports good governance and development.

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Umbrella clauses represent an external constraint on the violation of such principle. However, Thomas envisaged only a limited role for umbrella clauses as international law should only be injected into contractual disputes when some abuse of sovereign governmental power has occurred. The last issue in the context of the investment arbitration system relates to remedies and compensation in international investment law. Thomas did not perceive monetary compensation as the only solution for resolving a dispute between a State and a foreign investor. Instead, in line with the solutions adopted in a number of administrative law systems, nonmonetary solutions should be tried to allow a government to correct the result. It was in this spirit that he advocated that tribunals, rather than instantly awarding damages, should give the parties time to rethink their relationship and possibly settle. Thomas praised this approach as “flexible and effective” and encouraged the consideration of such remedies as far as allowed under the relevant treaties so that the standard monetary damages formed the remedy of last resort. This was a step toward better governance and the prevalence of respect for the rule of law. The fourth point concerns the relationship between soft law and the rule of law. In addition to investor protection via formalized treaties, Thomas saw an increasing role for soft law in this area. He wrote that there is “a large and constantly growing number of soft law instruments, such as the standards promulgated by various international institutions, which can and at times unpredictably acquire practical relevance.” This soft law is not only growing more important in investment arbitration than it has been in the past, but also has a more substantial role to play in international investment law than in conventional public international law. In his paper on international standards, Thomas recognized that reference to soft law sources possibly makes an award more palatable to the parties involved. Similarly, reference to, and some level of conformity with, such soft laws would provide some legitimacy to investment arbitration decisions, especially in the eyes of some critics of the system. Thomas saw soft law growing into what he called “the modern minimum standard of treatment for foreign businesses”. This minimum standard consists of a shortlist of international torts for which States could be held responsible in their treatment of investors and investments, including a lack of transparency. The fifth point relates to nongovernmental organizations and investment arbitration. Thomas had two completely opposite feelings towards nongovernmental organizations. On the one hand he criticized some NGOs for their not fully thought-through attacks on the investment arbitration regime and challenged them to present a realistically designed alternative that can be tested, as opposed to only criticizing investment arbitration

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for “not measuring up to a higher level of perfection it does neither pretend nor can achieve.” Dispute resolution based on advocate and political arguments rather than the rule of law were in Thomas’ writings “objective allies of root politics and corruption and thus in the camp opposite to the notions of sustainable development.” On the other hand, while generally critical of such politically-minded NGOs, he did find that they serve the important function of focusing public opinion on specific issues. They are among the few organized networks that are relatively unimpeded by power politics and bureaucratic restraint. The sixth and last point is the relationship between investment arbitration and sustainable development. Thomas’ basic view was that “in order to achieve greater sustainable development in various areas it is essential not to indulge in feeling good and projecting such essential goodness to others but rather to understand the workings of the world [which is] an altogether much more difficult complex, subtle and uncertain undertaking.” He then clarified that sustainable development requires a long-term stewardship interest, not the short-term politically political interest. That completes my review of this topic. Thank you very much. McCrumb: Next is Dr. Andrey Konoplyanik who has a background in the area of international energy development and investment. He is an energy economist and received his Ph.D. and doctor of science degree in international energy economics from the Moscow-based State University of Management. From 1991 to 1993, he served as Deputy Minister of Fuel and Energy of Russia with responsibility for external economic relations and direct foreign investment. From 2002 to 2008, he was Deputy SecretaryGeneral of the Energy Charter Secretariat in Brussels and since then, he has been a professor in international oil and gas at the Russian State Oil and Gas University. He is also a consultant to the Gazprom bank in Russia and will talk about the evaluation of energy markets and international investment protection. Konoplyanik: My presentation will address on the one hand, the parallel development of energy market structures and on the other hand, pricing mechanisms and institutional structures, as this correlates with the evolution of investment protection mechanisms. Simultaneously with the need to change the economic, financial, energy and institutional structures of our markets, new challenges are arising with regard to the development of investment protection and arbitration mechanisms. Starting with the development and evolution of energy markets: what are the main trends? Major developments will take place on local energy markets as well as on global common energy markets in the future. Local energy markets in

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individual countries are developing through the process of internationalization, affecting external trade and flows of capital. Simultaneously, world markets of energy resources are developing; soon there will be only one global oil market and one global gas market. Whether the gas market will have the same institutional, organizational, contractual pricing structure as the oil market is questionable, although there are parallels in their development. In the future technological possibilities for substitution of different energies will provide an incentive for investment projects in infrastructure. It is difficult to speculate when this will happen, but it will not be in our generation. This will affect projects in three different ways: integration, the long-/short-term nature of deals and the liquidity of market places. These three factors need to be effectively balanced. The question is whether liquid market places will be the only form of a common market in existence or whether a competitive structure will remain in place. Looking at the contractual structure of energy markets, there have been significant developments, for example leading the ‘physical energy’ market to move from long-term deals to short-term contracts. Concerning the development of the financial segment of energy markets, the aim in the 1980s was to minimize the risks due to increased oil prices. Since then, this financial segment has started to play its own role as financial players began to dominate this market, including via their price of observation. What happened in 2007 and 2008, when the prices first began to slowly rise and then collapsed, was the reflection of the development of competitive markets. This has totally changed the global vision of future energy developments which in turn creates a different vision for investors, who need to focus on longterm, pivotal and intensive energy projects. There is a need for more price transparency as price perception is part of the price-establishing mechanism. More people have to become familiar with the price formulas behind long-term contracts and the correlation between the changing prices of replacement fuels and the final price of gas resulting from these pricing formulas. These changes of contractual structures, prices and mechanisms in the energy markets also alter the predictability of future prices and investment conditions. The process of globalization and of establishing global energy markets provides a number of new risks. Risks were historically assessed through the evaluation of investment protection and stimulation mechanisms: when an investor developed a local project, several opportunities to deal with investment risks were available. These projects usually concerned investments which were outside of the investor economies and focused on resources that aided the development of countries, particularly economies in transition. It mostly concerned foreign direct investments involving large companies

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that wished to protect their investments by creating a stable investment climate. Usually these projects were also associated with the territory of the whole country, meaning that, if successful, this led to the creation of a stable climate for the entire country. Then random modernized concessions began to appear as well as production-sharing agreements, so protection became linked to the location of particular deposits. National legislation was developed to increase the level of stability so as to create a more favourable regime (including a tax regime) beneficial for foreign investors in particular. With regard to international law instruments, several developments are discernable. Bilateral instruments such as taxation treaties were first signed in the late 1950s and today, there are approximately 2,600 bilateral investment treaties as well as more than 2,800 double taxation treaties. These treaties create a network of investment protection mechanisms which is more or less universal although not as universal as might be necessary. As major market developments are intensifying, there is ‘a natural request’ based on economic and financial considerations to minimize the danger of incompatibility between these bilateral instruments. Another question pertains to the role of international organisations as some of them could be considered in competition with each other which risks to become an excessive drain on resources. Returning to the issue of challenges facing global energy markets, the major question is whether our existing international law instruments are effective or in need of improvement. My view in this matter is different from the view of the Russian leadership that has decided to withdraw from the provisional application of the Energy Charter Treaty. I believe this Treaty is the best available instrument and ought to be further expanded into new areas. The liquidity of this market not only provided the expected inquiries in the price, but it also provided inquiries into the need for change of international instruments and mechanisms for investment protection and stimulation. First of all, we need to distinguish instruments for mature markets as opposed to growing energy markets as these are essentially different. In developing these legal instruments, one could start from one universal instrument or one set of basic principles allowing for differentiation further on. On the one hand, growing markets (so-called rolling markets) are aimed at development into mature markets. This ties together different segments of energy investment resulting in a need to create new energy infrastructure. These markets need to establish a strong investment environment for both domestic and foreign investors, including the development of basic infrastructure providing access to resources and markets. Such investment can be costly, risky and long-term. On the other hand, mature markets have a different aim, namely to improve efficiency within

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the existing energy infrastructure through the development of open and competitive markets. That will provide multiple forms of access to diversified infrastructure for producers, suppliers and consumers. These markets are dealing with a different type of infrastructure investment compared to the growing markets because most (costly) infrastructure has already been developed. This implies a diversification of existing infrastructure, aimed to provide multiple choices to participants. Rules need to be developed for both types of markets while bearing in mind their different aims. On mature markets, major players are providing financial services, not energy, so they are receiving their profits from money transactions. Investment rules are most important for rolling markets, since they are mostly aimed for suppliers and producers dealing with physical energies who are interested in stable and predictable markets. Such investors are planning longer term projects. The question is: who should international law protect first, financial speculators or suppliers of goods and services? Concerning changing priorities and the evolving role of foreign direct investment, if investors wish to develop natural resources projects, they need financing, technologies and skilled labour. The new challenge is the diminishing role of traditional foreign direct investments in energy—‘traditional’ meaning the dominant flow from OECD to nonOECD countries in the past. New foreign investments in energy are developing from non-OECD countries to OECD countries, or, from nonOECD to other non-OECD States. In conclusion, we may need to change our priorities in international energy law to accommodate the changing role of foreign directed business.

APPENDIX A: PART II 15 October 2009 (continued) 10.30–12.30 Roundtable on Cross-Cutting Issues on Energy & Natural Resources and Development (continued) McCrumb: Graham Coop has been the General Counsel of the Energy Charter Secretariat since 2004. Prior to that, he was in private practice with Denton Wilde & Sapte in the Energy and Infrastructure Development Department in London and from 1992 through 2002 he was the head of the Energy and Natural Resources Group at Fresh fields. He will provide some updated perspectives on the Energy Charter Treaty, in particular its interaction with European Union Law. Coop: The Energy Charter Treaty is among other things an investment protection treaty, it was signed in 1994 and it came into force in 1998. It has 51 Member States plus the European Union so it is the equivalent of over a thousand bilateral investment treaties. In addition to investment protection, it also covers trade, transit, energy efficiency and related environmental aspects, but only in relation to the energy industry, including energy materials and products as defined in the treaty. Bilateral investment treaties have a very long history: the first was concluded in 1959 and by the end of 2007, there were over 2,600 BITs in force worldwide. The typical BIT contains protection for nationals of either contracting party against certain actions by the government of the other contracting party, such as discriminatory treatment, misappropriation or equivalent measures. The nature, scope, and functional mechanisms of BITs differ significantly from those of the EU treaties, but there is nevertheless a significant number of commonly shared objectives. Until 2004, with the then-15 EU Member States, there were only two bilateral investment treaties in force among EU States. Many EU Member States have negotiated BITs with third States, so-called extra-EU BITs, to distinguish them from intra-EU BITs. In the early 1990s, following the fall of the Berlin wall, many BITs were concluded between the 15 pre-2004 EU Member States and eastern European States. Eight of these eastern European States joined the EU in 2004, and two more joined in 2007. The result is a situation where over 190 formerly extra-EU BITs have become intra-EU BITs within the context of today’s EU, but many extra-EU BITs still exist. In recent years, the

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European institutions have demonstrated an increasing interest in foreign investment generally and in the issues covered by these BITs in particular, relating to both substance and formal competence. In relation to the latter, there are clear signs of an impending conflict between the defenders of BITs on the one hand and the European institutions and their supporters on the other. To a significant extent, this is due to the fundamental difference between international and European lawyers who each have different views on the respective nature and role of national and European law. For the European Court of Justice, the EC Treaty has created its own legal system which constitutes a new legal order of international law. It constitutes the constitutional charter of a community based on the rule of law. From the viewpoint of public international law, European law remains a subsystem of international law, albeit a highly developed international legal order. I propose to discuss the implications of this, firstly with respect to intraEU BITs and secondly, with respect to extra-EU BITs. Finally I will summarize the special status of the Energy Charter Treaty, which has a foot in both camps. As I said, since the accession of new States to the EU in 2004 and 2007, there are over 190 intra-EU BITs. In November 2006, an internal note circulated within the European Commission took the view that, and I quote, “most of the provisions of intra-EU BITs have been replaced by provisions of community law and their legal character after the accession is not entirely clear”. The relevant committee invited EU Member States to review the need for such BITs and to inform the Commission of the actions taken in this context so that progress could be reviewed at the end of 2007. This invitation does not seem to have resulted in much, if any, action from EU Member States. In addition, the relationship between intra-EU BITs and EU law has been considered in at least two investment arbitration awards. The first of these was delivered in March 2007 in the case of Eastern Sugar against the Czech Republic, which was brought under a BIT between the Netherlands and the Czech-Slovak Federal Public, to which the Czech Republic succeeded. The claimant had invested in sugar factories and it considered that as a result of actions taken by the Czech Republic after 2006, it had not been properly treated so it initiated an arbitration under this BIT. The Czech Republic entered an initial plea of lack of jurisdiction arguing that the Czech-Netherlands BIT, although never expressly terminated, was not applicable following the Czech Republic’s accession to the EU in 2004. In support of this plea, the Czech Republic produced a letter dated January 2006 from the Commissioner of Internal Market and Services within the EC to the Czech Deputy Minister of Finance, and interestingly, both

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parties, the Czech Republic and the Dutch claimant, argued that this letter supported their respective views on jurisdiction. However, the arbitral tribunal found that this letter was, and I quote, “for the most part diplomatic or ambiguous, and in any event, by its terms, without prejudice to any interpretation by the present arbitral tribunal.” The tribunal then reviewed the parties’ jurisdictional arguments in detail, both the argument that the accession of the Czech Republic automatically terminated the BIT and the argument that the BIT was implicitly superseded when the Czech Republic first joined the EU, and rejected these arguments. It also rejected the argument that the EU agreements covered the same subject matter as the BIT and took the view that the investment protection is a different subject from the freedom of movement of capital and of establishment, which was the subject of the relevant EU treaties. It also rejected the view that the BIT and the EU treaties were incompatible. It held that free movement of capital and investment protection are different but complimentary. The tribunal concluded that it had jurisdiction to deal with the Dutch investor’s claim under the Czech-Netherlands BIT. The same position was followed in some other arbitrations, including the Rupert Binder against Czech Republic jurisdictional decision of June 2007, which concerned a claim brought by a German investor under the German-Czech BIT. Although this award is not in the public domain and relatively little is known about the case, this decision also rejected the Czech Republic’s argument that rules on foreign investor protection were superseded by EU law following the accession of the Czech Republic to the EU. Although the Eastern Sugar case is not the only investment arbitration case that deals with the relationship between intra-EU BITs and European law, as far as I am aware, it is the only publicly available award analyzing these issues in detail. However unwelcome the result may be from the European law perspective, it seems generally accepted that the main finding of the award, namely that intra-EU BITs remain in force until their formal termination, is correct under international law. It remains to be seen how this issue will be resolved if approached from an EU law perspective, which is a serious possibility given that the Czech Republic is now seeking to annul the Rupert Binder jurisdictional award in the Czech courts. Moving to the topic of extra-EU BITs, the increasing interest shown by EU institutions certainly encompasses extra-EU BITs as well as intra-EU BITs. In 2006 the European Commission initiated infringement proceedings against Austria, Denmark, Finland and Sweden in relation to BITs which each of these EU Member States concluded with third countries prior to the relevant States’ accession to the EU. The proceedings against Austria and Sweden resulted in two judgments dated 3 March 2009 in

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which the ECJ ruled that Austria and Sweden had failed to comply with their obligations pursuant to the EC treaty. Both cases were based on a number of BITs concluded by the respective EU Member State with third States prior to its accession to the EU in 1995. These agreements were covered by Article 307 of the EC Treaty which, while preserving the legal validity of pre-accession treaties with third States, requires Member States to make efforts to bring these into conformity with EU law. The Commission did not argue that the mere existence of an extra-EU BIT created an instance of unlawful discrimination per se, which was a concern that had been expressed in relation to the intra-EU BITs. Rather, the Commission’s position was based on a clause contained in each of the relevant BITs under which each party guaranteed the freedom of transfer and free exchange currency of payments connected with investments, in other words, a ban on exchange controls. As for free movement of capital, both between EU Member States and with third countries, this is an underlying principle of the European Community enshrined in Article 56 of the EC Treaty. One would expect that such clauses in extra-EU BITs do not create any obvious difficulty. However, the EC Treaty creates exceptions to the principle of freedom of movement of capital. These include inter alia temporary measures to deal with exceptional capital movements creating threats to economic stability, and capital and payment sanctions against specific third countries pursuant to the EU’s common foreign and security policy. Although the EU has exercised these powers occasionally, for example in relation to Serbia and Montenegro, it was not claiming to do so in relation to specific countries with which these BITs had been concluded. In other words, the EU was not arguing that there was an actual incompatibility, instead the Commission’s position was based on a hypothetical incompatibility between the situation that might result from a wider future use of these powers and Austria’s and Sweden’s obligations under the BITs. The Commission argued that these obligations might make it difficult or impossible for Austria and Sweden to implement their obligations which created an immediate obligation for these countries to eliminate the incompatibility by renegotiating or, if necessary, terminating the relevant BITs. Austria and Sweden argued that, in the unlikely event that the EU did exercise its powers, mechanisms existed to avoid the alleged incompatibility. These included preventing the BITs from being applied either through interpretive devises, international law, or simple default. In its March 2009 judgment, the European Court of Justice rejected the measures put forward by Austria and Sweden, and therefore held that an incompatibility existed between the relevant BITs and the EC Treaty. As

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Austria and Sweden had not yet taken steps to eliminate the incompatibility, the ECJ ruled that they were in breach of their obligations under Article 307 of the EC Treaty and ordered them to eliminate it. The Austria and Sweden cases raise a lot of thoughts which will not be examined in-depth here, but it is interesting to note that the Commission did not claim exclusive competence to negotiate extra-EU BITs. Rather, the Commission’s arguments and the ECJ’s judgments were based on a specific BIT provision, the provision relating to freedom of movement of capital. Clearly these judgments are not directly applicable to the case of the intra-EU BITs because free movement of capital within the EU is a founding principle of the EU, which is not subject to the same exceptions as those which apply to free movement of capital outside the EU. However, it is clear that many other extra-EU BITs could be open to attack on this basis. Equally significantly, the Commission has a margin of discretion whether to bring before the Court of Justice an alleged failure by an EU Member State, i.e. it does not have to bring every alleged failure to court. Neither the impugned BITs with Austria and Sweden nor any others have become invalid per se as a result of the ECJ’s judgment. The effect of the judgments is that these States are obliged to attempt to renegotiate the BITs in order to bring them into conformity with EU law, or if this is not possible, to terminate the BITs in accordance with their termination clause. It should be noted that EU Member States have collectively concluded over a thousand BITs with over 150 third States. If on the basis of its success in the Austria and Sweden cases the Commission is considering attacking all these BITs, or at least all those which contain bans on exchange controls, what is to replace those BITs? If the EU institutions seriously intend to renegotiate treaties between the EU itself and third States to replace all of these extra-EU BITs, then they will be well-advised to consider the timing and resources implications of their intention. If they have no such intention, then they should consider whether the EU as a whole will gain any advantage by achieving complete internal consistency between the EU’s external obligations and the EC Treaty at the expense of the protection offered by the vast existing network of extra-EU BITs. Moving to the special status of the Energy Charter Treaty and its protection regime, the ECT is a mixed agreement dealing with matters of mixed community Member State competence to which the European Communities themselves, their 27 Member States and 24 third States are all parties. The legal basis on which the European Communities became parties to the ECT in addition to the EU Member States is set out in Council Decision 94/998/EC, clarifying that certain matters covered by the ECT involve the

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competence of the European Communities whilst others involve mixed competences or competences of the EU Member States. In relation to investment protection, the ECT is three things: it is an intra-EU multilateral investment treaty as among the 27 EU Member States; it is also an extra-EU multilateral investment treaty as between the 27 EU Member States and the 24 other Energy Charter Member States; and finally, it is a multilateral investment treaty which is wholly external to the EU as among the 24 non-EU Member States. In addition, the European Communities are themselves contracting parties to the Energy Charter Treaty, which means that the Communities have themselves assumed investment protection obligations under the ECT. As seen when discussing the Eastern Sugar case, intra-EU BITs continue in force until terminated by the parties, which does not appear to be incompatible with the parties’ accession to membership of the European Union. The same logic must apply to the Energy Charter Treaty in its capacity as an intra-EU multilateral investment treaty among the 27 EU Member States. In addition, the European Communities are themselves parties to the ECT. In the words of Article 300(7) of the EC Treaty, treaties made by the European Community itself with third States are “binding on the institutions of the Community and on Member States.” It is civil case law that the provisions of such agreements form an integral part of the Community legal order and prevail over EU legislation. Thus the ECT is legally binding on EU Member States as supported by comprehensive analysis of many commentators. What about the status of the EU as an extra-EU multilateral investment treaty? It seems clear that also in this capacity the ECT is binding on the Communities and on the Member States. Moreover, it is not open to attack by the Commission on the basis on which Austria’s and Sweden’s extra-EU BITs were criticized in the Austrian and Swedish cases. It is worth noting that at least four investment arbitration cases have been initiated under the ECT by investors of EU Member States against the governments of other EU Member States, in other words, intra-EU ECT investment arbitration cases, which is a comparatively new development. The first such case was registered in 2007. Two of these four cases have been brought against Hungary, one against Poland, and then most recently, a case brought by Vatten fall, a Swedish company, against Germany. This recent development has caused some concern to the Commission, which has sought and obtained permission to file amicus briefs in some of these cases. To conclude, we have barely scratched the surface of the relationship between the EU institutions on the one hand and investment treaty arbitration on the other. This is a topic that was dear to Thomas’ heart, and

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he spoke about it quite eloquently at the conference that we organized in Washington in 2007. I would submit that the Eastern Sugar decision correctly states the legal situation in relation to intra-EU BITs. If the ECJ’s decisions in the Austria and Sweden cases correctly state the Commission’s position in relation to extra-EU BITs, then it follows that the Commission bears a heavy responsibility to consider the interest of the EU as a wider entity before continuing on the path on which it started by launching the Austria and Sweden cases. The EU and the Energy Charter Treaty share many common objectives and it would be a tragedy if the differences between them, which are largely differences of detail and procedure rather than differences in substance, were allowed to become the subject of a political or bureaucratic territorial dispute, and thus obscure the considerable potential scope for fruitful collaboration. Tim: The next speaker, William Fox, will speak on the subject of emerging environmental impacts involved with alternative energy systems. Bill Fox works in private practice in Washington, D.C. Prior to that he has worked for many years as a professor of law at a number of different institutions in the United States, such as Boston University Law School, Indiana University and the Catholic University, Columbus School of Law. He is a senior research fellow at the Center for Energy, Mineral and Petroleum Law and Policy at the University of Dundee, and teaches a course in international business law. He served as a consultant to UNESCO and has a bachelor’s degree from George Washington University, a law degree from the Catholic University in Washington, D.C., and a master’s degree in law from Harvard University. His publications include “Understanding Administrative Law” together with Matthew Bender and “International Commercial Agreements.” Fox: We cannot disregard the intersection between environmental policy and energy so my first premise is that there are environmental consequences even for alternative energy systems. For example in the United States, alternative energy systems, renewables, etc., have, to a certain extent, proven not a panacea. In other words, they are not a complete answer to everything that is wrong with energy; each form of alternative energy, no matter what it is, entails environmental consequences. My second premise is that mediation has been improperly sold and has taken on in certain areas a kind of ‘left wing tilt’ which makes it difficult to sell in the business community where it belongs. To a certain extent, the same applies to alternative energy systems which not only have been ‘oversold’ but also have taken on a certain political coloration. At least in the U.S.,

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that really needs to be rethought. I am not at all opposed to alternative energy as anyone living in the 21st century has to recognize that there are various ways we can produce various forms of power. I would like to start this presentation with a couple of successful case studies. One case study relates to Israel, where a number of years ago it was decided for economic and social reasons to transfer more than 90% of the production of residential hot water heating to solar energy. There was very little debate about this decision as it resulted from firm enthusiasm, both on the part of the government and on the part of the Israeli citizens. It fits perfectly there, as Israel is a country with a lot of sunshine and many small housing developments, but without massive investment capital for large-scale energy products. There is a more recent example of functioning small-scale alternative energy projects on the Lakota Sioux Indian Reservation in South Dakota. The Sioux, one of the native-American tribes, were very fierce, they defeated good old Lieutenant Colonel Custer quite a number of years ago and only reluctantly moved onto the reservation. The Lakota are an extremely proud group of people and they are searching for economic independence. To that extent, they have developed a single wind turbine that was constructed on the Lakota reservation for one purpose: to produce the electricity necessary to run the tribal radio station so they get tribal communications roughly for free. The wind is always blowing in South Dakota but they did not try to make this installation anything more than that. When you think about a small-scale alternative energy system, your chances of success and of limiting environmental damage are considerable. There are also some less-than-nice stories, for example the fairly shortlived romance the United States had with corn-based bio-fuels which came close to destroying the entire agricultural system by bringing it to the verge of driving cereal and food prices through the ceiling. The first proposed outer continental shelf wind project was the Cape Wind Project just off Nantucket and Martha’s Vineyard Island, State of Massachusetts. That has received a lot of criticism by people who like to “summer” on Martha’s Vineyard and Nantucket and who do not want to see those windmills out there. In Boulder, at the seat and flagship campus of the University of Colorado, it was determined that a wind project that would substitute for a single coal-fired plant, would require a 300 square mile wind farm which the residents are objecting to. If Exxon in California kills birds in its oil and gas operations, it is heavily sanctioned by the United States government, but wind farms in California which last year killed approximately 80 Golden Eagles, a threatened species, seem to get a pass. A wind project is proposed for Mont SaintMichel in Britain, but the residents and merchants are objecting to a wind

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farm that is going to seriously impact the view. I would like to read you an excerpt from an article entitled “Controversial plans for a giant wind farm straddling the hills between two iconic whiskey-making glens have been rejected.” This is not a final decision as it is a rejection by some of the local governments so the project can possibly be reestablished. “It turns out that a 59–turbine wind farm, the 185 pound wind development project, is going to have an effect on both the Grant and the Glenfiddich distilleries and also impact Walkers of Aberlour, the makers of shortbreads”. There is strong local opposition to this, as the paper points out, because this affects the sacred industry of whiskey-making in Scotland and should thus not be tolerated. In sum, many people pay lip service to alternative energy, but when it winds up in their backyard, they seem to come up with lots of objections. This paper aims to develop ideologically neutral but accurate and timely methods for making decisions on various energy projects around the world so I am looking for a very hard, precise, thorough and systematic evaluation of all forms of energy. At least in the United States, but seemingly also in a number of other countries, alternative energy projects seem to get a pass where the traditional energy producers are put under the microscope whenever they try to get a project approved. So, the question is: do we have proper assessment tools? I looked at a number of U.S. examples. In 1969 the United States Congress passed the National Environmental Policy Act (NEPA) which is a statute that requires, when the federal government is engaged in significant projects that may significantly affect the quality of the human environment, that an environmental impact statement is prepared. Under NEPA one looks at environmental impact, at adverse environmental effects, at alternatives to the proposed action, at the relationship between short-term accomplishments and long-term consequences, and at any irreversible consequences resulting from this project. We can use this as a starting template for the evaluative process that I am developing. My research on China suggests that the 2003 Chinese environmental impact assessment law may carry a message for all of us—making China think about environmental impact, where they are opening one coal-fired plant every week, is a real breakthrough. With regard to decision-making, cost-benefit analysis has been greatly ignored both in the United States and internationally. One of the very few areas where formal cost-benefit analysis is required by statute in the United States is the outer continental shelf leasing system, but that does not relate to alternative energy except for this Cape wind project previously referred to. We need to bring a properly applied cost-benefit analysis into the equation and then determine who ought to make these decisions. In the federal United States system, there is a strong drive towards

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power sharing between the federal government and the state governments, although a very large component of decision-making belongs to the local governments because alternative projects are essentially local. With the Whiskey wind farm, Glenfiddich and Shortbread will be affected, not so much Edinborough. So, who should make the decision? There has to be a voice for all government layers and for the public but occasionally, where these things are vetoed, I am wondering whether the public voice in and of itself may be a little bit too loud and a little bit too strong, as opposed to every other actor in the equation. This is a work in progress and I have not made up my mind about who ought to be, in George W. Bush’s lingo, ‘the decider’ when it comes to choosing the location of an alternative energy project. Finally in the United States, we have to contend with judicial review of administrative action and to that extent judicial review has been used to block massive numbers of different proposals, not just on energy but also on a lot of other matters. We cannot get away from judicial review but it could be time to rethink the role of courts in making these determinations. For example, the US Congress had to write a statutory preclusion in its Act essentially forbidding federal courts from entertaining any lawsuits with regard to legitimacy of the Trans-Alaska pipeline. Had it not been for that preclusion, the pipeline litigation would have continued for at least 20, possibly 30, years. Todd: Our final speaker on the panel this morning will be Elizabeth Bastida who is a lecturer and director of the mining program at the Center for Energy, Petroleum and Mineral Law and Policy. She worked with Professor Wälde quite closely: he supervised her Ph.D. thesis and she has been a consultant to various bodies of the United Nations as well as corporations and NGO’s. Bastida: I have been working on a paper reviewing Thomas’ work and contribution to the study of the legal regime for the mining sector. At his return from Harvard University, Thomas started a research group at Frankfurt University on transnational mining contracts. That had a synergy with his work as a trainee at the United Nations to obtain his qualification as a German lawyer. The first paper that resulted from this research was called “Lifting the Veil from Transnational Mineral Contracts” in which he noted that knowledge about this type of contracts was shrouded in a veil of secrecy. The body of work that emerged from this research group and from his work for the UN Commission on Transnational Corporations made an important contribution to the field in terms of both substance and process.

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In terms of substance he analysed what he described as ‘the enigmatic nature’ of this type of contract referring to the limited information available. During his later work, he developed the concept of ‘dynamic stability’ which expanded beyond the narrower idea of stability in terms of investment security, in order to inform the function of law in contributing to developing countries’ economic development. He referred to a ‘marriage’ or adaptation of stability rules to form a project’s legal regime so as to respond to changing requirements and to the credibility conditions necessary for long-term commitments. As he set up broader terms, his contribution was fundamental for the establishment of the foundations of the legal regime for the mining sector, particularly from a transnational perspective. He initiated the work on the drafting of the Berlin guidelines that intended to provide environmental standards for the mining sector. He asserted that environmental and social aspects of mining had to be included in this type of agreement and advocated the involvement of affected communities and environmental groups in the authorization process. In terms of form and process, he supported the building of legal and managerial capabilities of developing countries to develop concepts and practices suitable to their own development situation. He emphasized the importance of disclosing and sharing information, which he then followed up with e-forums and the sharing of information in his communities of practice. He published very widely, including the proceedings of many conferences that he chaired, and he emphasized the need to collect information on transnational mineral contracts so that they could be analysed. This way they would serve as an aid for developing countries to gain experience and secure an equal footing in the negotiation processes with companies. An important aspect of his work was the emphasis on building knowledge as an inclusive and open process. This vision of developing practice committees, practice sharing information and building knowledge in the resource-producing countries, was present in his work from the beginning. Todd: At this time we would like to open up the discussion for questions. Matt: A comment that Graham Coop made in his presentation triggered some questions in my mind, particularly as this panel’s title is “crosscutting issues”, although I confess that I have not read the March 2009 judgments of the ECJ nor have I read the Opinion of the Advocate General. In reaching the conclusion that the prohibition on exchange controls in those investment treaties was inconsistent with EC requirements, was there discussion by the respondent States of the possible application of

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an essential security exception that is found in many investment treaties? The reason for this question is that this would perhaps give insight into how the EC, the European Union and the Commission regard the scope of an essential security exception; whether it covers only national security issues or also economic crisis issues. It would also help to understand the European Commission’s or the ECJ’s view on whether that exception picks up national security type sanctions issues. Do the existing sanctions authorizations override the European commitment to free transferability and free convertibility? Or, more broadly, what to make of the economic crisis argument that an essential security carved out in one of these treaties goes beyond national security issues? This picks up an economic motivation as argued in the Argentine cases and more broadly in the context of economic restructuring in Venezuela, Ecuador and Bolivia. Coop: Although I have read the judgments and the Advocate General’s Opinion, I have not read all the relevant treaties. The underlying issue is not that Austria and Sweden might have wanted to impose exchange controls in defiance of the EU prohibition on exchange controls but rather the other way around. The EU might have wished to impose exchange controls under its exceptions which you very well summarized as being in two categories—national security which tends to motivate exchange controls with respect to specific third countries and economic crisis management which could mandate general exchange controls. Although there may be specific clauses or exceptions in these investment treaties which could have helped buttress a dissent by Austria and Sweden along the lines indicated, that was not good enough for the Commission. The Commission did not want a situation where it could decide in its wisdom to impose exchange controls for one of the reasons explained. Then Austria and Sweden would have had to defend their compliance with the Brussels Directive on the basis of a treaty clause which might (not) be totally in their favour. What the Commission wants is a clause in all extra-EU BITs stating that there is an exception unless Brussels decides otherwise. Now Austria and Sweden have the unenviable task of renegotiating the relevant BITs with all third States, including some powerful ones, to provide for an exception along these lines and probably third States are not going to just grant this concession without expecting some kind of consideration in return. Male: I have two related questions on intra-EU BITs. First, are there any intra-EU BITs between the older (EU-15) countries or are all these related to the new Member States? Second, the main attraction for any investor is the access to arbitration against the host State. Given that these investors

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have in many cases access to very competent courts, how important is this attraction still for investors? How many investors would prefer a resourceful arbitration? The reason behind this question is that it is often assumed that the arbitration option was created particularly for investors in developing countries where the local courts are much weaker. Coop: With regard to the first question: prior to the arrival of 12 new Members in 2004 and 2007, there were according to my information only two intra-EU BITs among the 15 EU Member States. These were a BIT between Germany and Greece dated 27 March 1961 and a BIT between Germany and Portugal dated 16 September 1980. Noticeably, both these BITs were concluded by Germany as that country has always been a very active negotiator and concluder of BITs. Both treaties were negotiated with States which were not EU Member States at the time they signed the BITs. So, if you push the reasoning back from 2004 to pre-1986 when Greece, Spain and Portugal acceded to the EU, there has never been a BIT concluded between two States which were both EU Member States at the time of conclusion of the BIT. This is because, and your second question taps on this, a State which is a Member of the EU instills a certain measure of confidence in investors that that State will act in a generally predictable way and therefore there may be less demand for BIT protection. Your second question is whether there is such a strong desire for international arbitration on the part of investors if they know they can resort to very competent European courts? I have no doubt that the courts within and outside Europe are very competent. However, from the investor’s viewpoint, the substantive protections included in BITs do not necessarily find an exact equivalent in the body of European law. Moreover, European law is subject to change at the unilateral decision of the European institutions. One significant issue which has arisen in the context of the latest intra-EU investment treaty arbitrations is the extent to which EU Member States can bind themselves to maintain a particular legal regime on the one hand or, on the other hand, the extent to which the investor just has to accept all possible evolutions in EU law as a part of the legal landscape. The executive institutions favour the second viewpoint which gives them more freedom to develop the body of EU law and probably the ECJ will also have more sympathy with that viewpoint than an international tribunal acting under a bilateral investment treaty. Male: I thoroughly agree with Bill Fox. Every month I write an online column on China and in the previous one, I discussed the lack of honesty, not just in China but everywhere, about clean energy and the constant use

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of the term ‘zero emission car’. The head of Honda announced a new zero emission car but in China 80% of the electricity is coal-driven. Due to bad reporting, the public is ignorant about the politicization of clean energy while politicians continue to set goals that they know (or should know) are unachievable for technical, economic, social or planning permissionrelated legal reasons. Someone on television needs to explain this to the lay man, although it is extremely complicated. Earlier comments emphasised stability of contracts and I wondered whether Andrey Konoplyanik was going to address this too in relation to the scope of sovereignty over resources. There have to be mechanisms for governments to adjust inappropriate decisions of previous regimes, as is arguably the case in Russia and Venezuela. Konoplyanik: Several cases present an accumulation of concerns on the side of investors and States. Stability has to be dynamic if the State is looking for maximum rent collection. A mechanism needs to be developed which provides opportunities for investors to earn a maximum rate of return. The State and the investor cannot both receive their maximum so they are obliged to negotiate the deal in a balanced manner. This balance cannot be fixed for the whole duration of the project because such project can last for a decade while the political cycle is definitely much shorter, i.e. four years, sometimes eight, although longer in non-democratic States. It is not yet clear how to find the best effective dynamic equilibrium between the investor and the State. On the one hand, there is a necessity to have long-term stability that will stimulate the investor’s interest to develop the project and the intention of both parties to realise maximum earnings; on the other hand, there are the risks of investing a huge amount of capital. Your question presented a somewhat one-side story concerning the complaints of investors as to how their stability expectations were violated by the State. Both parties were not fully in their right because States also have fair expectations regarding this balanced sliding scale dividing the profits from production and oil. States need to guarantee the absence of abrupt price changes and changes in the micro-environment but States will also expect that if prices increase, earnings will do the same. When prices were going up in 2003, there was a fair expectation that this would increase the revenues of the companies and in turn those of the State. Simultaneously, the operators of this project who were responsible for the development and financial issues within the energy consortium underevaluated the risks and the costs. That is why their second phase development cost needed to be increased from 12 to 20 U.S. dollars in order to stay within the levels of profitability by maintaining their production and revenue balance.

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When this deal was signed in 1994, the fair expectation of the State was that the production sharing agreement was the best available compromise between the interests of the host State and those of the investor. Afterwards the host State claimed that the investor was preventing the product sharing mechanism from effectively working in the common interest. During the international arbitration, Russia tried to approach the public to explain the economic reasoning behind its disagreement with the investors’ action. In order to invite the investors to renegotiate and improve the deal, i.e. to find a new dynamic balance, the Russian government was using ‘environmental speak’, trying to find other reasons unrelated to the substance of the debate. For example, it claimed that there had been a violation of fishery rules and that river crossings had not been adequately done—peanuts which were used to force investors to change their end of this deal. The host State concerns were valid but no one clearly understood. One year ago the same mistake was made by the Kazakh government. If we wish to develop the most effective instruments, we need to work on this important dynamic balance. Regarding economies in transition, investors are very capable and they can manage to effectively organize the structure of a deal. When Russia was initiating these production sharing agreements in the early 90s, it did not have enough domestic resources. That is why it had special legal and financial advisors which were reputable firms: one U.S. firm and one French investment bank. But because of this foreign involvement, questions arose as to whether these companies could be trusted to have the interest of the State at heart. The Russian and Kazakh governments have fair and valid economic reasons for what they do; reasons which were not adequately presented on the international level. You referred to ‘the ignorant public’; indeed people did not understand the situation and conceded that investors’ rights had been violated. In other words, host States are bad and investors are good; host States are wolves and investors are rabbits. The real story however, is a bit more complicated. Fox: I wrote years ago about the United States’ failure to ratify the Energy Charter Treaty and there has been some recent discussion in the U.S. about ratification, but there is no strong movement in that direction. Is it any longer relevant that the United States has not ratified the Energy Charter Treaty? Coop: Some official reasons were given for the United States’ failure to sign or ratify the Energy Charter Treaty. These included that the ECT did not go far enough in protecting investors during the pre-investment phase as it only protected already-established investments but it did not

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protect investors against discrimination during the making of the investment. Moreover the treaty did not respect the Jackson-Vanik amendment in U.S. law which forbids the U.S. government from negotiating free trade agreements with States that do not respect freedom of immigration. Essentially the ECT is a free trade agreement in relation to energy and many of the States which became parties to the treaty in 1994 did not, at least at that time, respect or guarantee freedom of immigration. This was a major concern for the U.S. political mindset. There was a third reason regarding the difficulty of providing guarantees in relation to acts carried out by sub-federal entities, in the U.S. case, state governments. There is an ECT provision which addresses this concern, but it was felt that this provision did not go sufficiently far so as to comfort the U.S. federal government. Those were the official reasons and one could take different views on the validity of these reasons. Beyond that, there were also unofficial reasons and the most significant one was the general reluctance to fully endorse international law which started to be felt within U.S. political circles in the mid-1990s and became stronger under the Bush administration. The feeling was that a treaty such as the ECT provides certain benefits on a multilateral basis while the U.S. can serve its national interests just as well by negotiating these benefits bilaterally as it has done with many countries. Why it should favour the multilateral approach which also provides these benefits to all other countries and thus increases the competitive advantage of countries other than the U.S.? Carrying that reasoning a stage further, certain major U.S. oil companies took the view that they could negotiate just as effectively with small mineral-rich States as any government could— so why would they encourage even their own government to negotiate a treaty which would then provide benefits to their more modest-size competitors? Finally, to respond to the question about the future, my understanding is that there has been some interest in the U.S. in taking up this possibility in the new political landscape. Through its energy committee and its foreign relations committee, the New York City Bar Association has prepared white papers to persuade the present U.S. government to review its position. Other parts of the U.S. political landscape are also addressing the issue, but it takes a long time for a large country like the U.S. to make a major change in its international policy. Konoplyanik: There are two dimensions to your question. One is quite clearly a U.S.-related dimension; the second, which may not be as clear, is a Russia-related dimension. Starting with the U.S. dimension, there is one reason that is more important than the others: the United States will for long continue to prefer bilateral treaties. In theory, both parties to such

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treaties are equal but in practice, if one of the parties is the United States, one party is a little bit more equal than the other. In 1992 a few major, mostly U.S., companies approached the negotiation process of the Energy Charter Treaty, with a letter trying to explain that this Treaty would work to the detriment of business. These companies had overall revenue flows equal to the GDP of a small country, so they had the leverage to negotiate their own deals. That was the philosophy in the early ‘90s. Today, the political reason for the U.S. position has remained but the intention of large companies has diminished in importance as the role of national oil companies has significantly increased. Multilateral instruments have been changed in substance and effectiveness so the negative attitude towards them might diminish as the ECT is still considered at various decisionmaking levels. The ECT is an open process; the United States can accede in the future. The absence of the United States has a very negative effect for Russia because at the Russian decision-making level, the opinion is that every player should participate in an organisation to make it work. Allowing for different preferences is valid for academics and lawyers but not for political decision-making. So, the absence of the United States in the ECT supports the position of Russian decision-makers who oppose Russia’s accession to the ECT. McCrum: When a government takes an action for the purpose of environmental protection, is there any reason for that action to be treated differently with regard to an alleged expropriation of a mineral investment? Sabahi: The starting point is the government’s right to expropriate as part of its right to regulate. It has been a challenge for international lawyers and arbitrators to draw the line when exactly a particular regulatory measure has become expropriation. In the United States for example, the government has introduced certain characteristics or elements to define what acts constitute an indirect or regulatory expropriation, listed in the Annex to the 2004 Model BIT. Such characteristics have their roots in U.S. law where they are used to define for example proportionality. There is no black and white answer to this question as it depends on the circumstances of each case and the interests involved in a particular act. McCrumb: From the perspective of the Russian government today, how important is it to attract private sector and foreign investment to develop Russia’s natural resources and how important in this context is the need for investment protection?

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Konoplyanik: As an advisor, I am providing advice which does not necessarily correspond to the opinion of my government so I am not always in agreement with my government’s actions. This is one of such issues. First of all, a lot of discussion recently took place about the allegation that Russia is closing its doors for foreign investment. In my opinion, Russia is just reorganizing its philosophy concerning foreign direct investment because without such investment, it is impossible from an economic point of view to develop new projects. Companies like to share their risk if they are to develop multi billion dollar or Euro long-term capital-intensive projects. The capacity of Russian companies alone would not be sufficient to organize adequate project financing. Some limitations to investments were introduced: the policy will be that the majority stake has to be with Russian companies. Not many projects are being developed today because most production concerns the development of already existing areas. New developments relate to project-financing where the foreign companies can be involved as minority stakeholders, such as the recent deal to develop the Eastern pipeline. I agree totally with my government that foreign investors should be able to participate though with limited opportunity in key projects. Western companies would prefer not to be minority stake holders, but rather to be majority stakeholders or to have control over the managerial operating functions. However such functions should be controlled by Russian companies. Strategic industries debate about the law on access restrictions but availability of clear rules is better than the lack of clear understanding. The fact that in particular industries, the majority stake holding positions are reserved for Russian companies is the continuation of the philosophy that foreign direct investments are welcome but with a specific role, namely on the minority stake holding level. Although this is a logical policy, it may not correspond to investors’ prior expectations. For example in the early ‘90s, a company that wished to procure a project presented its draft agreement and refused for six years to change anything, saying ‘either we develop this project on the basis of this agreement or we are not doing it all.’

APPENDIX B 15 October 2009 (continued) 14.00–15.15 Special Presentation on Foreign Investment and the Work of the UN’s Special Representative on Business & Human Rights Moderator:

Stéphane Brabant

Contributors: Peter Muchlinski, Lorenzo Cotula and Andrea Shemberg Brabant: Our panel today is on Foreign Investment and the work of the UN Special Representative on Business & Human Rights, John Ruggie. Thomas Wälde and John Ruggie have a similar background and were good friends. They agreed that work must be done on drafting ‘an international license to operate’ to which John Ruggie added the notion of ‘a social license to operate’. The world is moving from ‘reference to legality’ to ‘reference to illegality’. The first pillar of John Ruggie’s argument is that companies have to respect human rights; the second pillar is to act with due diligence. There is a shift from ‘government’ to ‘governor action’ and there is also a shift from ‘legal sanction’ to ‘persuasion and consciousness’. On the one hand, there are treaties providing obligations for States and on the other hand, there are obligations for investors. The goal is for companies to respect human rights and due diligence. Both John Ruggie and Thomas Wälde realized that treaties for implementing company obligations might be a nightmare but there are alternatives which have the advantage of being quicker and applicable not only to States but also to companies. I have never liked the word soft law, as a law is a law to me and today there are some very hard sanctions for violating soft law, for example with respect to human rights. John Ruggie has given us tools to help realize human rights. The 2006 award in Kenya dealt with corruption and notions of international public interest, so soft law is softly becoming hard law. There is reason for concern because the same companies which are holding 90% of the oil reserve and oil productions are not necessarily known for bank ability; they are not the stock market; they do not need financing; and, they might have a different agenda. Therefore, all those rules apply to national companies but not necessarily to the entire business world.

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Being a lawyer becomes more and more complex; for example, a competent counsel can no longer neglect relevant international soft law when drafting advice to companies. John Ruggie’s three principles to protect, to respect and to remedy, form the global common framework which has been adopted by many companies. Shemberg: I am a legal advisor for John Ruggie, my main focus is on investment and I am mandated to seek out different views and perspectives, to understand and integrate them. Last week we had a UN meeting with over 300 people and there was a panel on investment which was quite different from this one. First of all, there were a lot more women, but although the meeting was about investment stability, most discussion focused on the instability resulting from the lack of management of social human rights. Although the world is extremely diverse and the issues surrounding contract negotiation are extremely diverse, we have common goals which include stable investments, rule of law, growth, development and prosperity. International arbitration and human rights law have much in common in terms of basic principles. One could think of human rights law as a super-constitution, an international benchmark and a set of conditions that are the basis of human dignity. When approaching investment and human rights issues, this dimension ought to be added: what are the basic needs for human dignity? In 2003, the UN Draft Norms were adopted by a sub-commission of the UN Human Rights Commission. This was, in summary, a code of conduct for companies which created a very divisive debate between NGOs and the business community. In 2005 the Human Rights Council and Commission appointed John Ruggie for three years with a ground-clearing mandate to make some sense of this highly politicized debate. In the first three years John made a lot of enemies because he basically scrapped the Norms, but in 2008, he came up with a policy framework that was unanimously welcomed by the Human Rights Council. In the UN world, unanimity is almost unheard of; this was the first time the Human Rights Commission or Council ever agreed on a substantive policy on business and human rights. John was appointed for another three years to make the framework operational; to provide concrete guidance on what States, companies and others are supposed to be doing. We are a year-and-a-half into putting this framework into practice so I would like to describe the different parts of the framework and how they work together. The responsibility to respect is a corporate responsibility including non-infringement of rights, due diligence and access to effective remedies, meaning the need to have remedy and grievance procedures. One way that governments might tie their hands from being able to fulfill their

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human rights obligations is in their efforts to welcome investments and make promises to investors. The responsibility to respect is operationalised through a set of guided principles. What does human rights due diligence mean? What is required and what are some tools and concrete steps that companies can take to achieve appropriate due diligence? In the remedy and grievance work, one of the more groundbreaking aspects is the set of six principles for grievance mechanisms. John is currently conducting a number of pilot projects, for example, in one project two Chinese suppliers for Hewlett Packard and Chinese clothing suppliers are participating to understand how to operationalize and use those grievance principles. The investment work started in 2006 with a consultation of the financial sector but although NGOs and academics participated, there was no response from the companies or commercial lawyers. Then the INT and John jointly embarked on an empirical study of stabilization clauses, reading through 90 clauses, putting them in categories and describing them. What we found was that current practice and even projects funded and supported by international institutions that should be at the cutting edge of everything, used really outdated ways of achieving stabilization. Dynamic stabilization was not present outside the OECD although these were new projects because the people involved in supporting the projects did not understand why it is not okay to freeze all laws for 100 years. They had actually not even processed that there was a different way of doing things. We talked with developing country negotiators, for instance in Johannesburg, Morocco, London and Paris. Based on the 2006 constitution, there has been a real shift in the discourse of NGOs, companies and everyone else involved which has resulted from this kind of prosperization of perspectives. Under the mandate, we have assembled a group of committed general counsels, commercial lawyers, government representatives, people who work in development organizations and at NGOs to discuss which principles could operate for guiding negotiations of stabilization issues. Wedraft model clauses to shed light on general principles. From the very beginning when we presented the stabilization paper draft, people were saying that stabilization as such is not a human rights problem; one has to look beyond it. So we organised an expert workshop which took place last June, to actually ask those who negotiate and manage projects about the human rights issues that create instability in projects. How do those relate to the negotiation and how should they be managed better to help community relations and achieve a social license to operate? The summary of this meeting is on the web, listing 11 issues. One was the capacity of commercial lawyers, financial people, arbitrators and States to understand the potential human rights impact of projects. One lawyer

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noted that this is not even on the checklist of due diligence, so there is some capacity building left to be done in terms of human rights issues. Another issue was how to actually do human rights due diligence and John’s framework outlining responsibility to respect will help with that. The next issue was how to establish effective community engagement at an early stage so that it contributes towards creating a stable social environment for investment projects. Another issue was the creation of international social and environmental standards. An illustration: the issue of displacing populations is well-understood from a human rights perspective but it is not often present in the planning of projects. Property rights form a huge issue for human rights, particularly protecting the property rights of local populations or giving them a proper new place to live if they have to be displaced. Transparency is important, as well as security arrangements for project installations. Some of the other issues besides stabilization that came up were revenue-sharing in management, realizing that this can actually be an impetus of conflict and how to deal with that. How do you manage this ahead of time in order to avoid conflicts? The last set of issues related to grievances and remedies for third parties which generally do not get factored in during the negotiations although they maybe should. These issues included renegotiation and dispute resolution, and how to embed a changing circumstances clause in the contract. Finally, what we are trying to achieve under the mandate is to come up with guiding principles on stabilization and some thought models. We have been told by institutions, commercial lawyers and general counsels that a set of markers would be quite useful as a common reference point for issues worthwhile discussing. What we are trying to provide is a tool, a conversation starter, so that the deal can be made while also addressing these issues, instead of having a deal breaker conversation about the ‘evil’ human rights issues. Muchlinski: My job today is to explain the concerns regarding the operationalization of the framework that John Ruggie is developing. Lorenzo will concentrate more on the property rights and stabilization questions and I will consider the implications of the two sets of legal questions raised by this framework. First of all, my presentation will address the implications of corporate government and secondly, the implications of externally regulating human rights questions. My initial response to the John Ruggie framework on the duty to respect and the concept of due diligence was that this is pretty self-regulatory, but the framework is more than that. Corporate responsibility in this area is linked to the State’s duty to protect and to provide remedies, but there are also non-judicial self-help remedies

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that corporations could apply. My focus for the next minutes will be on the duty to respect because we need to strengthen our general understanding of what corporate governance is, how internal governance structures work as well as the policy and procedural devices that John Ruggie suggests. He has already commissioned quite a bit of research on this in relation to company issues. The first question is how to actually adapt internal governance mechanisms so as to ensure visibility of human rights in business decisions and subsequent respect for human rights as the project develops. The business sector is already dealing with these questions as a 2007 paper that John commissioned shows continued survival of the Norms in a unexpected way because, for example, the business leaders of the Human Rights Initiative use the framework of the Norms as the table of substantive questions indicating what they have to deal with. The first steps of the 1990s through 2000sin this area have not been completely abandoned. It is wrong to assert that John Ruggie is taking a completely new departure, aside from some technical implications of the Norms because the actual substantive issues that were put on the agenda are still there and help to inform how the human rights impact is to be assessed from a substantive point of view. The second set of questions relates to the proper balance between an internal self-regulatory due diligence approach to human rights on the one hand and a mandatory regulation which promotes the State’s duty to protect the right to a remedy on the other. It is important to develop a deeper level of understanding of how regulation itself works. There has been quite a lot written on the relationship between self-regulation and mandatory regulation which could help to inform the evolution of more technical points in this area, for example the development of a due diligence standard. Sometimes one needs some sort of legal framework explaining the algorithms and necessary steps in order to perform a good due diligence analysis. The other possibility is to continue to a third set of questions relating to liability implications. When due diligence is referred to, a lawyer’s antennae immediately register the question “if I do not do due diligence, am I negligent?”. What is the relationship between the requirement to perform a human rights due diligence analysis and the possibility of a duty of care? In John Ruggie’s April 2009 report, concerns were expressed about what one has to do to avoid being exposed to liability if a due diligence analysis is too much expanded, if too much evidence is offered or if there is a failure to properly analyze the risks. John Ruggie’s response is that greater transparency and clarity in the decision-making process is possibly the best defense against such claims of liability as it also offers a chance to

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show that an honest, good faith effort has been made to assess these risks. This argument is quite strong but at the same time, if there is no clear notion of how to go about due diligence, firms may feel insecure about undertaking this project. They also feel very insecure about the possibility that they might do something wrong which a good public interest lawyer will pick up and run with a negligence claim on behalf of his client. This is something we need to think about. We also have to think about how much we wish to develop the duty of care. Historically in a corporate law context, direct duties of care have been relatively flexible to avoid creating problems regarding the relationship between entrepreneurship, risktaking and human rights requirements. Another question is: how do we actually deal with the content of the duty of care? The fourth set of issues relates to the company law implications of this discussion. General theories of corporate governments and how they involve company law focus on a contest of shareholder or entity theories. If we say that corporations have a duty to respect human rights, we are actually bringing in groups and actors who are not shareholders and who are not directly involved in the company. That can be quite problematic given that many countries’ laws only take into account shareholders so this creates a need for reform at the national level. The other question concerns liability. We have doctrines of corporate separation, a separate personality which is a legitimate defense against a human rights violation. Then there is the question of the appropriate amount of compensation. There is a further set of questions: do we attribute liability for human rights violations to the individual directors and other managers who are involved in the decision-making process with regard to the alleged violation? Here we may draw certain analogies from criminal law. Criminal legislation in the UK for example encompasses a notion of systems liability which may have a role to play in assessing liability for a breach of human rights law by a corporation. The fifth set of issues relates to implications for international investment in the context of an exercise of State power to protect community rights. Do we bring a motivational element into our analysis? There is a lot of arbitral interpretation which suggests that the State’s intention or motive has to be considered in addition to the effect on property rights. The broader question that arises towards the end of John Ruggie’s 2009 report concerns the substantive side of arbitration. In paragraph 113 of the 2009 report, he says that “[a]rbitration by such entities might also be an option. In particular, companies operating in conflict affected areas should have a strong incentive to agree ex ante to use such mediation/arbitration bodies in the event of disputes with communities, and their investors

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and States should have a strong interest in seeing them do so. Arbitration would be subject to the same caveats as above, and should not preclude judicial recourse.” The question is: what would we be arbitrating? The subject-matter jurisdiction of the current generation of BITs does not include human rights so there should be a reform to include some kind of human rights responsibility clause as the starting point for a corporate responsibility section in BITs. This seems to implied by the emphasis that John Ruggie put in various BIT reviews on the need to place the human rights discussion on the agenda. It is still not very clear where that will lead. To summarize, the UN special representatives working in this area have moved on to an interesting plan and it would be wrong just to dismiss this as there is something very significant developing, but it is a work in progress. The framework of the duty to protect, the duty to respect and the duty to remedy is still very much open for interpretation. The John Ruggie process as such is open to different interpretations, particularly concerning the implications of corporate governance and the balance between self-regulatory and full regulatory responses. Cotula: I have enjoyed the privilege of being involved in some of the work on responsible contracting and it is really encouraging to see how much progress has been made and how much promise there is for further progress in this area. Progress so far has been focused on reconciling investors’ interests with States’ ability to pursue public interest goals, particularly with regard to human rights, but also more generally with regard to social and environmental objectives. This issue really came to the floor in 2003 in a UK report after which a pipeline project was initiated that includes not only academics but also commercial lawyers working on contract negotiations in the private sector. That debate has been extremely useful and as a consequence, a more constructive debate has developed looking at the range of contractual options and identifying better contractual practice. At the end of the day we all agree on similar principles. One key issue that has emerged is that an economic grievance process is part of dynamic stability to honour contracts, meaning that even if regulation change is allowed, investments are simultaneously protected. Allowing that process while at the same time safeguarding investment interests is a much better option than just trying to freeze the law. Another muchdebated issue relates to the question how to ensure that investors are protected against arbitrary treatment while allowing States to pursue human rights or other government goals. States might put forward justifications for their actions based on for example, environmental considerations but often the real interests lie elsewhere. It is possible to bring in caveats to

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ensure that regulation is genuinely in pursuit of human rights and environmental policy. One example is the Energy Charter Treaty which contains references to internationally accepted standards and treaties, offering a benchmark for discerning what is a genuine justification and what is not. One last remark about the work of John Ruggie on responsible contracting and investment contracts is that the broadening of the mandate is very good for development because it generates a good momentum to negotiate new contracts. There was a very strong endorsement of what John Ruggie produced in his first mandate: his framework for further development was not only supported by the Human Rights Council but also formally endorsed by the business community. Here is a real chance to come up with concrete steps to clarify what human rights responsibilities are, according to a very pragmatic approach. One remaining question is how to deal with companies in other parts of the world that have a different way of doing things. In his final report last year, John Ruggie looked at how the law has struggled to keep the pace of real world changes, particularly with regard to globalization. There is a very rapid growth in the number of investment treaties but much less progress has been made in sharpening up the human rights system, be it regional or global, in the face of globalization. John Ruggie’s mandate is making progress in that respect but there remain further issues such as property values which actually share very strong commonalities. Ensuring that progress is made concerning investment options will also entail progress in the equally important fight of human rights law, particularly in national law systems. There is a lack of proper management of social activists who may create a threat for the security of investment projects. Government changes can also be a problem as an investor might loose its land property rights as happened to a South Korean company in Madagascar. Male: Are there any mechanisms that provide guidance on how to actually poise this duty to protect and how to make more companies respect their duty to respect? Do we need remedies for victims of human rights violations to address those issues at the international level or do we have to relegate them to domestic courts if the country in question does not have any interest in pursuing those obligations? Shemberg: The framework is a common platform for describing duties and responsibilities. Ruggie is making recommendations on how to put it into place, either with incentives or through legislation, but that is work in progress. We have planned a large conference in Toronto to discuss our survey of 20 law firms in 42 jurisdictions investigating how corporate law

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currently embeds the responsibility to respect human rights. To the extent that it does not, we asked what they would recommend in terms of corporate law changes. Also in terms of grievance recommendations, our work is ongoing. One existing possibility is a website in seven different languages where you can discover judicial and non-judicial remedy opportunities and where experiences as well as empirical information are shared. There are also initial conversations about an international mediation facility that would train people for mediation, offer advice to local mediators and facilitate local mediation processes in areas where human rights abuses occur that involve businesses. These are some embryonic ideas that are being considered. A pilot project with five companies is ongoing to understand how an industry-based grievance mechanism might work, hopefully leading to recommendations on what States should be providing as judicial, administrative or other remedies. Male: I can see how the due diligence would allow companies to identify risks and either decide not to invest because it is too difficult or too expensive, or to invest where the human rights risks are easily identifiable. How do you envisage your scheme addressing investments in countries where the human rights issue is nationwide and not project-specific? Shemberg: One of John’s main points of consideration concerns State-owned enterprises. How do you deal in an international scheme with the different issues that companies may be facing? In terms of principle, the responsibility to respect is about those entities that are engaged in commercial businesses based on ownership. So, in theory, it applies across the board but one of the major challenges of his work is getting States behind it. In Geneva last week, there were many State representatives present and John also has a good relationship with many of the more powerful States in the Human Rights Commission. The idea is that if you get a broad consensus on the framework; if you give concrete ideas on how to implement and embed this, it becomes part of society whether it concerns lending, investing or insuring. It is a means to build some leverage on those companies that are hard to have leverage on, although it will not answer every question. When John presented his 2009 report, Brazil, India and China spoke up in the Council to praise his work with very strong words of support for the framework. Our hope is to continue that. John will be going to Moscow in March on Russia’s invitation so the idea is to engage as much as possible with States. The due diligence is not as much about whether to invest or not, it is an ongoing concept about having a human rights policy, understanding your impact, making or avoiding such impact, and then tracking

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performance. You have to make your own calculations as a business, but the question is: do you understand your human rights impact? John spends hours with general counsel officers of companies explaining how to understand human rights risks, how to mitigate them, how to deal with them internally, etc. Male: In his 2008 report, John specifically says that the mere fact of investing in a country with a poor human rights record bears a suspicion of complicity. It comes down to how corporations see their duties of care, so the question seems to be: on the basis of the facts as you know them for the purposes of your investment, what do you foresee and how will you respond if the worst happens? We, as an international community, could express our opposition to certain practices which should be a pretty strong signal. Brabant: Many countries are not respecting human rights but in Africa, for example, Exxon Mobil and other companies cannot afford not to be very careful with regard to human rights. At the International Bar Association last week an interesting insight concerning tax credit was discussed: instead of paying the banks in cash, at least part of the money was used for prevention projects benefiting indigenous populations. Male: A point that perhaps goes beyond the responsibility to respect is the need to formulate international human rights that will protect people against action from their government. This really made me think when I started analyzing some of the investment treaties, particularly the compensation clauses. Male: Human rights can include aspirations for well-paid jobs and improved standards of living, from an improved sanitation and healthcare to educational opportunities that are associated with economic development. How do you suggest determining who should be regarded as spokespeople for the human rights perspective, in particular regarding project development where the majority of a local population may well be in favour of economic development, but environmental or other interest groups may claims to speak on behalf of the local population and be in outright opposition to economic development? Shemberg: John Ruggie will give guidance on how to understand your human rights impact, including community engagement. There may be conflicting issues within the community, such as who speaks for the community

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and who takes bribes instead of giving the money to the community members. The contract work will pull together the existing experience and good ideas that we have come across in our consultations but there is no one way to deal with it, it is an issue that needs to be managed constantly. Cotula: In an ideal world, the government would promote investment so as to create jobs but that is a balancing act whereby trade offs are made concerning the way the investment is structured entailing for example, certain commitments on local contracts. In some countries where oil or minerals are present, there may be a very high environmental risk. There is no silver bullet answer to that problem. Mark: All three presentations focused on the misconduct of businesses and a concern that international investment law and arbitration may either not be a forum in which one can control that misconduct or that international law might even serve as a shield against a claim that misconduct occurred. What I did not hear being discussed is the other actor in human rights abuses: the State. We are all aware of situations in which governments engage in horrible human rights abuses; examples include a human rights organization that is being thrown out of the country improperly, media that support opposition being shut down, and foreigners having their visas revoked. I did not hear anything about the affirmative use of international investment law to protect private actors against human rights abuses by States. When thinking about the tools that governments use when they engage in human rights misconduct, the effect of those tools is to shut down a company or a human rights campaign. This may be a breach of the minimum standard, a failure to give fair and equitable treatment, a denial of justice and access to the courts, or in case of permitting a mob to overwhelm an office, a failure of full protection and security. Some treaties, most obviously the U.S. investment treaties, explicitly cover profit as well as non-profit organizations and while the object is clearly to protect property, the tools governments use when they abuse human rights, affect property as much as they affect other rights. I did not hear any discussion of using international investment treaties for the purpose of protecting human rights against misconduct by host States. There are at least three cases, maybe four, involving for example Chile, where a Spanish owner of a Chilean newspaper operation successfully sued for compensation when that news operation was shut down. Another case involves a claim by a Ukrainian publisher who was allegedly improperly shut down because he supported a political opposition party. The majority held that that was factually not the case but they said that if it had been

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the case, it would have been a violation of the investment treaty. So my question is: why are we 100% focused on misconduct by businesses rather than focusing in addition to misconduct by States? If we think about both those issues, we will end up with a more balanced view of these international law disciplines. Cotula: I totally agree with your analysis, using international investment law as a tool to enforce human rights is a very interesting possibility. It would make a lot of sense to strengthen the human rights safeguards. Mark: Does there have to be a new court? There is an existing forum, investor-State arbitration. Existing norms such as fair and equitable treatment are embedded in existing treaties. If the country accedes to such a treaty, why go to a less effective forum, such as the sadly ineffective African courts, rather than a forum that has a track record of being moderately effective? Cotula: I agree but the issue is the extent to which in realistic terms rural communities have access to international arbitration. Mark: It could be done on a contingent fee basis. Muchlinski: Today we are focused on corporations’ duty to respect human rights; we are not talking about States’ duty to respect the human rights of the corporation which is an issue that has already existed for many years. Shemberg: One of the major criticisms of the Norms was that States have the primary responsibilities while their policy is both horizontally and vertically incoherent. Departments and ministers are not working together so when they are dealing with economic issues, they do not consult their neighbours in the human rights department. This idea of giving markers on specific human rights issues is not at all about bad corporations—it is more about starting a conversation between the government and the companies. The work is about understanding the impact of human rights issues and embedding that understanding in agreements, investment treaties and investment projects. This is not about finding fault. We need to understand ways to embed this idea which may mean that the company and the State have to be briefed differently so let’s discuss tools to get this done.

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Male: In 95% of the cases companies try to find ways to remain in the country in the best position possible so they are already willing to discuss. Male: The issue lies with those countries and governments that do not have the capacity to impose human rights: as long as they do not acquire that capacity, we are giving up on them.

APPENDIX C 15 October 2009 (continued) 15.30–17.00 Roundtable: What does the Future Hold for International Arbitration? Moderator:

Tim Nelson

Contributors: Hew Dundas, Bart Legum, Mark Feldman and Sophie Nappert Nelson: My name is Tim Nelson from Staten Island, New York. With me are Hew Dundas, Sophie Nappert, Mark Feldman and Bart Legum and we are conducting a Round Table on the Future of International Arbitration. We hope to have a free-flowing discussion where participants can interject at any time because the five speakers are not going to bring lengthy presentations. I would like to start off with an anecdote: last week I was contacted by a journalist who asked me for an international arbitration practitioner’s view on the recent NAFTA plans to explore space in a search for water resources. I thought, “well, this is what it has come to in international arbitration, they think of us as space cadets”. I answered the question trying to provide a serious analysis based on what investors would want if they were put into a remote environment, i.e. what assurances, what legal protections and what framework they would need. I discussed comparable situations, such as the Antarctic sea, and the ways in which those situations have been dealt with. Ultimately my question was so substandard and boring, it was brilliant. I will now come back down to work with a more earthly set of questions on the immediate future of international arbitration. One issue is the future of arbitrators in facilitating settlement between parties; this has been the subject of ongoing debate in the community and opinions tend to differ based on cultural background. Dundas: One of the topics Thomas and I discussed over the years is the extent to which arbitrators should get involved, if at all, in facilitating settlement. My proposition is that the future of arbitration lies very much in the direction of German arbitration. This is derived from the German judicial system whereby in Article 278 of the Civil Code, a judge has the statutory obligation to engage the parties in settlement discussions. In contrast, the traditional English approach is that of an arbitrator as a remote

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person imitating a stone statue sitting at the far end of the room, utterly dead, never remotely giving any suggestion on anything but at the end of the day, this arbitrator makes the decision. My colleagues in London are adamant that the concept of arbitrators being at all involved in any system of settlement is a penalty offense but I am siding utterly and totally with our German and other civil law colleagues on this. In a major arbitration conference in Hamburg last week, an English judge almost had steam coming out of his ears at the thought that an arbitrator should engage in settlement discussions. But in the future, arbitration is going to evolve into a much more broad-ranging, expansive, pro-active, problem-resolving style compared to the old-fashioned English approach of a stone-faced judicial figure making a decision at the end of the day. Stéphane: There is a wide variety of different cultural practices and expectations as to what an arbitrator or a judge is going to do to promote settlement during the course of proceedings. In some cases it may be a good idea for an arbitrator to get involved in settlement discussions but in many cases it would send absolutely the wrong message and undermine the faith of the parties in the process. One of my first contacts with Thomas was when I worked as the Chief of the NAFTA Arbitration Division at the State Department and Thomas wrote an email proposing his services as a mediator stating that the Methanex case against the United States under NAFTA would be a case well-suited for settlement. It was a very interesting proposition, albeit one that I had a great deal of difficulty even beginning to imagine. Had the arbitrators in that case suggested that the parties settle, I think that it would have really caused a lot of issues. Nappert: My own difficulty with getting involved with settlement is the following: in case of failure, how do you go back to your former role? How will the parties perceive you and more importantly, how about the things in your head? It is an almost impossible task to achieve and what this knowledge does to your decision-making ability is something that no one is able to control exactly. That would be my only reservation to what is otherwise, if things go forward, a happy settlement. Dundas: In Germany, at the appropriate moment, the judge summons the parties to his chambers but if the settlement session goes nowhere, they just go back ten minutes or an hour later so to exclude from the discussion the one-on-one discussion with parties. The German system has a very nice twist to it in that the parties’ loyalists are entitled to be present at the conference with the judge in chambers.

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Male: The United States’ federal judges at least in many states can be quite vocal, if not ruthless in terms of driving down a settlement when they feel they can. Male: In response to Hew’s example, I have been involved in an arbitration exactly like that: there was a German party and a English party, and the sole arbitrator was a former German judge who encouraged the parties to settle but the parties did not react. Later, when the award was published, all of them simultaneously reacted that the losing party filed a request for settlement before the case was over. They filed a challenge and the arbitrator was in a very uncomfortable position, although that challenge was dismissed. It is a very good, pragmatic idea to try to settle but it requires a lot of raising awareness and talking about how laws of different countries operate, otherwise it will be very problematic. Male: I would add an additional State’s perspective, which is that we operate within an interagency process that involves a number of different government agencies that often get relatively minor decisions cleared. When you factor in the kind of complications that could arise and add these to that interagency process, it would require quite a bit of work to reach a level of comfort. Male: I will be the one to raise the ugly ‘no scenario’ point that some arbitrators make their money charting by the hour so maybe more money needs to be made in allowing the case to close. There is an institutionally built-in financial disadvantage to arbitrators making such suggestions. If there are any arbitrators disagreeing, now is your opportunity to diffuse some of that prejudice. Male: There has been a push by the APA and the CPR in New York to consider alternatives to address some of the consumer dissatisfaction with arbitration in the sense of tying costs and in the interest of fairness and balance without necessarily actually favouring one side over the other. Let me just survey some of the counter-considerations. It is impossible to separate in your mind the knowledge you gain through mediation and switch back to the head of an arbitrator but how many of us who have acted as counsel in mediations have actually acted in full tenure and have taken off our counsel hat? In mediations, we still try and present the fact in the best light for our clients so I do not know if that actually excludes the arbitrator from any difference in knowledge. The practical problem is a question

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of enforcement and recognition of settlements and how that fits with the New York Convention and its different domestic equivalents. Nappert: There is a wind brewing in international arbitration that could be termed either revolutionary or reactionary depending on which side you focus on. There are voices calling for a return to the original concept of arbitration being an arbitrator or a tribunal in which both parties have equal confidence. Personal nominations of arbitrators are alien to this concept and are certainly not part of a fundamental right of due process. Going a step further, such evil as dissenting opinions in arbitrary awards are being ascribed to the practice of party appointment as is the corruption of confidentiality. This call is being made by very eminent voices. Is there a due process element to being able to choose your tribunal? Is there really a difference between the tribunal composed of two partyappointed arbitrators who choose a chair with whom they would like to work versus a completely neutral appointment of people who have never worked together? This question relates to the reconciliation of the concept of arbitration as consensual with that of a tribunal constitution in which the parties have no say. Direction processes by the parties, the impact on liberations and the possibility of dissent lead to the crucial central question that is not being addressed by those who call for neutral appointments: who will make those neutral appointments? Arbitral institutions, I hear you cry. Indeed they do, in the most opaque, non-transparent manner so the real unaddressed issue is: who is looking down the process of arbitration? Is it the parties who want to win? Is it the arbitrators that are partyappointed and make sure that their party’s view is being heard by the tribunal? Or is it the appointing authorities? Is there a reason that court appointments exist in the first place? Male: I have had two recent LCIA appointments where the LCIA and not the parties had made the appointments. In both cases, I knew the other two arbitrators quite well, and I am sure the LCIA has a fairly thorough knowledge of who knows who. I would be surprised that the LCIA would haul out complete strangers which may not be compatible with the dynamic of good-working tribunal. Legum: The revolution that you described exists today in the sense that parties can, if they wish, agree to have all arbitrators appointed by the institution. There is nothing that prevents the parties from concluding a contract, treaty or any other form of compromissory clause agreeing to have all

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arbitrators appointed by the institution. The parties are voting with their feet away from that solution and I do not see whether the current proposal is “let’s take away the ability of the parties to design the dispute settlement system that they want and force upon them the only option of having all arbitrators appointed by the institution”. If that is the proposal, then I do not find it very attractive. Male: In terms of this method being forced on the parties, at least in the perspective of investment agreements in the United States and according to Chapter 11 of NAFTA, it is part of the parties’ consent to arbitrate that each of them may select its arbitrator, so this raises very fundamental issues. Female: Under the LCIA rules, the default rule is that the institution will appoint all arbitrators unless the parties have opted into a selection process. As a matter of fact, in 60–65% of cases, this rule is modified to allow parties to appoint their own arbitrators. So, parties are voting for a system of appointing their own arbitrator. I do not accept the argument that party-appointed arbitrators become hired guns for ‘their’ parties. That has not been my experience and I do not see that as calling into question the legitimacy of the arbitral process, there exist other issues. Male: There are two sections within arbitration where, although the arbitrators do not become hired guns, the problem does arise. One example is maritime arbitration where the background of the arbitrators effectively counts. Owners choose almost invariably a former owner as arbitrator, which has meant in the past that this arbitrator nearly always decided in one direction. This is almost certainly unjustified in the widespread perception but the same applies in some branches of the inspection industry between main contractors and sub-contractors. Certain people seem to be associated with one or the other. Male: The NAFTA process for salvation claims is a mandatory process triggered by either a claimant who believes that it has a common issue or by a State facing a potentially common issue by the parties. NAFTA seems to suggest that the World Bank will make the appointment of the entire tribunal, as the appointing authority for all three arbitrators. If they were content concerning the issue of consensus, they then proceeded as necessary if they found that there was indeed an issue that was joinable amongst them under the provision. What is interesting is that in practice the parties, both in cases involving the United States and involving Mexico, when faced with this situation, have chosen instead to make a general agreement

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with the claimants not to apply that mechanism. They have contracted around that mandatory provision, you could say that it is due process but it really is much more strategic: if you are going to spend a lot of money on a case, you at least want to know that you picked one person in that show. Secondly, sometimes the appointing authority does not have the entire confidence of the parties in the process, as it is not necessarily seen as the most neutral body given that the pool of eligible arbitrators were all picked by States and the institution itself is part of the World Bank. Claimants might not feel comfortable about the fact that the choice is going to belong to that body and might prefer to take their own chances, as there exist other mechanisms. A NAFTA decision on a challenge just came out that is apparently 14 pages long which for anyone who is watching NAFTA challenge decisions is probably wonderful. It means that they wrote 14 pages of reasoning which is a very good sign—it might have to do with the new Secretary-General. Male: There area couple of empirical elements you could look at in determining what advantages an all institutionally appointed tribunal has and whether there is an advantage to a sole arbitrator. Once you have a sole arbitrator, the odds of an institutional appointment do tend to rise by definition. Another test is to look where parties tend to opt for arbitration if the bid in question gives them that option, because an answer trial will determine the appointing authority as opposed to the World Bank. From a general arbitration standpoint, I can tell you that clients enjoy and feel very engaged in the appointment process whether or not it ultimately results in influencing the decision. It is a foreign engagement and the subject of many discussions before the appointment actually takes place. It is just part of the rhythm of the game and I would be very surprised if, as a whole, the party-appointment option would be abolished. Male: I have a small anecdote regarding an appointment in a case involving a travel agency. It had never happened in the entire history of this travel agency that it became a party to an arbitration and had to choose its arbitrator. The agency had no idea what to do, its law firm had no idea what to do, so they came to us and said “please help, we need an arbitrator”. We gave them some recommendations which then went through the whole travel agency’s selection process. Male: Since the 16th century arbitration has involved public policy and all arbitrators are judges appointed by a new type of venue. For private commercial arbitration, I am not sure whether the German system where the judge can take a quick look at the file and suggest to settle, does justice

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to the case. English arbitrators are not just sitting and doing nothing for three weeks, just taking notes. If mediation is such a good system, why is it completely failing within the ICC? The ICC is a big institution; it has roughly 300–600 arbitration cases a year. Ten years ago, the ICC made other rules for mediation which attract perhaps about 10 cases per year. So there is basically no ICC mediation. If you ask a president of a big French company, she will probably say: “if we want to mediate, we are big enough to pick up the phone and call our counterpart to the other side.” Male: In my professional environment, the ICC is largely unknown for reconciliation and mediation which may be a publicity failure. There is another way of looking at the various substantial cultural differences: in England, a decision was set aside on the request of the parties. The arbitrator became a mediator but they could not mediate to a conclusion, so it went back to arbitration. Later one of the parties challenged the award and won the challenge. Rule 42 stipulates that at any time the tribunal can take its arbitration hat off and become a mediating facilitator, but if that does not work, it can put its arbitration hat back on. Also in certain U.S. courts, some judges have the practice of taking their robes off. Dundas: The starting point of this discussion was the future of arbitration and my ideal is that the future would be more in the direction of the German approach than the old-style English approach in this regard. Male: Switching to a different theme away from procedure and towards evidence and substance: in the case of Methanex v. the United States, one fascinating incident was that the claimant was rummaging through its opponents’ or third parties’ garbage which it viewed as a legitimate information retrieval tool. This led to certain consequences in that case and also in a similar case where the Turkish government was accused of using its State security apparatus to obtain evidence. Male: There are two different issues here. One is the legal issue in awards such as Methanex and then there is the reality that practitioners in the field of investment treaty arbitration experience on a daily basis. Methanex involved evidence that had been illegally obtained by a private detective service that had been retained by previous counsel for one of the parties, the Methanex Corporation. They were seeking to find evidence, not in the dumpsters of the U.S. State Department or the Californian government but in those of the competing industry, so essentially a witness. A very interesting issue developed at the Methanex hearing as to whether that

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evidence was illegally obtained. This resulted in a play within a play, in that there was the regular hearing and a side-trial dealing with the circumstances in which this evidence had been obtained from a dumpster. At the end of the day, the tribunal found that it had been illegally obtained because of the placement of the trash container in question, which was not out in the open as had originally been asserted by a witness. Google Maps really proved handy in this particular instance as it showed that the dumpster was in fact inside the building of the witness and it was trespass under California law to break into the building, open the door of the dumpster and enter it. In the Turkish case, there was no evidence that the State security apparatus was used intentionally by the lawyers representing the State to try to develop evidence. In some governments there is a habit of listening to what people say and tracking their traffic which came to the attention of the claimant and then ultimately the tribunal. It was asserted that this had been done to get documents such as drafts memorials into the hands of the Turkish government, so the tribunal concluded quite rightly that this called into question the integrity of the process and demanded that it quickly needed to stop. So, that is the legal side. On a more practical level, governments of States that were formerly part of the Soviet Union inherited a well-established surveillance system. It is a fact of daily life that there are certain things that are never said on the telephone, never transmitted through e-mails, or never anywhere written. It makes witnesses afraid to talk to counsel for the claimant, it makes it difficult to communicate with the client on issues that are essential to the representation but it is a reality. Male: I remember a case in which two persons disclosed no supposed connection but a private investigator put on the case by the company found out within 48 hours that these two individuals, who were partners in separate law firms, actually had a separate law firm in which just they themselves were involved. When this was made public, their response was to threaten a lawsuit for breach of privacy. Male: In the Methanex case it was stated that the claimants had violated Californian law. Does this mean that the tribunal took Californian domestic law into account? The real question is: what is the law of the decision? Male: The detail in which the Methanex tribunal addressed Californian law is striking; in the transcripts, there are pages and pages of discussion of Californian law on this point. The U.S. was very clear in its position that

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information obtained illegally was not admissible, so the question becomes whether the legality of information obtained within the state of California should be determined by Californian law? Male: The question whether someone’s conduct violates a criminal statute, which was effectively at issue in Methanex, is one that would ordinarily be looked at by a tribunal, both in terms of the law territorially applicable to that conduct and also in terms of the integrity and fairness of proceedings. Male: What if you were dealing with one of the wilder regions, where it is possible to declare by presidential decree that anyone who resists is a traitor? This is not a completely hypothetical scenario as it has happened in some cases. My fear is that it may be declared that anyone who renders assistance to the claimant is violating the law of the State and then by definition, any evidence gathering activity is illegal receipt of information. This is not too unrealistic a scenario and I would have trouble thinking that you would measure the legalities of the claimant’s conduct by asking whether it violated such a presidential decree. The claimant and respondent jointly come to an arbitral panel and should have equality of arms. Male: Equality of arms in itself depends on what the local law is. If both sides can go dumpster diving, there is no problem. But if it is illegal to do it and one side breaks the law, then there is an issue. Male: How do you identify documents that are the product of dumpster diving? Male: Coffee stains was the example used in Methanex. Male: Sense of smell was another one as you can see in the original documents. Male: Let’s imagine an arbitration is taking place in Beijing but the Beijing arbitration rules do not produce a clear answer as to whether information is obtained illegally. If it is clearly obtained dishonestly, to me as an arbitrator it would be certain that I have to take action with regard to that evidence. Male: There are obviously many countries with very broad definitions of State secrets, including economic information; for example whether a certain activity is a State enterprise activity may be considered a State secret.

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We do not have to have a situation where the president of the country issues a decree designed to block a particular dispute. What standards does one apply to the introduction of evidence to avoid that such evidence might be considered a violation of domestic law by virtue of a very broad definition of State secrets? Male: I would assume it applies more as an evidentiary privilege based on the existence of a State secret if you look at it under the ‘compelling grounds’ approach of Article 9 rather than as a question of evidence. Male: Every time the United States have been sued, they have won; however, one detects a growing conservatism in the U.S. towards investment arbitration. My question concerns reversing the polarity; what will happen when traditionally capital-exporting States repeatedly become respondents? Male: The experiences of the United States as a respondent in investor-State arbitration have contributed to many refinements in the existing 2004 Model BIT as well as in FTA investment chapters that have been negotiated based on that Model, particularly with respect to dispute settlement and transparency provisions. The 2004 Model BIT emphasizes greater efficiency in dispute resolution for example by providing in Article 28.4 for a preliminary objection mechanism for dispensing inadmissible claims, which reflects the NAFTA experience of defending against multiple claims with varying levels of merit. With respect to transparency, developments are reflected in the U.S. conduct in Chapter 11 arbitrations and in the 2004 Model BIT. Article 29.1 of the Model BIT for example requires that all documents, transcripts and warranty be made available to the public, building on earlier commitments from the 2001 Interpretation by the NAFTA Free Trade Commission. This commitment is implemented by posting such documents on the State Department website. Article 29.2 of the Model BIT requires that hearings be made available to the public, which also builds on earlier efforts by the NAFTA parties to support open hearings in investor-State arbitration. With respect to non-party participation, Article 28.2 authorizes the acceptance of applicant submissions, again building on Chapter 11 practice, notably in the Methanex case which was the first Chapter 11 case to record a non-party’s ability to make applicant submissions. Refinements have been added to Article 5 which sets out the minimum treatment obligation and incorporates the clarifications made in the 2001 NAFTA Free Trade Commission Interpretation. The U.S. administration is currently in the process of reviewing the 2004 BIT Model to ensure that it is consistent with the public interest and the overall U.S. economic agenda.

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The key question is whether the current model achieves these objectives or whether changes should be made. A few weeks ago, the State Department’s Advisory Committee on International Economic Policy reported to the administration regarding its review of the Model BIT, which is now posted on the State Department website. We are in the process of considering this input as well as input from other advisory bodies and the public, and we attempt to conclude this review sometime this Fall. Male: I quite like the Canadian Model BIT but I prefer the Netherlands Model BIT because it is simple. I appreciate the great amount of thought going into the U.S. Model BIT including provisions for the preliminary objections, but the other preliminary objections by the sovereign are rather without merit and one would be better off just stating the simple merit jurisdiction. It would be preferable not to include some of the most recent findings which allow for security reasons because this would imply one could, essentially, give the United States a blank check to expropriate without consequence if they base their decision on security grounds. My problem with the United States is not that it has been a consistent winner, but that it has become more conservative. Male: Mark, you mentioned the interagency process, could you explain the intention behind drafting for example the necessity defense into the Model BIT, on which the Department of Defense might take a very different position than the Department of Trade? Male: Our interagency group includes agencies from various backgrounds including U.S. investors, tourists and defense-oriented agencies. The positions we take in arbitration reflect the dynamic of the entire interagency group as we balance the views of U.S. investors with U.S. defense interests. The intended outcome is a more balanced division in arbitration. The arbitration interagency process is similar to the processes of the Advisory Committee which has brought together a wide range of stakeholders expressing a broad range of different views on these issues. In the Advisory Committee’s report, there are several recommendations made by the entire committee while other suggestions were made by specific members of the committee. It is a challenging process but it is an important one, to bring the views of many different stakeholders together, just as we have to bring together the views of the various U.S. government agencies whenever we file, but the end product is a more balanced product. Male: The D.C. bar held a programme on that exact question more than a year ago and there was a variety of views, some of them technical, some

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of them political. One thing that struck me in that entire hour-and-ahalf session was that there was an organized interest group in Washington D.C. opposing the growth of investor-State arbitration and the use of arbitration by investors. There also was an interest group in support of investor-State arbitration. There were groups that would like to see investor-State arbitration either remain as it is or grow in substance; they tended to focus on other issues. Certain groups regarded investor-State arbitration as a poor public policy choice and they wished to see it either restricted or eliminated, so it was higher on their agenda list. One general conclusion was that the anti-group was better organized to take advantage of a significant American loss than the pro-group. There was consensus that the United States will at some point in the future lose—gravity does come into play when the U.S. is respondent. Female: Is there a sense that there would be more confidence in the system if an entity such as the United States did lose at one point? Male: From the perspective of some developing countries it would be helpful in terms of selling the loss to their domestic constituents to be able to say that this happens in a balanced system. But the broader question concerns the political impact of a loss in the U.S.: would it cause a change in policy on the part of the U.S. government? My own view is that it probably would not. Male: There are two questions here: the effect on new treaties and the effect on treaties that are already in existence. The treaties that are already in existence are going to stay in effect for at least another 10 to 20 years because each one of these has a provision (‘a tail’) that even if you terminate the treaty, it stays in effect for existing investments for another 10 to 20 years. That in itself creates a disincentive to terminating a treaty because it is not going to have an immediate impact and ultimately this is not really on the mind of most American voters. Male: There is no other respondent like the U.S. at least politically and perhaps symbolically. Male: The whole point of the system of trade and investment agreements is to protect certain rights so everybody wins. The problem is that lawyers think of winning and losing but there would not be a loser in the true sense of the word as long as it is agreed that the arbitration panel did a good job and came to a fair result. If the U.S. were to be forced or asked to honour its treaty obligations and make a payment, would that be a problem? It

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would really depend on the issue because there are some issues where probably it could be looked at as ‘one off ’ and there are other ones where it would not. The NAFTA and the CAFTA have a ‘tail’ but during the last election, the whole notion of the existence of NAFTA came up repeatedly, which might come back into play if the U.S. lost a NAFTA case. Male: Another topic of particular interest is the provisional application of the ECT and the country in question there is the Russian Federation. Female: I usually start talking about provisional application by referring to a personal debt of gratitude to the Russian Federation without whom the provisional application of treaties would remain the sleeping beauty of treaty law. Last summer Russia announced its intention not to become a contracting party to the ECT. A signature of the ECT entails provisional application under Article 45 unless the State opts out of the provisional application, which Russia did not do. A signatory has the obligation under the Vienna Convention on the Law of Treaties to refrain from acting in a manner that would defeat the object and purpose of the treaty. This obligation lasts until “[t]he signatory shall have made its intention clear not to become a part of the treaty.” Russia’s statement articulates that it does not consider itself bound by these terms and this is indeed something which puts an official stance to what it had alluded to on several occasions. Speaking of treaty tails, this is not the end of Russia’s obligations under the ECT because Article 3 maintains the application of the Charter for 20 years following the effective date of termination. Therefore the issues concerning the effect of a provisional application remain current. The decision on jurisdiction in Kardassopoulosv. Georgia is the only decision so far on provisional application and that decision is likely to be tested for many years to come. First, should there be a common factor to provisional applications to make them consistent with Article 26 of the Vienna Convention which places an obligation on States to apply treaties in good faith? One could start from the proposition that provisional application means full-blown application. A worn-out provisional application seemingly without prospect of replication, is that a breach of good faith under Article 26? Is it some sort of abuse of the process? Is provisional application itself an exception to the mere fact that it bares the exceptional feature of allowing a State to indulge in a treaty’s inconsistency with internal obligations so as to get out of its international obligations? If so, then it may not apply in provisional application cases with no prospect of replication. Second, could one argue that Russia remains bound beyond the 20 year rule by ECT provisions

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that can be considered provisions of customary international law as seen in Article 3 of the Convention? For example, would Russia remain bound by the misappropriations provision of Article 12? Male: I would like to get some understanding of the scale of the consequences to the international community if Russia were held to be subject to the ECT during the period between signature and renunciation. Coop: In three days, the 60 day notice period comes to an end, so Russia’s termination of provisional application will be official. The issue of provisional application has been discussed in great detail in the Kardassopoulos case, but it has also been touched upon in other cases where the tribunal assumed mainly that provisional application means full application as if ‘contracting parties’ also included signatories, subject to certain limitations.The Kardassopoulos case really is the first case in which the issue has been analyzed in detail. For most States, the period of provisional application was relatively short, perhaps a few years, and that period had moreover come to an end by the time arbitrators considered the issue. In one case, the treaty had been signed by the United Kingdom and Gibraltar but ratified for the U.K. without mentioning Gibraltar for political reasons, so Gibraltar was detained indefinitely in the same way that the situation for Russia was detained indefinitely until last August. I would be surprised if a tribunal would hold that a State could effectively put an end to provisional application simply by doing nothing, but the alternative is to make the provisional application provision applicable indefinitely which is not very attractive either. Of course the Russian Federation put an end to that possibility as far as the ECT was concerned by its notice according to Article 45.3. The provisional application for investments in existence will continue during the grace period of 20 years which will run from 19 October 2009 to 2029. Male: Almost nothing has changed: Russia was not very satisfied with the provisions of the treaty from the very beginning. One concern was that the interpretation of ‘two parties’ in Article 7 on transit can be presented in such a manner that it will be to the detriment of the country. For the previous six years, Russia was trying to find a way to solve this substantive problem. Provisional differences can still be changed because Russia is still a signatory to this treaty. It is in the same position now as Norway, Australia and Ireland. In recent years Russia became more active in the process and put together the recent Russian Initiative that was presented on 21 April by the Russian President. It is being discussed how to use the

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criticism to overcome the lack of action of the political leadership. These documents definitely send a message to the civil servants in the responsible ministries that have slowed down or stopped their active participation in such rules. But there are also a lot of people in Russia who oppose this action so it is not a unanimous decision. There is still an ongoing process to return Russia to this treaty because there are Russians who see its benefits. Male: It is wonderful that the policy debate on this issue continues in Russia so I would like to ask about Russia’s potential interest in continuing the ECT or investment treaties. One thing that emerged from the recent governmental expropriations is that Russia has some of the strongest Stateowned enterprises although we should continue this debate in a broader context beyond the United States and Russia. Male: Article 1503 NAFTA obligates parties to ensure that State enterprises exercising any regulatory, administrative or other governmental authority delegated by the State act in a matter consistent with the investment obligations of Chapter 11. Chapter 11 in turn permits a claim to brought for a breach of Article 1503. A similar provision can be found in Article 22 of the 2004 Model BIT which applies to State enterprises when these enterprises exercise any regulatory, administrative or other governmental authority. The U.S. briefed this issue in a non-disputing party submission in the UPS v. Canada case; this brief is available online. Examples of how State enterprises can exercise delegated authority include the granting of licenses, approval of commercial transactions, imposition of quotas, fees and other charges. Each of these examples refers to acts that are inherently governmental in nature, the conclusion being that delegated governmental authority under Articles 1503–2 concerns delegated sovereign authority. Regarding the U.S. government’s review of the 2004 Model, we are reviewing comments and recommendations concerning State liability arising from the acts of State enterprises as you can read in the Advisory Committee’s report online. Both NAFTA Article 1139 and Article 1 of the 2004 Model BIT define investors of a party to include State enterprises. NAFTA Article 1139 sets out an exhaustive list of property interests which qualify as an investment. Article 1 of the 2004 Model BIT likewise defines investment but uses a non-exhaustive list so the analysis of whether a State-owned enterprise can bring a claim, is far more likely to turn on whether the enterprise holds the investment because the enterprise as such would clearly qualify as an investor under either Chapter 11 or the 2004 Model. What is left is the

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fact-specific analysis of whether the investor actually holds an investment in the territory of the party. Male: A question for future arbitrations is what will happen with claims by ‘sovereign’ sale enterprises? Ironically this could be the kind of enterprise which, typical for the former Soviet Union, has obtained its assets from expropriation although a variety of different circumstances is possible. Does the current framework enable such State-owned enterprise claims to be brought on the basis that the State-owned enterprise is a national of one of the contracting parties? Male: Under the principle of separate legal personality, a State-owned enterprise is clearly not the same as the State so there is nothing in the Convention that prevents a claim being brought by such an enterprise. There will not be a wave of these cases because in terms of State-to-State relations, most governments will not really see a claim by a State-owned enterprise as distinct from a claim by the State itself. Most of those issues will be resolved at a diplomatic level or through other means than investment arbitration. In a case not too long ago, we advised a State-owned enterprise that there was this possibility of investment arbitration for a dispute and they said “thank you very much but first we are going to see what our government can do”. I remember reading in the newspaper a little later that a large number of secret service agents had descended upon the office in the host country that was causing the problem and the problem simply went away, never heard again from that particular client regarding this particular dispute. States have leverage to resolve these cases short of arbitration so I do not expect to see a huge increase in them.

APPENDIX D 16 October 2009 09.00–10.15 Reflections upon the Idea of International Judicial Review Moderator:

Robert Voltera

Contributors: Stephan Schill, Ian Laird, Todd Weiler and Klaus Reichert Male: I hope you have all had your copy of the A Liber Amicorum to Thomas Wälde − many thanks to the authors and particularly to Jacques Werner and Arif Ali for all their hard work in putting this together. This is only the first of two books that are to come out in honour of Thomas; there will be a bigger scholarly book picking up on many issues discussed here. A book that is available for a very modest price at the front desk includes one of the last papers that Thomas wrote. It resulted from a seminar held a couple of years ago to mark the 30th anniversary of the Center on “International competition for resources, the role of law, States and markets” for which Thomas reviewed the last 30 years of the interaction of economics, politics and the law in international oil and gas markets. Voltera: This panel session’s title is “Reflections Upon the Idea of International Judicial Review” and the panel consists of Stephan Schill, Klaus Reichert and Ian Laird. We will be conducting a discussion rather than a series of presentations to encourage audience participation, whether by way of question or comment. My panelist members have urged me to be Socratic in intervening with the audience if the audience is not voluntarily interventionist. Today international judicial review in the context of investment treaty arbitration is conceived in two senses which are distinct but interrelated. One of the senses is a judicial review at the level of what the State has (allegedly) done to a foreign investor. The second conception of judicial review is the review of the arbitral panel and its award in which the panel has itself conducted a review of State conduct. This is sort of a quis custodiet ipsos custodes, who will guard the guardians? We feel confident that the audience will dig into these themes with relish and enthusiasm as they are very familiar. I am commence this session by reading out the thoughts

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of Thomas Wälde on this subject. This comes from an e-mail that he sent to the OGEMID listserv on 28 September 2007 and, typical of Thomas, it was sent at 4:11 a.m. Ian circulated this to the panel and we all thought it would be appropriate to read it out today. The subject title of his e-mail was A New International Investment Soft Law Instrument? Thomas described how, for a long time, he had been advocating that there is a need for a new international investment soft law instrument as it would be a truly international restatement. This could take the form of an update of the 1992 World Bank Foreign Investment Guidelines or a code for governments and investors in this field. When this was raised in the meeting of the ILA Foreign Investment Law Committee, the chairman, Professor Schreuer of Vienna University, appointed Professor August Reinisch of Vienna University as the chairman-designate for such a project. Thomas suggested to debate issues that come up in this context, such as the problem that several international organizations have tried and failed to develop rules in this area. The only successful project was Ibrahim Shihata’s 1992 World Bank Foreign Investment Guidelines. Preparing an international convention seems at present not politically feasible. A soft law instrument could be prepared more easily and its success would basically be dependent on the market, i.e. the users. Similar soft law instruments by the IBA (Conflict of Rules and Evidence Rules) and some ILA committees have been effective. A soft law instrument can work if it is professionally prepared by competent people with enough reputation, credibility and experience in preparing international soft law instruments and if there is a market for it. In investment arbitration the open-ended nature of treaty language tends to create a need for persuasive and authoritative guidelines. A one-sided unrepresentative instrument will have little effect, for example, the Greenpeace rules for international investment or the Exxon US Oil Industry Code for foreign investment protection. There are serious counter arguments: the speed of jurisprudential development may currently be so slow that even soft law codification is premature. Also, one could ruin such a project by tackling it without competence, experience or proportional representation of the major countries and legal cultures. The ILA might not be the perfect institution because of its selection process; you may need the resources of a major law firm to support long drafting and negotiation processes. Thomas solicited the views of OGEMID members both publicly and privately, wondering what they thought of the various institutional umbrellas although he feared that a new MAI as a binding treaty was simply not feasible at the time. He added in true Wäldean fashion that he would have liked to find out from the leaders of the profession whether they had a personal interest in the

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issue. I would now like to call upon Stephan to give us an overview of Thomas’ views on international judicial review followed by some thoughts of his own. Schill: I was involved with Thomas in a project that very much deals with this issue; we had put together about 30 people for a book project and set up the contract when he tragically passed away so I am trying as good as I can to continue that project. On the concept of international judicial review in investment treaty arbitration: lawyers often like to think in analogies, specifically with regard to issues that are novel and vague. There is somewhat of a clash of cultures between people that come from a commercial arbitration background and people who approach the subject from a public (international) law perspective. Investment treaty arbitration resembles regular arbitration: we have a procedure which is arbitration; we have remedies which we know from arbitration; and it concerns the settlement of specific disputes. There are however significant differences: the nature of the obligation, being a treaty; the relationship between the parties, not being equals but standing in a hierarchical relationship; and the investor being subject to the sovereign powers of the State. State consent is not specific to a certain dispute or contract but to a whole class of actions for a number of years, i.e. 10, 20, 30 years or even longer. The core difference between investment treaty arbitration and commercial arbitration is that a private party can ask the tribunal to review the legality of State acts. In a certain sense, investment treaty arbitration is very similar to recourse to the European Court of Human Rights or the European Court of Justice, because awards are public and because there is an increasing possibility for non-parties to participate as amicus curiae. This was very much Thomas’ view as he explained in his Separate Opinion in the Thunderbird case and I would like to quote a passage from paragraph 12: “[i]nternational commercial arbitration assumes roughly equal parties engaging in sophisticated transnational commercial transactions. Investment arbitration is fundamentally different from international commercial arbitration. It governs the situation of a foreign investor exposed to the sovereignty, the regulatory, administrative and other governmental powers of a state. The investor is frequently if not mostly in a position of structural weakness, exacerbated often by inexperience (in particular in the case of smaller, entrepreneurial investors). Investment arbitration therefore does not set up a system of resolving disputes between presumed equals as in commercial arbitration, but a system of protection of foreign investors that are by exposure to political risk, lack of familiarity with

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and integration into, an alien political, social, cultural, commercial, institutional and legal system, at a disadvantage. Legal principles for and methodological approaches to examining the factual situations, habits, natural instincts and styles from commercial arbitration are therefore not suitable guideposts for investment arbitration.” In the recent decision in Glamis Gold, the tribunal seems to have taken that approach seriously from a conceptual perspective when it regarded itself not as a creature of contract but as part of a public system of private investment protection and arbitration. There is a significant difference between commercial arbitration being a rather private mode of dispute settlement and investment treaty arbitration being part of a public system. One public dimension is exactly the fact that tribunal awards have an effect as persuasive non-binding precedents to which future tribunals turn to interpret another treaty with respect to another dispute. They also may influence the conduct of States that are not parties to the treaty at issue and/or were not parties to the arbitration. For instance in recent treaty practice, the U.S. has included so-called anti-Maffezini clauses in their investment treaties in reaction to a dispute in which they were not involved. In sum, there is a significant international public element that develops from investment treaty arbitration. If we take this public nature of investment arbitration seriously, what does this mean for certain issues that come up regularly in investment treaty arbitration? For example, is it really feasible in a public system that individuals act as arbitrators in one case and counsel in another? This only becomes a problem if two disputes form part of the same system and are not compartmentalized. Another question concerns determining the applicable law. Can a tribunal, as it would usually be the case in commercial arbitration, relegate this question to the parties and basically have the parties present the law, or, does the tribunal have an obligation to find the law itself ? In the recent Glamis case, the tribunal, even though it endorsed the public approach, did not take the initiative to interpret the customary international law minimum standard but said the claimant had to prove what the standard entailed. If the claimant cannot do this, we return to the common ground between the parties. Another issue concerns the qualification of arbitrators. If investment treaty arbitration was a purely private dispute settlement mechanism, there would be no problem with having arbitrators without much experience in public international law and investment treaty arbitration, because the parties just get what they pay for. But since these awards have some effect on future arbitrations, decisions which are incorrect concerning public international law actually pose a problem. Then finally there is the issue of reasoning. How does an

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award have to be written? Who is it addressed to? Is it only addressed to the parties or does the reasoning have to reflect some broader principles explaining the legitimacy of a certain decision to a broader public? Voltera: Clearly there is a difference between commercial arbitration and public international law arbitration in the form of investment treaty arbitration. If there is a commercial arbitration, it is a purely private agreement between parties. They can decide to resolve their dispute by a coin toss or by who wins the World Cup, and if they choose arbitrators to determine the outcome of their dispute, they can choose whomever they want. These investment treaty arbitrations have a public role: they deal with the application of the rule of law in public international law and these concepts are very important to investment treaty arbitrations as they are not commercial disputes. What happens if there is a tribunal that is unlearned in public international law, is not following the rule of law, and is not furthering the broader context of judicial review of State action? Laird: When hearing about this contrast between commercial arbitration and the public international law dimension of investment arbitration, I recall that this was certainly something Thomas often talked about because he wanted to emphasise this public dimension. When discussing the idea of judicial review, he was trying to be quite provocative and a bit aspirational. For part of the public international law world, the simple idea of a private entity, such as an individual or a corporation, seeking review of government conduct and then having the ability to enforce a real remedy, such as monetary damages, is an extraordinary thing. Thomas’ experience covered the whole development of this incredibly interesting topic so he had the perspective to realize what a novel development this is, although we now take it for granted. It is worth mentioning that this represented Thomas’ hope of how these things would develop. One of his major comparisons of this judicial review idea was to domestic administrative law, to the administrative review by courts. Although this depends on the particular legal system, it is consistent amongst many systems that judicial review in terms of government action is a fairly wide-ranging power. Canadian courts have so-called inherent jurisdiction which allows them to basically second-guess the government. Depending on the nature of the government action, there is usually a sliding scale of deference to the decisionmaker which has become highly developed over time and takes its roots out of the British as well as the American system which have an extremely well-developed review of government action. When Thomas was talking about judicial review, it was very provocative because in international law this idea is not as developed; there is

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certainly not that level of second-guessing, of being able to subject a decision to that kind of injunctive remedy which courts can take in certain situations. When you throw out a red flag like this, some of us get excited with the idea that perhaps there are limits on ultimate discretionary power which are inherent in the international system, but this is pushing against the systemic nature of international law. The idea that there can be an independent outside decision-maker coming in and saying “no, you were wrong” is a very fundamental concept which Thomas reiterated in many different ways as part of his overall thinking. Thomas was not really a very balanced person in his views; he was perhaps a little more on the rule of law side as opposed to the statist or sovereigntist side. In his frequent debates on OGEMID he would be egging on Howard Mann who liked to spar with him on these topics. Looking at this overall debate, there undoubtedly is a tension in investment arbitration at every level and Stephan alluded to a number of these issues in terms of treaty negotiation, for example the clauses trying to deal with Maffezini, or, in a NAFTA context, the narrowing of the scope of Article 1105 in a Free Trade Commission Interpretation. This is perhaps a systemic element because this concept is in fact a little alien and pushes against the norm. Thomas had a broad perspective because he had worked with governments at the UN as well as with claimants. As a person who has worked in government myself in the Canadian context at the highest political levels in federal and provincial government, the other side of the coin is certainly very attractive. But as lawyers, we need to maintain a broader perspective so there should not be a dichotomy through which we divide ourselves into camps, rule of lawside versus sovereigntist or statistside. There should be a common ground. Do we have judicial review in the sense of domestic law as in the comparison that Thomas was trying to draw? I think we really are a long way from that but what the future holds is largely in the hands of those who follow on Thomas. Voltera: Clearly the investment treaty context provides for a review of State conduct that was previously unprecedented insofar as individuals were concerned. Public international responsibilities have always existed but the mechanisms for the subrogation of those rights to individual investors is quite novel, particularly through a unilateral ability to seek a quasi-judicial remedy at the international stage. Previous comments have focused on some very interesting issues that seem to coalesce around the rule of law, adding that Thomas was balanced between the rule of law concept and the statist concept. That is an interesting way of putting the dichotomy. Thinking of the rule of law as a methodology for ensuring adherence by a

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State to its international legal obligations including treatment of aliens and their property, is clearly a focus of investment treaty arbitration in terms of review of State activities. One theme that came out of both presentations so far is that the rule of law is at the centerpiece of investment treaty arbitration which begs the immediate question to which law reference is made. In addition to the agreement between the parties and the BIT, the applicable law is public international law which makes it different from commercial arbitration. The law cannot be varied in terms of substantive application, therefore arbitral tribunals operating under these treaties have to follow the rule of law. They cannot apply concepts of ex aequo et bono or equity just frivolously; they have to apply public international law as they find it. In a highly controversial recent case involving Slovenia and a Croatian electricity operator, the tribunal’s decision on jurisdiction was very troubling for a public international lawyer. The idea that public international law, norms of treaty law and the Vienna Convention can be set aside because a tribunal has some ‘inherent sense of fairness’, is obviously of great concern. One commentator on OGEMID called it an abhorrence in international law. Reichert: That was the dissent. Voltera: What has to be done if a tribunal, as the custodian of the rule of law, does not follow this rule of law, instead diverges from public international law and whimsically decides something? Reichert: When the topic of judicial review was raised, my thoughts instantly went to quis custodiet ipsos custodes; who ultimately runs the ruler over these decisions? Where ultimately does the control lie? And what is the approach of the controller? That can have a fundamental impact on these decisions and on the public dimension of these cases and awards. Governments and Attorney General Departments will look at these decisions to arrange their activities so that the public purse is not exposed to unpleasantness in courtrooms around the world. Otherwise taxpayers and voters will thank us very much for this − so these are very significant consequences. In 1937 the Irish embedded in their new constitution all sorts of fundamental rights clearly expressed together as ‘inherent rights’ that citizens could invoke before the superior courts so as to strike down inconsistent decisions and acts of parliaments. Those rights lay dormant for about 30 years. Then, in the mid-1960s, the new Chief Justice suddenly seized upon these with a degree of judicial activism and a whole series of cases came

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before the Irish Supreme Court so that many acts of the administration and of parliament were struck down. This has given rise to very robust jurisprudence on administrative acts. After 20 or 30 years, the statist element came into the equation and there was a pushback. Obviously the government did not like its acts being reviewed as often as they were and decided that it would appoint safer hands to the bench. Currently there is much more difficulty in effectively reviewing the acts of the State, the ministries or the public officials. So, what we have seen in Ireland is the evolution from a long dormant set of rights, suddenly seized upon in a halcyon period of 30 years of joyful litigation, to a push back—perhaps that is a natural cycle one may see in investment treaty arbitration as well. Where may awards end up if, due to the legal order in which they are rendered, they are capable of being challenged in national courts? Then national judges apply the Article V standards of the New York Convention and there is no debate about the substance of those standards. The difficulty may lie in the fact that this concerns a very diverse range of countries and jurisdictions, each with their own unique approach to fact-finding and definition of proof. National judges who may never have actually written the words ‘public international law’ in that sequence before, are suddenly asked to apply Article V of the New York Convention. That is something that can potentially give rise to interesting and/or troubling results. I would like to specifically focus on the court’s approach in a case in which I am involved, namely in Daala where a jurisdiction point is being taken by the government of Pakistan on a commercial ICC award rendered in Paris. The approach to the validity of the arbitration agreement point of the English enforcing court is dealt with by way of a total rehearing on whether the parties bargained for arbitration. This de novo rehearing on validity takes nobody by surprise in London but it surprises many people in other countries. This argument has been run both in the High Court and the Court of Appeal; it is now virtually a matter of public knowledge that Daala has petitioned the Supreme Court for permission to appeal, so the approach to this point under Article V is hopefully going to play a role in the Supreme Court. Across the 140 jurisdictions that have signed up to the New York Convention and are applying these standards, there is any number of different approaches to how courts actually go about their work. In London you have a total rehearing on specific points that give rise to the English approach towards deduction of evidence. In other countries huge deference may be given to the content of the award. There is a potential desire for harmonization through the different approaches of courts all around the world. There is no drive at the moment for expanding or reducing the grounds of review under Article V of the New York Convention. Ultimately in judicial review as in any form of judicial action,

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the party who wants to get paid is very concerned about where this all ends up: will a court in a particular country agree that I can take those assets belonging to this particular sovereign? What may give rise to some debate is the suggestion of Albert van den Berg that the word ‘manifest’ should be inserted into the start of Article V of the New York Convention which would take away or harmonize standards in relation to the courts’ approach to judicial review. Voltera: Anyone who has read the MHS annulment award knows that it is possible for a judicial body to find something to be manifest even if 20 or 30 other tribunals have rejected the same argument. It is perhaps just adding another very low hurdle for a judicial body to jump over but it is an interesting idea nonetheless. Reichert: In excess of 11 percent of ICC cases are with States or State parties so this is a very significant area, almost hidden from judicial review, which brings State activities again into the commercial field and within the scope of Article V of the New York Convention. There is this broad tapestry of treaty cases being brought under ICSID and under the UNCITRAL Rules in addition to this large body of quasi-commercial cases being conducted under, for example, the ICC rules. Voltera: The public policy ground under the New York Convention returns us to the theme that has been playing throughout this panel about the rule of law. The international law of treaties as codified in the Vienna Convention is quite clear. It is customary international law and therefore must, under almost every legal system, be a part of the domestic law of the country. To the extent that a tribunal itself does not follow the rule of law in correctly applying public international law, that is ipso facto a manifest violation of the public policy of every domestic legal system. That leads us to the issue of the outlying awards: are they, in terms of judicial review, merely going to wither on the vine from disuse? The reality of practice is that there are some learned tribunals that know public international law who will tell counsel not to bother pleading a certain case, because it is not worthy of consideration. Is this self-regulation? Are there just outlying or peripheral awards and peripheralized arbitrators who are not acting as appropriate guardians, who are not following the rule of law as required by public international law and who will eventually be marginalized by the market forces? Laird: In one of Thomas’ editorials of 2005, he wrote about one of the key roles for OGEMID being, in his words, to serve to enhance quality control.

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Arbitral decisions are in the tradition of commercial arbitration mostly confidential. This virtue is often met by strident criticism as it also entails the absence of quality control. But investment arbitration, being a form of public policy, brings back the public policy element that encompasses international judicial review of government conduct. This requires and now obtains, greater transparency in the sense of western judicial, traditional, professional and critical discussion. Jan Pauls son said there are awards and then there are awards. OGEMID plays a very important part in the public debate that leads to that development. Voltera: OGEMID plays a great role in that sort of conformity and analysis. In some respects that is a topic for the next panel on the convergence of the law, but these are obviously interrelated ideas. Klaus: At the closing session of the eco-congress in Montreal, Ian spoke about the good awards chasing away the bad awards which was one of the great seminal speeches on this point. One would indeed hope that good standards would be chasing away bad standards when it comes to this diversity of national courts where ultimately the point may be raised in relation to execution. Regardless of the fact that execution may not have anything to do with standards applied in the award, people will still argue them. People will argue virtually anything to stop the public purse or the public assets from being seized. This debate would be critical of that, but one would hope that counsel in all countries are aware of the facts if information is available to them. Nappert: I have two points. The first point is a piece of information from the UNCITRAL Secretariat concerning a New York Convention workshop. The UNCITRAL Secretariat is in the process of completing a very large survey of its Member States as to the enforcement and the application of the New York Convention in national legislation and by national courts. 104 States replied to a questionnaire sent out by UNCITRAL with the help of the IBA. On their website one can find the replies per category of question highlighting possible discrepancies in the application of the New York Convention. One of the next steps in this project is to draft a guide to harmonize enforcement. UNCITRAL would value feedback from an investment award perspective, so the second step entails a series of practical workshops on the ground to educate judges tasked with enforcing commercial as well as investment awards. My second point relates to Thomas’ opinion on the Thunderbird award: could one maintain that there is inequality of arms in investment arbitration on the part of the investor who is at the mercy of the host State, when

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many investors are increasingly State-owned or have a significant State presence? Perhaps the notion or the dynamics of investment arbitration as a process ought to be reviewed. Voltera: When examining this idea of investment treaty arbitration and judicial review of State action, it is useful to step back at one point to consider that there are many different kinds of investors and many different kinds of States. There are small investors, State-investors and State-component investors; there are very large investors and there are different kinds of investments. Canada is one of the countries that have had amongst the most investment treaty claims brought against it; it is relatively sophisticated and wealthy; it has a cadre of excellent lawyers in the government service, etc. There are other countries that obviously do not fall into those categories; that are impoverished; that do not have institutional internal knowledge. These countries are faced with for example a large multi-national company that can pay millions and millions of dollars for sophisticated legal teams, while the country can barely afford to pay for a few hospitals. In such cases, there are some very interesting dynamics in terms of the tribunal’s role in reviewing the rule of law. In the Romania case for example, the tribunal awarded significant costs to the State which won against the enormous French State-backed multi-national corporation. The tribunal did not buy into the argument that this was a poor little investor needing to be protected against a State and have its costs paid for. Schill: No matter how the inequalities run, the tribunal has to act as a custodian of the legitimacy of the proceedings, particularly because this is a public system and therefore does not stick to commercial principles of party autonomy and equality. The tribunal has to ensure that the process is fair. Male: Would tribunals explicitly, to use a sporting term, handicap a side? Would the tribunal be saying, “we know you do not have any good lawyers, we will take that into account”? Or would they purely work by the quality of the case presented? Philip: They should not side with a party they feel is handicapped but in conducting the proceedings they would to a certain extent have to take those issues into account. This does not mean that the tribunal should put itself into the position of the applicant of the weaker party and support that position. The tribunal has to act independently, no matter how well a party is presented.

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Laird: Susan Frank has analysed related issues in terms of the question “who’s won and who’s lost and by how much”. One of the issues she has focused on in a piece for the Columbia FDI newsletter concerned the question whether developing countries are getting the short shrift on a purely statistical basis. How are countries faring that are under-resourced and not as sophisticated as Canada or the U.S.? Statistically governments, including developing country governments, are on average winning more cases than losing them. When they do lose, the awards are dramatically reduced from what was claimed. Particularly regarding fair and equitable treatment or damages, tribunals are very much taking into account that one party is at a disadvantage. For example in MTD v. Chile, the tribunal cut the award in half based on the logic that the investor should have been more sophisticated. It should have known that it was dealing with a country that was going to take its investment. So, instead of getting the 100 dollars, it got 50 for stupidity— which has happened in a number of other awards as well. Tribunals are very cognizant of that balance; it may not be directly in the law or in the treaty but they certainly are taking that into account. Voltera: It cannot be overemphasized that States themselves are almost invariably very concerned with the rule of law in all their activities. There are obviously some egregious acts by some States once in a while that fall outside the scope of the rule of law, but even the most egregious violators of international law are generally concerned with the rule of law and follow it on the international stage. We just do not see it that often because it does not make the headlines. For example, Venezuela has an enormous publicly-stated nationalization programme and has been expropriating foreign investors and local business people left, right and center for a very long time. And yet, Venezuela has not withdrawn from the ICSID system; it has denounced one of its treaties with the Netherlands but at the same time requested renegotiations so that there will be a new treaty in place. It has abided by all awards against it and appears to conceive the rule of law and international law as very important. It has been using its power to negotiate and have compensation reduced but it has complied with the awards against it. If you look at its major expropriations, with the exception of Conoco and Exxon Mobile, the cases which were decided against it in investment treaty arbitration are peripheral and small awards. The majority of its expropriatory activity has resulted in negotiating settlements in accordance with the rule of law. Sabahi: Number one: arbitrators are guardians of the legitimacy of the process; number two: they should not follow the position of the rich party.

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I agree with this but the question is to what extent the arbitrators could more or less act like judges in a civil lawsuit, rather than following the arguments of the party’s advocacy style? Right now the commercial arbitration style very much dominates the system of investor-State arbitration, arbitrators think and use their independent judgment in determining what the law is, putting the facts aside. Schill: In investment treaty cases, arbitrators should act like judges at the international level with respect to determining the law, which means finding the law themselves and not putting that burden on the parties. What the Glamis tribunal did, namely to ask the claimant to prove what the customary international law minimum standard entailed, is problematic from that point of view. Voltera: Questions of jurisdiction are necessarily within the domain of the tribunal. Based on the ICSID Convention and other instruments, a tribunal always has to assess its jurisdiction regardless of whether this is raised by the parties. This is a fundamental part of the rule of law in public international law. Schill: This requires that there is some competency with the arbitrators in those areas. Weiler: There is a decision requesting arbitrator Christopher Thomas to decide whether to continue with his job as arbitrator in a NAFTA case and if so, to refrain from any further work as counsel or advisor to Mexico, even though the NAFTA case in which he is sitting involves Canada. This is an interesting new twist with respect to an arbitrator practicing as counsel. At this point, Mexico has nothing to do with the proceedings but it has a right of intervention under the NAFTA. I was counsel for the claimant in that case and we challenged Mr. Thomas’ sitting there. EDF v. Romania is interesting because they have adopted the public international law citation model. But talking in the language of jurisprudence, they are actually saying: “in commercial law, this is the way we issue awards, this is the way we assess costs”. This is more tautological. This is not a penniless claimant but there certainly is no good bottom-up explanation as to why this is the right model for costs as opposed to using a judicial review model which generally would not have costs assessed, at least regarding access to justice issues. Canada’s review system is highly developed but Canada does not have an administrative law code or administrative law judges. It basically has a common law system so as a result

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there is considerable deference to any political decision-maker (coming out of the deference to parliament) but it does not show much deference to anyone else, especially a quasi-judicial decision-maker. If it is showing any deference to the executive, it is on the basis of expertise that a generalist court might not have. In the American system based on an administrative law code and a constitutional separation of powers theory, they nonetheless have arrived to the same conclusion which is deference to administrative decision-makers, not for their expertise but because of a Congressional statement. Therefore, they are vested with this constitutional authority. Nonetheless, both systems both end up in the same place and the question really is, does jurisprudence in either case tell us much about judicial review or more about judges? I think it is more about judges because what both systems engage in is something that a Canadian administrative lawyer once referred to as jurisdictional game-playing. The idea that jurisdiction is as wide or as narrow as a judge needs it to be to come to the results (s)he wants; whether something is patently arbitrary or only sort of arbitrary. Manifest or patent, these adjectives do not matter. At the end of the day, the judge can intervene if (s)he wants to. Judicial review under human rights statutes such as Canada’s Charter of Rights and Freedoms or the European Convention is only about 30 years old; it is interesting how much less deference can be shown in that context. So the query is whether the right model for judicial review is the court as the ‘human rights reviewer with strike-down power’ or the court as the ‘administrative law reviewer with strike-down power’. There are two different models. With respect to Ian’s juxtaposition of statism versus the rule of law, I would prefer to see it referred to as statism versus liberalism because statism is sovereigntism while sovereignty and the rule of law are both key principles underlying the legal order. You need both principles to make things work. This notion of the State as the gatekeeper in administrative investment law entails that the State can decide which rights investors have, but it can also limit the access to those rights. You then have a rule of law but you also have the sovereignty principle—with both principles standing on equal feet. This does not always lead to a palatable result for private interests, but conceptually it makes sense and begs the question whether judicial review is even appropriate if we fully accept the sovereignty principle. If States are truly gatekeepers, is there any need for judicial review? This is the human rights argument which is why it might be better to call the dichotomy statism versus liberalism because the liberal believes that there should be less government and more private action, where a statist always expands on the role of the State.

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Male: Will this rule of law protect strong companies against weak States? The current instruments protect a rule of law that reflects non-equality between companies and States. Historically, something might have been a balanced deal under the rule of law at that time, but from today’s point of view it might be considered totally unequal. We definitely need to discuss this dynamic equilibrium or this dynamic civilization, so as to find out how effective methods can improve respect for the rule of law. Concepts need to be adapted to the changing economic positions or to the changing comparative powers of the State. Reichert: Let’s say you have a weak impoverished State that becomes suddenly the subject of an investment treaty claim against it. There are many law firms with a large dispute resolution department who may set aside three or four good people to get expertise in treaty arbitration. They can afford to take a very lenient view of fee arrangements with States. So, the moment a case is registered against a State, there is probably a cavalcade of people rushing to the Attorney General’s office of the respondent State promising a fantastic contingency arrangement. This may perhaps redress some of the imbalances. Voltera: This is also a phenomenon affecting investors as regular clients tell us that when they have a claim, 30 law firms approach them. Perhaps it redresses the imbalance but on the other hand, what these practitioners are doing, is buying the experience usually at the expense of a State because claimants are often—not always—a bit more sophisticated. In such cases, one of the parties is getting inexperienced, unqualified advocates who do not know public international law but are trying acquire credentials. Is that serving a system? There is no regulation of the international bar as we know it.

APPENDIX E Saturday 16 October 2009 (continued) 10.30–12.30 Roundtable on the Question of Convergence in International Law Moderator:

Kaj Hober

Contributors: Federico Ortino, Melaku Desta, Tai-Heng Cheng and Mark Kantor Hober: Welcome to this panel on Convergence in International Law; we have an eminently experienced panel to address this topic: Melaku Desta from Dundee, Federico Ortino from Kings College London, Tai-Heng Cheng from NYU Law School and Mark Kantor from Washington D.C. We have divided our topic into three subtopics. The first subtopic is international law jurisprudence: can a convergence be discerned with respect to international law and jurisprudence, for example a cross-fertilization between different areas of international law? What role, if any, does WTO jurisprudence play? The second subtopic is the practice of international (economic) law: who practices international law nowadays? Are these the same old persons in international investment arbitration as in international commercial arbitration? Should we see the same old persons or should they be different? Is there a new kind of international lawyer, well versed in both public international law and commercial law? The third subtopic concerns the role of States in dispute settlement. Is it good or bad that investment treaty arbitration is being handled the way it is being handled now—predominately in a privatized fashion? Should States get more involved in this? Should we have an international court for investment disputes? Each panelist will make a short introductory remark on each subtopic and then we will open up for discussion. Cheng: Thomas dedicated himself to asking people to think outside the box. Take conventional wisdom, he would urge, turn it upside down, shake it and look at it from all angles and take nothing for granted. The notion of convergence of international law presupposes that there is also fragmentation of international law. I would like to suggest that there are at least

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three different types or levels of fragmentation. The first is fragmentation of substantive principles and laws. The second is fragmentation of venues of decision-making: national courts, international tribunals, negotiating venues and so forth. The third is perhaps the most abstract form of fragmentation: fragmentation of jurisprudence writ large, i.e. disagreement as to what the concept of international law itself is. There are those who believe that law is a system of legal rules, including the positivists and the law and economics scholars. There are those who believe that law is a process of decision-making, including the policy-oriented scholars as well as those from the transnational legal process school. Finally there are those who believe that there is no determinacy in law and who may even go so far as to say there is no such thing as law itself. One necessarily needs to address fragmentation of concepts of international law in order to address the applied forms of fragmentation. For instance, without an agreement on what the concept of law is, the style of reasoning of tribunals will be different. This relates not just to what counts as a source of law but also to how we reason to reach what we claim to be a legal outcome. In the past, scholars have tried to establish the dominance of one concept of law over the other concepts but 800 years of history tell us that no scholar has ever been completely successful. I think there is no need to establish dominance of one concept of law. What we should do instead, is recognize that each concept of law does not meaningfully deviate from the others conceptually. The meaningful disagreement comes in ontological and normative commitments prior to conceptualizing. This concerns commitments as to what the purpose of law is, for example: is it to apply rules or to achieve a good outcome? Or both? There are also commitments as to what the value of semantics is. Does the concept of law have to accord with common semantic understandings of the word ‘law’? Once we recognize that the fight is really about ontological commitments we can actually start to meaningfully agree and disagree with each other by denoting different forms of law. For example, a scholar could say this outcome by a tribunal is perfectly legitimate or correct as a matter of law, one by which I mean a positivist outcome or positive concept. But law is a policy process of decision-making which could be thoroughly wrong. An arbitrator is bound to depart from legal rules if the outcome would simply be completely unjust. Such arbitrator could clarify his decision by simply saying, “yes, law 1 requires outcome X but law 2 should predominate here as it requires outcome Y”. Both Michael Reisman with a policyoriented approach and Ronald Dworkin as a positivist agree that this is what a judge should do in an extreme and unjust situation. This approach, however, raises numerous questions. How do we mediate between different concepts of law when both are in play? How do we decide which

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controls? How do we decide which concept of law is applicable and which decision-making forum? Should a foreign policy advisor’s concept of law be different from that of an adjudicator or scholar? When they disagree, how do we reconcile that? Kantor: Tai has started off our panel on convergence with the concept of fragmentation; I would like to go one step further down that path and apply the concept of fragmentation to the politics of creating binding dispute resolution forms. In the last decades we have witnessed a growth in international dispute resolution forums, each of which has focused on a particular problem, for example, the WTO dispute resolution body, the European Court of Human Rights, the Inter-American Court of Human Rights, other specialized human rights tribunals, the ICC, other specialized international criminal courts and of course investor-State arbitration. Each of these has developed for the purpose of providing a forum for particular kinds of protected classes, most obviously in the world of investorState arbitration where the protected class consists of foreign investors. This results in a tendency to think about the development of law as emanating from each of those forums. Convergence comes into play as these various forums begin to operate in a fashion that requires consideration of what is happening in one forum for the purposes of pursing objectives with respect to another forum. Yesterday, I raised the question of non-profits bringing investment treaty claims because international investment law contains tools to protect against abuse of power by a State which raises issues of freedom of speech, freedom of press and freedom of association. The underlying legal principles may not be categorized merely because we have chosen for political reasons to develop specialized forums rather than an overall single set of forums. In investment law, the seminal decision concerning the international minimum standard is the 1926 Neer case. Whether one likes it or one dislikes it, it is at the heart of the discussion. We all know the famous quotation: “treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to willful neglect of duty or to an insufficiency of government action, so far short of international standards that every reasonable and impartial man would readily recognise its insufficiency”. This reminds me of a case which dealt with the failure of authorities to apprehend or punish those guilty of murdering an American citizen. This had nothing to do with international investment, except that the victim lived and worked in Mexico as superintendent for an American mining investment. At issue was whether that individual’s treatment was readily recognized for its insufficiency as a matter of international law. This is as much a standard of human rights as it is

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a standard of international investment law and yet for some reason today we seem to think of it only in the context of international investment law, arguably because we have chosen for political reasons to fragment our dispute resolution forums. As those forums begin to ‘un-fragment’ themselves, we may see a convergence in the substantive standards that apply to the conduct of States and that of citizens with respect to States. Ortino: Convergence of international law is quite a broad topic; we could be talking about whether there is convergence within international investment law, within international economic law or within public international law as a whole. That is one level of questions that one could raise; the other level where such discussion could happen, is at the level of treaty-making, law-making, decision-making or policy-making. Should we even be aiming at convergence at any of these levels? I find it difficult to rely excessively on the adjudicative arm of international law to carry out hardcore convergence, particularly broader cross-field convergence, whether it concerns environmental law, human rights, trade or investment. That should not be expected too much from the members of the Appellate Body in Geneva, investment arbitrators and so forth. This role should be put more clearly in the hands of policy-makers and law-makers. On the other hand, the rule that adjudicators do play, is to strive for convergence within the smaller subject area. So there is a sense of responsibility, even for arbitrators, to strive for a certain level of convergence as part of their role in investment law. Different roles can be played by policy-makers and decision-makers depending on the type of convergence concerned—a specific subject-matter convergence or a broader convergence which possibly better be called coherence within the different areas of international law. Hober: That raises at least one critical issue concerning the role of arbitrators: are they only supposed to decide the case before them or are they supposed to ensure that international law in this area remains a coherent body of law? Desta: There are concerns that international law lacks coherence across the different subsystems of international law. The German judge in the International Court of Justice, Bruno Simma, recalls that some people claim international law is simply a random collection of notes without sideways or structure. It is even questioned whether international law is a system of law. Simma concluded that the topic of fragmentation is overstated and many issues described as fragmentation of international law rather concern functionality negotiations of governments on the national and

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international plane. In other words, as the function of international law grows, different branches of domestic law are finding their international equivalents in different forums or subsystems. However, on the national level, this structure is kept together by a unified court system often with a Supreme Court at the top. At the international level, there is a proliferation of international (arbitral) tribunals which poses a very real risk of conflicting outcomes in cases based on the same factors. For example, the Swordfish arbitral case was brought against Chile simultaneously with a case brought by Chile against the EU so the possibility of a conflicting outcome was very real. Nappert: Federico questioned whether convergence ought to be placed primarily in the hands of decision-makers, or whether policy-makers were perhaps a more appropriate bunch to bear the burden. But policy-making takes time while decision-makers have an immediate job to do, so in the interest of immediacy and because decisions of investment tribunals eventually influence generations of BITs and policy in the field, there could be an immediate role for decision-makers followed by policy-making. Would that be an acceptable model? Ortino: My concern lies with burdening arbitrators and judges with new tasks, particularly concerning convergence within different areas such as human rights issues, trading goods or environmental protection in addition to investment law. Of course this issue will come up but it is not really for them to find a solution; one could think about looking at comparative law as a source of inspiration. In terms of finding specific answers for specific issues, the question is whether you can simply turn an investment tribunal into a world court without any attribution of powers. Hober: Another aspect that one should perhaps consider when talking about investment arbitration is why clients should pay this particular tribunal to create international law? All that clients are interested in, is to have a resolution to their dispute. Muchlinksi: I agree with the sentiment that we can overstate the problem of fragmentation. I will start with a quotation from Professor S.F.C. Milsom who was one of Britain’s leading common law historians. In the 1966 Toronto Law Review, he gave a definition of law which I found extremely helpful: “law is the increasingly complex analysis of facts”. If you think about what we are doing in international law, our analysis of facts is becoming increasingly complex and governments are giving us the power to address many more different fact-situations. An international investment

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agreement is actually a State act of authorization that a certain discourse should be developed by experts at the international level. We have epistemic communities that attempt to give a certain conceptual unity to these discourses. Experts are operating with a certain uniformity because they are all using the methodology of international law which is one key issue that should never be forgotten. We have all been trained in treaty interpretation and analysis of the sources of law − that is a common factor. But we have a multiplicity of tribunals comparable to the competition between different courts in Medieval England. The Court of Common Pleas, the Court of Exchequer, the Admiralty Court; each had their own specialist group of lawyers vying for business, but at some point the Crown had to make sense of all of this. We are working in an increasingly globalised legal environment where many different issues, other than diplomatic interactions and the conduct of war, are regulated by international law. Almost similar to the Middle Ages, we are beginning to develop a global legal system. I am quite optimistic about the future because fragmentation is simply a natural response to the complexities of globalisation signaling the need to respond with regulation and adjudication. Cheng: I am unsure whether we all know what the methodology of international law is; the deeper I get into it, the less of it I know. I will quote from Bruno Simma and Michael Reisman to show you how different the methodology can be. Bruno Simma wrote that law is regarded as a unified system of rules that according to most variants emanate from State will. This system of rules is an objected reality that needs to be distinguished from law as it should be. This is closer to a common understanding as to the methodology of international law. Michael Reisman wrote that, from the perspective of the disengaged observer, it will be apparent that arrangements and processes function within the framework of a world or regional order in a specific context. If we accept that as the concept of law, then Sophie’s concern about where the appropriate creators of international law should be situated, i.e. policymakers or courts, is perhaps a false dichotomy. In such case all these venues and actors would be decisionmakers creating different forms of international law which in different contexts provide a world order. We need to discuss how we understand international law conceptually and why or how these different concepts may interface with each other. Voltera: There is a global legal system; it is called public international law. There is not a global judicial system; it is fragmented. There is no divergence of public international law; there is fragmentation of its interpre-

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tation and application. This involves for the most part a homogenous interpretation and understanding of public international law and in certain circumstances, some outlying, potentially marginalized, arbitral decisions which either will be ignored or leading the way. If you look at public international law beyond the investment treaty context, you will see that the International Court of Justice deals with issues of State responsibility. The European Court of Human Rights and the American system deal with questions of State attribution. The International Criminal Court in The Hague deals with many of these issues. The International Law Commission created its draft articles on State responsibility in a broad context, not purely limited to the international law of investment arbitration. UNCLOS tribunals and WTO panels illustrate the myriad of interactions between States at an international judicial level. There is an even greater myriad of interaction between States that does not reach the international judicial level. The courts and tribunals whose awards and judgments we analyse, represent the tip of the iceberg where public international law is consumed and there is a very significant degree of homogeneity in application and interpretation. This is not a divergence that requires to be converged; there is a distinction between the homogeneity of the underlying law and the fragmentation of analysis and interpretation in the current international judicial process. Voltera: Potentially things are fine, but perhaps the question should be whether there is a need for convergence of the law or a need for convergence of the judicial process. Male: I wish to bring up the diametrically opposite notion of fragmentation, namely international unity. Thomas used the notion ‘the market State’ of Philip Bobbitt’s work on The Shield of Achilles to explain the decline of the nation State. One of the reasons for this decline is that States no longer are at liberty to go to war under international norms; the emergence of the market State defuses the notion of public and private international law. It is one of the broader notions in investment arbitration today and because of the inherent nature of investment arbitration, it is a very unique principle bringing different streams of international law together, including human rights, environmental regulations and so forth. Rather than just referring to fragmentation or even convergence you could consider the notion of unity in the light of this emergence of a changing statehood. Kantor: I grew up in a system which has experimented with decentralizing the development of the law for a couple of centuries. While it is common to think of the United States as acting through the federal government, the

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role of the federal government as a significant player in the development of the law is a relatively recent innovation. For centuries, the 50 states and state courts, plus the District of Columbia developed—sometimes competing—views about legal principles. Over an extended period of time, we may have reached a harmonization of those views, sometimes through soft law such as restatements; other times through a confusing mix of soft law and foreign law, such as the Uniform Commercial Code as adopted in 51 jurisdictions; and sometimes through binding overarching federal legislation. The most important element of that system is the duration required to achieve that kind of harmonization. I am perfectly comfortable with competing differing views being maintained for an extended period of time, which many of my friends in the world of international law are not comfortable with. They are much more impatient with the time it takes to develop a consensus or a harmonized view, and very frustrated with the shortness of time it takes for a consensus to fall apart. In the context of international dispute resolution, people think the debate on the meaning of ‘customary international law’ for example, is resolved through investment treaty arbitrations and other similar form. And yet, in the broader world, not the specialist world in which we live, the far more important debate about what that concept means takes place between the International Committee of the Red Cross on the one hand and the U.S. State Department on the other. They argue about how one creates customary international law and the only decisionmaker with respect to that debate is some combination of political events and the media. Bearing in mind all of those factors, I am very uncomfortable characterizing any particular set of rules as law because I do not see any decisionmaker. At some point we mayre-evaluate the consensus on these issues and hopefully this consensus does not fall apart. We live in a world with a multiplicity of voices creating an interlocking web of relationships. Only after an extended duration of time will those relationships begin to solidify into something that we can rely upon as a common shared understanding of binding obligations on each of us. Kathleen: Iteratively, over time, States have been ceding certain aspects of their sovereignty to outside decision-making authorities; this is very obvious in the context of the EU and of investment arbitration. Basically, the norms are to some extent set: one could debate on the precise extent but public international law applies. Treaties provide a binding decisionmaking mechanism to apply international norms to sovereign States. Previously no one except the State itself could really make those kinds of binding decisions but inherent in that process of ceding sovereignty is that

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it takes time. There will always be a certain element of fragmentation so our role as arbitrators or decision-makers is to carefully think about our function within the treaty mechanism. Is our role to decide the case before us or is our role, in the context of the treaty system, to make public international law? My view would tend towards saying “yes, we want to decide these cases correctly within the context of public international law and we want to give the parties the right to express their views”. But beyond that, is it really our function within the treaty system to be making public international law such as the ICJ does? Cheng: There is an inherent tension between States’ authority to make law and the dispersion of law-making power to broader decision-makers. This is not new: the Babylonian Code of Hammurabi reserves law-making power for the king and yet, even in Roman times, lexmercatoria emerged as a dispersion of law-making authority from a State to a self-regulating private class of merchants. So, although this tension is not new, it remains important. I am not convinced that there can be no disagreement about public international law but deep disagreement about its interpretation and application. Let me give you some quick examples. Concerning the invasion of Iraq by the United States, there was deep disagreement between the U.S.’s interpretation of the Security Council resolution which it understood to authorize its invasion as opposed to the French and Russian statements putting forward a completely different interpretation of that Security Council resolution. Is this just a difference in interpretation or in understanding of the rule of hard law authorizing political and military acts? Two cases cut to the core of this issue are Methanex and Loewen. In the Methanex case, part of the argument as to why there was no legitimate expectation on the part of the claimants was because the Californian political process was widely known and therefore they could not claim to be frustrated by it. If you read that relevant passage carefully, I wonder whether a policy-oriented approach of one of the arbitrators may have snuck into what appears to be a positivistic analysis of legal standing. In the Loewen award, there is an obiter dictum which essentially implies that quick implicit judgments against the United States may undermine the entire structure of NAFTA itself. That was the period in which John Kerry, as senator, had sponsored an act in the Senate calling for the withdrawal from NAFTA. If that is not an awareness of the political context in which the decision was rendered, I do not know what is. If it is in fact a consideration of the political context, there is a real question as to whether conceiving law as purely rules or a process of decision-making will in practical terms affect arbitral outcomes.

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Muchlinski: Arbitrators do not need to worry too much about making international law because they are not judges; they are decision-makers. Gus Van Harten advocates the establishment of a full court to judicialise international investment arbitration, to create a doctrine of stare decisis and to institute an appellate body. This could get us to a point where these pronouncements become formal law. There is a substantive process at work which is the creation of a literary forum interpreted by people who form an epistemic community. In that process an attitude to certain issues arises which is law-like but not identical to formal law in the way of a formal lawmaker who passes the law. Even when that happens, lawyers will always interpret and the point is not that there may be divergent readings; the point is that the experts involved know how to read in an expert fashion. And that then becomes the common method or the common interpretive process which may still arrive at distinct outcomes. That is normal, otherwise we would all speak with one voice and we would not really be doing law, we would be doing administration. That is a very important distinction when talking about legal order. We are not aiming at administrative certainty and uniformity; we are aiming at justice which in the end has many facets. For example the Americans thought they were doing justice when going into Iraq, other people did not think so but everybody could read the resolutions in an agreed fashion. Brabant: I would like to give a practitioner point-of-view. I sometimes have the feeling that there are two worlds; the world of transactional lawyers and the world of arbitration; those who want to anticipate and those one who give the sanction and protect investments. Maybe these two worlds are a bit too separated and the good news is that as arbitration lawyers, we can be useful. Can a transactional lawyer avoid looking into awards and discussions during arbitration procedures? Can we avoid today not to anticipate what arbitrators might say? When we prepare contracts for investments which will last for 20 or 30 years, can we afford not to have a very precise look into international law? Arbitral precedents are not binding so sometimes we have to be pragmatic. When making huge long-term investments of billion of dollars, we have to look into international law; we have to make sure that we can anticipate. This is the role of the lawyer when advising a State or a company when drafting a contract or preparing for arbitration. Transactional lawyers increasingly need to look at previous awards as they have to be public, confidential or not. We are always happy to read the doctrine written by professors of international law as well as dissenting opinions from arbitrators to build a reliable and sustainable international investment contract.

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Kantor: Except in the largest of contracts between the State and a private party, except in that narrow circumstance of transactional matters, deal lawyers do not think about the development of international law. Since the great majority of cross-border transactions involve private contracts which may, in the end, be the object of State conduct, deal lawyers may think about the application of host State law, particularly of regulatory law. That is probably a failing and I plead guilty to having committed malpractice for decades; now that I teach, I often tell my students they should not make the mistakes that I made. But sadly, the number of transactions where the lawyer and the party, when creating the deal, think about the international legal framework, is extremely small. Voltera: First, I agree with the reference to the second Iraq war: the international community, in terms of the State actors, were unanimous that no conflict could be initiated without authorization under Chapter 7 of the UN Charter. There was some difference on whether that authorization had in fact been given already by virtue of the existing resolutions or if something new was required; that was the debate, not whether the use of force was justifiable other than under Chapter 7. The second point is that arbitrators in these investment treaty cases do not have to worry about creating international law because they cannot. Looking at Article 38 of the International Court of Justice Statute, it is very clear there are three sources of international law: treaties, custom and general principles. Decisions of international courts and tribunals are a subsidiary means to accurately and correctly identify existing norms of international law. Such decisions are in Article 38 on a par with the writings of leading scholars which are equally not sources of law in and of themselves; they are subsidiary means of determining what the law actually is and that is quite significant. We should not be worried about investment treaty tribunals creating law, because they can no more create law than can the writing of an eminent law professor. Male: If you look at the jurisprudence of investment tribunals, what is at the basis of most decisions? This is possibly previous investment decisions as well as sometimes the writings of scholars. So they are not creating any law as such, but the value of decisions by investment tribunals is quite high. Investment tribunals are supposed to settle disputes but at the same time, even if you take the parties as the only interlocutors of the tribunal, the tribunals have to talk to the parties in the light of what has been developed before and current. In fact, the parties themselves heavily rely on that broader development and for tribunals to ignore that would clearly undermine their function in the eyes of the parties, let alone the

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broader community. It is too easy to say, they cannot create law as there is no binding precedent. If you look at the actual reality of things, it is a little bit more. Voltera: Has the recent Slovenian case changed centuries of public international law in relation to the law of treaties? Has it all of a sudden created a new international law that says a tribunal can retroactively, on its own initiative, reinterpret a treaty and insert words that were not inserted there? It is quite an abomination and it has not created international law as such. I presume it will be challenged and overturned by a national court, but one never knows what the outcome will be. Male: Probably that decision has no value but many others do have great value. Voltera: They have value because they have correctly ascertained the international law according to Article 38. Desta: There is a semantic issue here as in formal terms Article 38 clearly says that writings of eminent publicists and judicial decisions are subsidiary evidence of where to find the law rather than making the law. I have never seen any international arbitration award, WTO report or ICJ decision that does not refer extensively to previous decisions as they should in the context of confidence building concerning the decision-making process. At the end of the day, there are disputes because there is uncertainty about the meaning of the law, otherwise, we would be doing administration rather than law. So given that uncertainty, does the way arbitrators are interpreting these things not matter to our understanding of what the law is, even if they are not creating it? While they are deciding a case, they are also indirectly contributing to international law and therefore, there is a certain level of responsibility on the shoulders of every arbitrator. Male: This last observation really captures the essence of the role of decisions in developing international law and bilateral investment treaty interpretation. Although you are technically describing Article 38 correctly, if you want to ascertain the content of public international law and open a textbook on public international law, the bulk of the discussion will be on decisions of the ICJ and comparable bodies; it will not be on the work of scholars. Nowadays development of the law is generally case-driven. ICJ decisions do not have stare decisis effect, but in terms of international law, they are treated that way de facto.

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One of the great historical heresies that we were always taught is the ‘great man’ theory that individuals can come onto the world stage and change things. One thing that the convergence debate teaches us is that individuals and personalities do count. In bilateral investment treaty law, one of the reasons why ICJ jurisprudence and public international law are making more of an appearance in arbitral awards is because people are appointing public international lawyers to the tribunal. In a bygone era, investment arbitration people might think of the Holiday Inn v. Morocco case as the first case in history relating to international investment law whereas now, as a result of the broader base of individuals who appear before tribunals, we have a broader perspective. The reason is that when you have a public international lawyer on your tribunal, you say to yourself, as every practitioner does, “well, I better cite some public international law cases”—then you have to read such cases and so you become educated. The best example I can think of is the CMS annulment decision with regard to necessity. One of the people on that tribunal was James Crawford who is a practitioner and an arbitrator who straddles both public international law and bilateral investment treaty law. I really think his presence on that tribunal accounts for the fact that there was a convergence in the analysis of necessity as a public international law doctrine under the draft articles on State responsibility and the role of that doctrine in bilateral investment treaties. A lot of people in the commercial field would never have connected the two, but for the fact that there was somebody on the tribunal who understood both systems and was able to merge them in his own jurisprudence. Cheng: As to the apparent false distinction between disagreeing on rules and disagreeing on interpretation, let me offer a simple thought experiment. We can all agree that the sky is blue, but if you interpret blue to mean blue and I interpret blue to mean anything between blue and magenta, is that so different than disagreeing that the sky is blue versus the sky is pink? So this notion of “it is down to how we all read law” is best characterised by what two friends of mine who work in foreign ministries have characterized as “legalish”. Nappert: What was described as a way of thinking about international law, that rigid Article 38 hierarchical way, is precisely the reason why we have fragmentation. The better view is to take a more fluid look at international law where you consider sources of international law as a dynamic force, moving with time.

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Hober: Let’s move on to the two remaining topics. If you recall, the second issue was the practice of international law: who is actually practicing international economic law today? We will combine that for reasons of timing with the third topic which is, in general terms, the role of States in dispute settlement. Should States become more active or should this be left, as is largely the case now, to private dispute settlement? Desta: When reading the Waste Management award, I was struck by how the tribunal interpreted the fair and equitable treatment standard. Jurisprudence is now broadening this area of international investment law, using international arbitration as a global judicial or administrative review mechanism. If I was part of a developing country government, knowing how this is being developed, would I ever enter into a bilateral investment treaty with this kind of clause? This would mean that I could be subjected to judicial review in terms of due process, the arbitrariness of the process, and so on. In particular, could any measure pass such scrutiny in many of the poorest countries? What are the development implications of this, especially in countries where the wrongs are being done not because of choice but because of complete ignorance or lack of capacity? Ortino: The second topic actually continues some of the previous discussion in terms of the profile of the perfect arbitrator or the perfect investment practitioner. The beauty of investment arbitration is the variety of the people involved in it. If you look at for example the WTO system, you see a permanent institution. Investment arbitration carries certain benefits, one of which is the plurality of views that are brought to the community by the fact that arbitrators are chosen by the parties from a plurality of different backgrounds. This is reflected in the different arguments made before investment tribunals and by the reasoning of the tribunals themselves. This is a positive feature which goes in the direction of facilitating convergence. The question is whether there could be an excessive plurality? The fact that arbitrators come from different backgrounds and have different conceptions may also allow for misunderstandings concerning legal concepts. This could undermine the coherence and certainty which is an important value of the whole system. I would opt for the Thomas Wälde feature that is an expert on a multiplicity of fields that will in the long run be beneficial to the system. Kantor: I see increased fragmentation, diversification and enormous centrifugal force in the practice of international economic law concerning what Robert referred to as “inexperienced, unqualified advocates providing inadequate representation” which I would characterize more neutrally

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as “new entrants into this market”. Let’s look at some of the underlying economic demographics. Between the ICC’s establishment in 1923 and 1976, there was a grand total of about 3,000 international commercial arbitration cases. Between 1976 and 1987, that aggregate number doubled; it went to 6,000. Between 1987 and 2001, it practically doubled yet again; 11,400 aggregate cases. Right now on average there are 600 to 700 cases a year in the ICC, which means it will more than double again in a decade. There is a dramatic increase in demand but limited supply of lawyers, the 20 U.S. law firms have the top 10 international arbitration practices in the U.S.; the 15 solicitors’ and barristers’ chambers in the U.K. have the top five practices in the U.K.; same concept in Frankfurt, Paris, Geneva and Zurich. They do not have the capacity to grapple with that dramatic growth although new entrants also seize the opportunities. The same development takes place in investment treaty arbitration: in 1994, there were one or two cases a year; since 2007–2008, there have been 30 to 40 cases. Unsurprising, there is a very large number of new entrants into the market and not just in terms of law firms. Every practicing lawyer in this room recognizes the new attractive markets, the business opportunities in Brazil, China, India, not only in the U.S., France, Germany, U.K., Belgium, the Netherlands—as a result of globalization. Not only do we have new entrants in terms of individuals but we are seeing dramatic changes in conceptions of how to operate a formal dispute resolution system. Surely, no one would say my friends in Brazil apply it the same way as my friends in the U.K. The impact of U.S. domestic litigators on the international arbitration system has created this oft-discussed Americanization. Concerning the third point, I expect a continuation of dramatic differences in views on the role of the State in our daily business lives because the process of globalization and market changes will lead to greater diversity rather than greater convergence. Voltera: There is obviously no monopoly on intelligence and eloquence; neither is there a monopoly on an ability to profoundly know and understand public international law. There may be an imbalance of representation and therefore the investment treaty arbitration as a judicial review process may be structurally flawed in certain respects. One of such respects relates particularly to developing countries’ capacity to be represented. It does not mean that new market entrants cannot learn the substantive law and then be effective players in the market, but it is slightly different from the commercial arbitration world. If one was to generalize at a very abstract level, most commercial arbitrations revolve around a particular question of a breach of contract under some national legal system. Either the lawyers and the tribunal know the national legal system and therefore

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understand the law, or experts are brought in to describe what the parameters of the domestic law are. The remainder revolves around factual and evidentiary disputes. Investment treaty arbitrations are different because they are always dealing with public international law. These treaties are bilateral codifications of existing international law with some textual variations and the remarkable novelty lies in the dispute resolution mechanism that enables private action under international law. The substance, the procedure, everything pertains to applicable international law and the system is not well-served by market entrants who have not educated themselves sufficiently. It is one thing to become educated in an area of law and then begin practicing it, it is another to learn a substantive area of law along the way—and that is what is happening. It is not good for the clients of that sort of lawyer; it is not good for investment arbitration; it is not good for public international law and it is a challenge for the system which will not go away lightly or quickly. To do commercial arbitration, you need to learn the rules and procedures of the ICC, the LCIA or similar. There is no substantive body of commercial arbitration law which is very different from public international law. Voltera: If there was an effective compulsory bar society for public international law, like there is for the New York Bar, the Law Society of England or the Barreau de Paris, there would be a different approach by practitioners to undertaking these cases. There would be substantive legal requirements; for almost every area of practice you have to have some kind of qualification; you cannot practice New York law unless you get called to the Bar in New York. So there is a minimum quality control by the regulating body; in public international law there is no such thing at all. Weiler: There is a small community of people who try to keep up with both investment law cases and WTO dispute settlement cases. The costs awards in the EDF case and the Plama v. Bulgaria case resemble a contract lawyer interpreting a treaty while paying only lip service to Article 38 and the applicable rules of treaty interpretation. Will the arbitrator class change over time due to the expertise that is available to intelligent people who will service arbitrations in the future? Some investment cases are very trade law-oriented or human rights-related, which I would see as a false dichotomies. As the older arbitrators die off or retire, will the old guard be replaced with a new guard which might not just consist of arbitration lawyers? If you had a big commercial dispute, would you not go to someone who has a very good grounding and understanding of public international law?

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Desta: The jurisprudence has a much more developed understanding of national treatment, for example under the NAFTA or other investment treaties. Whenever national treatment issues arise, parties or their lawyers are very keen to bring jurisprudence into the argument, giving it their own spin to support their views. Initially in the NAFTA contracts, there was quite a lot of weight given to jurisprudence but gradually it seems to be moving away from that. Male: If you look at the Continental case and the decisions that have been cited there, close to half of them are from the WTO. Investment jurisprudence does not have the same impact within the WTO so it is a confirmation of my initial remarks that the investment arbitration system is much more open to this type of interaction. If you were thinking of the ideal arbitrator, it would probably be somebody who has those different credentials and expertise. Coop: This false dichotomy is a real issue in terms of international investment law on the one hand and trade law on the other; I have tried to explain to a trade lawyer from the European Commission why in a model agreement for cross-border patent projects, you need to have stability for at least 15, if not 20 or 25 years. In trade law, countries can change the trade policy every year so what does it matter if they do it with an agreement? There is a communication gap sometimes, but this is all the more reason why access to the international bar should not be regimented; we all have a lot to learn from one another. During my years in private practice I have seen that even very experienced practitioners said “I cannot make this argument against this opponent because this is not worth my future prospects of obtaining work from this opponent”. Open access to the International Bar, even though it carries the risk of bringing in a few incompetent or under-qualified people, is the best guarantee against nepotism.

APPENDIX F Closing Remarks from Philip Andrews-Speed We have had a wonderful one-and-a-half day of exploring and furthering Thomas’ life work in this field and even as a non-lawyer, I have seen that we have been taking the subject to and beyond the cutting edge. I am very grateful that all of you have taken time out of your busy lives to come here. Thomas’ work was not just about research and thinking, it was about capacity building which is a virtual legacy that will be continued. There is also a physical legacy: the Centre in Dundee produces men and women that will lead developments in these fields across the world. We have just admitted 120 master students from 40 nationalities. We run five courses relating to dispute resolution and arbitration. Kaj will be taking leadership of our activities for students in addition to the seminars that we run for public participation. Courses refer to regulation, governance, business transactions, human rights, climate change and social responsibility. For example, Charles McPherson from the IMF is lecturing on extractive industries revenue management. We want to build in development economics so where the Centre started with the conventional regulation of resources extraction, we are coming to a full cycle in terms of what this means for the people on the ground. We have an initiative that we placed before the International Energy Forum to cooperate in the establishment of a focal point for mutual understanding between officials in energy departments around the world. Our agenda is not limited to what we do in Dundee. We are continuing Thomas’ legacy to build the ‘Thomas Wälde Renaissance man’ through all our courses in interdisciplinary law, economics, business, politics as well as social conscience. In his will Thomas left a significant amount of money to the Centre for the establishment of a Ph.D. scholarship in international economic law. This is an endowment in perpetuity but it does not cover the full cost of the scholarship, so we will very soon be seeking assistance in topping this up. There will be different modes for people to donate and we hope you will ask your law firms or employers to do the same. This is an important tribute to Thomas and a concretization of capacity building as a key to the future. You are part of a very limited charter and with the number of ongoing investments and disputes; we need a hundred times the people that we have today. A very important thank you goes to Todd who encouraged you to attend this symposium, who constructed a great agenda and who organised the platform for this wonderful occasion. Todd’s work has only just begun because

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he has the book to edit. I would also like to thank the chairs, those who took part in the panels and all of you for taking time off work to come here. A number of themes have arisen that we might seek to follow up on in some kind of formal or informal debating chamber in the future. We already have seminars on dispute resolution that we will develop as an immediate research and seminar agenda. This was a wonderful symposium as a tribute to Thomas and a great intellectual experience; this is not an end point but a starting point to trigger new ideas. It is very easy to travel to Dundee so if you are coming to the UK and have a bit of time, let us know. We would be delighted to offer you the opportunity of fitting in a 45–minute talk to one of our classes or more. If you are in the arbitral dispute resolution field, then do feel free to contact Kai. You are part of the real virtual community that Thomas has built up and which we would like to continue.

INDEX 1154 Agreement between King Henry II and the Merchants of Cologne 338 1496 Intercursus Magnus Treaty 338 1641 Treaty of Truce and Commerce between the Portuguese Crown and the Republic of the United Netherlands 341 1696 Treaty between Great Britain and the Netherlands 000 1794 Jay Treaty 343 1831 USA-Mexico Treaty 348 1844 USA-China Treaty 348 1867 USA-Nicaragua Treaty 348 1870 USA-San Salvador Treaty 348 1871 USA-Orange Free State Treaty 348 1882 USA-Korea Treaty 348 1887 USA-Peru Treaty 348 1894 Japan-Great Britain Agreement 349 1894 USA-Japan Treaty 348 1909 Sweden-China Agreement 349 1914 Netherlands-Norway Agreement 350 1920 USA-Siam Treaty 348 1929 Harvard Draft on the Codification of International Law 352 1934 Reciprocal Trade Agreements Act 347 1959 Treaty between Germany and Pakistan 365 1961 Harvard Draft 362 2004 U.S. Model BIT 124, 288, 322 2005 Comprehensive Economic Cooperation Agreement (India and Singapore) 124 2010 Public Statement 109 n. 8, 117 n. 32, 123–124, 125 n. 58 Abs-Shawcross Draft 361–362, 378 Abuse of rights 336, 375 Academic Draft Common Frame Reference (DCFR) 51 Access restrictions 512 Ad hoc tribunals 22, 479 Administrative law Canada Inherent jurisdiction 546 Absence of administrative law code or administrative law judges 554

International judicial review 542, 544, 551 See also International judicial review 542, 544, 551 United States Administrative law code 555 Constitutional separation of powers theory 555 Agreement on Trade-Related Investment Measures (TRIMs) 191 Alien Tort Statute 408 Alternative Dispute Resolution (ADR) Arbitration 283 n. 59 Conciliation 293 n. 41 Mediation See also Mediation 285 Alternative energy systems Britain Mont Saint-Michel 502 Wind turbines 484, 502 Israel Solar energy for residential heating 502 United States South Dakota Lakota Sioux Indian Reservation 502 Single wind turbine 502 Massachusetts Cape Wind Project 502–503 Martha Vineyard Island 502 Wind turbines 484, 502 Scotland Wind turbines 502 Wind power 484 American Restatement of the Law of Contracts 104 Amicus curiae briefs 13, 20, 406 n. 92 Andean Pact 179 n. 2, 188 Annulment proceedings ICSID annulment proceedings 317 Appointment of arbitrators Institutionally appointed arbitrators 531 Party-appointed arbitrators 530 Sole arbitrator 528, 531 Arbitration See BIT arbitration See Commercial arbitration See International investment arbitration

578

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Arbitrators Qualifications 35–37, 42 Reasoning 38–39, 42–43, 134 n. 87 Argentina Financial crisis 280 Argentina-United Kingdom BIT 468, 477 Argentina-US BIT 468, 476 ASEAN Comprehensive Investment Agreement 251 Association of International Petroleum Negotiators (AIPN) iv, 308 Association for the Protection and Promotion of Investments 359, 361 Asymmetric relations 11 n. 36, 12, 22 Autonomous transnational commercial legal system 90 Bali Action Plan 258 Bilateral investment treaties (BITs) Economic arrangements 118, 121, 140, 146 Legitimacy crisis 107, 109–110, 114, 116, 128, 148 See also Legitimacy crisis 40 n. 62, 112–113 Standard of review 130 Bilateralism Anarchy-ordering international law 143 Grand project 143 Global law 135, 143 Network 143–144 Single multilateral treaty 144 Binary paradigm 139 BIT arbitration Adversarial process 000 Binary process 134 Binary system 135 Consensual approach 135 Imagery 107, 117, 120, 137, 139 Informal method 135 International investment arbitration 109 n. 8 See also International investment arbitration 4, 9 n. 27, 13 n. 43, 14 n. 47, 21, 29 n. 25–26, 31 n. 38, 40 n. 65, 309 n. 1, 327 n. 115, 329, 423 n. 45, 439, 450 n. 45, 469 n. 108, 477 n. 153, 557, 566 Legitimacy crisis 107, 109–110, 112–114, 116, 128, 147–148 See also Legitimacy crisis 40, 318 Negotiation 123, 136 Standard of review 130 BIT awards Inconsistencies and contradictions 114 Breast milk substitutes 187 n. 29, 234 n. 38, 392 n. 38

Bribery 8, 18, 224 n. 5, 226 n. 8, 238, 451 n. 46 See also Corruption 18, 39, 116, 213, 218, 226, 270, 328–329, 386–387, 410, 420 n. 36, 491, 513, 529 CAFTA 331, 538 Calvo doctrine 277 n. 11, 281, 370–372, 375 Canadian Model BIT 536 Charter of Economic Rights and Duties of States (CERDS) 371, 373–375 Choice-of-law-rules 72 Climate change Barrier of cost 259 Economic theory 257–258 Government onus 260, 274 Greenhouse gas emissions 257, 260 International response 28 Sustainable development 257 Global energy technology revolution Key technologies 261 Center for Transnational Law (CENTRAL) 80 Creeping codification Arbitral procedures 83 Comparative research 82–83, 94, 98 Digests of common law 82 Evolution 81–85, 98 List of principles and rules 82, 84 Lex mercatoria 45 n. 1, 55, 79 n. 2, 80–81, 85 See also Lex mercatoria xiii, 45, 49 n. 6, 55, 56 n. 34, 58 n. 44, 64 n. 60, 72, 83 n. 20, 86 n. 29, 87 n. 40, 87 n. 45, 87 n. 47, 88 n. 48, 90 n. 60, 90 n. 63, 92 n. 74, 94, 95 n. 95, 96–97, 98 n. 112, 98 n. 113, 99 n. 117, 100 n. 122, 100 n. 123, 101 n. 125, 101 n. 126, 101 n. 127, 393 New Lex Mercatoria (NLM) 79 n. 3, 81 See also New Lex Mercatoria (NLM) 55 n. 26, 75 n. 89, 79, 81, 85, 87 n. 44, 89, 93, 102, 106 Open-ended character 95 Scope 101 Sources 55, 82 TransLex ‘www.trans-lex.org’ 80, 98 See also TransLex ‘www.trans-lex.org’ 80, 88, 98, 100, 102 TransLex principles 80, 98 See also TransLex principles 55, 79–80, 88, 98–99, 101–106, 106, Codes of conduct Civil law approach 52–54, 56 Common law approach 52–54

index Hard law versus soft law 385–386, 389, 391, 406, 427, 513 Lack of consistency versus flexibility 388 Sub-contractor liability 396–399 See also vicarious liability 397–398 Validity of soft law 393 Voluntariness 000 Comparative public law Comparative methodology 95–96 Cross-regime comparison 478 Functional comparative method 96 Commercial arbitration Commercial principles Party autonomy 25, 552 Equality 552 Private dispute settlement 23, 34, 545 Public dispute settlement 13 Commercial treaty practice Legal equality 339, 345 Unequal treaties 346, United States commercial treaties 348 n. 52 Commission on a World Investment Code 358–360, 361 n. 100, 367 n. 118 Common Frame of Reference (CFR) 51, 57 n. 36 Compensation Monetary compensation 168 n. 51, 323, 325, 490 Non-monetary damages 323, 325 Conflict of laws 76, 84, 103, 129 n. 70 Conflict resolution mechanisms Alternative Dispute Resolution (ADR) 283 n. 59, 285, 293 n. 41 See also Alternative Dispute Resolution (ADR) 283 n. 59, 285, 293 n. 41 BIT arbitration 34 See also BIT arbitration 34, 107–111, 113–118, 122–130, 132, 134, 136–139, 140 n. 105, 143, 148, 150 Commercial arbitration 25–26, 34–35, 42 See also Commercial arbitration 13, 14, 22, 24–26, 29, 34–39, 41–42, 45 n. 1, 46, 64 n. 60, 66, 72 n. 80, 78, 81 n. 9, 82, 83, 87–88, 89 n. 66, 98 n. 113, 103, 169, 188 n. 34, 201, 285 n. 83, 405 n. 90, 531, 544–546, 548, 551, 554, 557, 571–572 Dispute resolution 132, 275, 281, 282, 285, 289, 293 n. 141, 343, ICSID 282, 363 See also ICSID iv, 13, 18, 19, 29, 125, 134, 251, 278, 280–282, 285, 288, 301, 312, 317, 328, 363, 550, 553 International Chamber of Commerce (ICC)

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See also International Chamber of Commerce (ICC) 18, 46, 47, 64, 87 n. 47, 238 n. 54, 243 n. 67, 251, 278, 352, 442 International investment arbitration See also International investment arbitration 4, 9 n. 27, 13 n. 43, 14 n. 47, 21, 29 n. 25, 29 n. 26, 30 n. 38, 40 n. 65, 109 n. 8, 309 n. 1, 327 n. 115, 329, 423 n. 45, 439, 449 n. 45, 469 n. 108, 477 n. 153, 557, 566 Mediation See also Mediation Negotiated settlements 200, 206 UNCITRAL 46, 48, 251, 278, 287, 294, 297, 330, 550–551 Confidentiality 14, 25, 29, 284, 288, 297, 529 Consent to arbitrate 530 Consideration 14, 21, 32, 37, 56–57, 61–62, 69–70, 83, 87, 91, 105 n. 138, 142, 168, 170, 179 n. 2, 180, 184, 195 n. 58, 197, 210, 231, 241–243, 250, 256, 272, 278, 321, 323, 330, 335, 352, 357, 361, 377, 399, 414, 427, 430, 434, 437, 440, 443 n. 19, 446, 450–452, 470 n. 116, 486, 490, 493, 506, 519, 521, 528, 550, 559, 565 Consumer protection 56, 75, 187, 270 Convention on Contracts for the International Sale of Goods 46, 48 Convention on the Law Applicable to Contractual Obligations (Rome Convention) 65, 70 n. 74, 71 n. 78 See also European Regulation on the Law Applicable to Contractual Obligations (Rome I) 65 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (See ICSID Convention) 13 n. 43, 188 n. 34, 276 n. 2, 278, 283 n. 66 Convergence of international law (international unity) 557, 560 See also fragmentation 557, 560 Conventionality Thesis 427, 429 Copenhagen Climate Conference 258 Copenhagen Accord 252, 258, Confidentiality See also Transparency 14 n. 47, 29 n. 25, 297 Constitutional law 42, 320 n. 67 Constitutionalisation Decentralization 447 Nuclei model versus constiutionalisation model 445, 446, 449

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Corporate accountability (See Corporate governance) Corporate behaviour (See Corporate governance) Corporate governance Accountability 228–229 Codes of conduct See also Codes of conduct 45, 187, 234, 252, 274, 386–391, 393–400, 402, 409 Due diligence See also Due diligence 516 Duty of care 517 Good corporate citizenship 228 Good governance See also Good governance 115, 150, 309–310, 312–313, 320–321, 323, 332–333, 446, 487–489 Human dignity 233, 336 n. 2, 414–415, 417–418, 422, 432, 435, 438, 514 Human rights 226–228, 239–240, 519 See also Human rights Human rights due diligence 240–241, 515–517 International corporate social responsibility 223, 233 See also International corporate social responsibility (ICSR) 224 Law makers 230, 435, 560 Reasonable foreseeability of harm 242 Responsibility to respect human rights 228, 239, 241 n. 63, 402, 521 Shareholder value approach 228, 241 Social contract 233 Corporate social responsibility (CSR) (See Corporate Governance) Corruption 18, 39, 116, 213, 218, 226, 270, 328–329, 386–387, 410, 420, 491, 513, 529 Czech-Netherlands BIT 496–497 Damages 26–27, 49, 59, 87, 165, 170, 175–176, 323–324, 397, 401, 442, 449, 458, 474, 487, 489–490, 546, 553 De-nationalisation 80 Denial of justice 000 Access to courts 000 Administration of justice 38 n. 57, 342, 462–463 Fair and equitable treatment 316 n. 40, 316 n. 41, 523 See also Fair and equitable treatment Gross misapplication of the law 454 Judicial finality 459 Local remedies 136 n. 92, 351, 450 n. 45, 460, 477 n. 154 Minimum standard of treatment 455

See also Minimum standard of treatment 30, 317 n. 47, 318 n. 49, 320, 335–337, 372, 453, 455, 457, 490 Retrospective application of the law 90, 454 Statutory immunity 456–457 Undue delay 463, 466 Depoliticization 279 De Re Metalica 1556 485 [check spelling] Developing countries 15, 111, 120, 137, 154, 180–182, 185–196, 200, 204, 206, 208, 234, 237, 248–249, 263, 276, 306–307, 326, 366, 369, 389–390, 408, 505, 507, 537, 553, 571 Developed countries xvi, 15, 116, 121 n. 44, 137, 144 n. 117, 181–182, 185–186, 188–189, 191–194, 196–198, 232, 258, 365, 369 Diplomatic protection Treaty system 337, 565 Discrimination (See Non-discrimination) Dispute Prevention Policies (DPP) 275, 289 Dissenting opinions 316, 529, 566 Doctrine of autonomous interpretation 67 Doctrine of misrepresentation 54 Doctrine of necessity 466, 468–469, 471 See also Necessity Draft Articles on the Responsibility of States for Internationally Wrongful Acts 469 Draft Common Frame of Reference (DCFR) 51–52, 56 Due diligence Internal self-regulatory versus mandatory regulation Negligence Duty of care 242 Liability 240–241, 405, 517 Due process of law 349, 456, 485 Dworkin, Ronald 426–427, 429, 432–434, 437, 558 ECHR see European Convention on Human Rights 6 Economic Agreement of Bogotá 356 Economic Conference of the Organisation of American States 358 Economic development 248 n. 10, 257 n. 38, 269 n. 82, 270 n. 85, 275–276, 278, 280, 348, 356 n. 82, 359, 456, 505, 522 Economic view Bilateral Investment Treaties (BITs) 118 n. 34, 119 nn. 36–37, 121 n. 41 See also Bilateral investment treaties (BITs) 5 n. 3, 6 n. 4, 20, 27, 107–108, 111 nn. 10–11, 116 n. 30, 117, 32, 126 n. 58, 140 n. 105,

index 146–147 n. 122, 148, 186, 193 n. 52, 250, 253 n. 29, 277, 318 n. 53, 363, 369 n. 126, 370 n. 128, 378, 428, 455, 485, 493, 495, 569 BIT arbitration 122 See also BIT arbitration 34, 107–111, 113–118, 122–130, 132, 134, 136–140 n. 105, 143, 148, 150 Inconsistent interpretation 000 Legitimacy crisis (???) See also Legitimacy crisis 40, 318 Static view 121–122 Ecuador Commercial mediations 290–291, 294, 300 Energy and natural resources Alternative energy systems 484 See also alternative energy system 501 Balance between environmental protection and resource development 485 Energy and mineral sectors 483–484 Coal 484 Copper 484 Energy 483–485 Exploration and development sectors 484 Fossil fuels 484 Mineral 484 Natural gas 484 Oil and gas 484 Silver 484 Predictability 486 Transparency 486 See also Transparency 14 n. 47, 17–19 n. 69, 20–22, 29 nn. 25–26, 30, 88, 105, 131, 240, 249, 252, 270, 281, 297–298 n. 164, 299, 300, 308, 313, 320, 326, 330, 386, 406, 408, 486, 488–490, 492, 516–517, 535, 551, Energy Charter Treaty (ECT) Establishment stage 505 Pre-investment stage 509 Energy industry Globalization 252, 492 Liberalization 245, 247–250 Independent power producers (IPP) 249 Effect of international ‘soft law’ 249 Energy investment decision making process Basic legal expectations 268–269 Importance of probity 270 No universal standards 267 Requirements of financeability Completion risk 271–272 Credit support 271–272

581

Currency risk 271–273 Risk of change of law 270–271, 273 Energy market structures Competitive markets 492, 494 Global energy markets Price-establishing mechanism 492 Price transparency 492 Predictability 492 Rolling markets versus mature markets 493–494 Energy sector 245, 253 n. 30, 257, 263, 264 n. 63, 265, 267, 274, 386 n. 13, 387 n. 18, 388, 391–392, 485, Energy security concerns Energy supply disruption 248, 254 Enforcement and recognition of settlements New York Convention 70, 529, 549–551 Entry stage 11, 22 Environmental protection 14, 22, 234, 255–256, 397, 490, 484–485, 511, 561 Environmental standards 255–256, 505, 516 Equator Principles 252, 393, 446 Equitable remedies Promissory estoppel 62, 92 Unjust enrichment 72, 103 Erga omne 12, 447 European Commission (EC) Margin of discretion 499 European Commission on Human Rights 459 European Convention on Human Rights 6 n. 5, 9 n. 25, 407, 454–455 European Court of Human Rights Access to justice 341, 554 Expropriation 10, 332 See also Expropriation Margin of appreciation 10, 472, 476, 479 Moral damages 449 Proportionality 449, 450 European Court of Justice 52, 443, 496, 498, 544 European Regulation on the Law Applicable to Contractual Obligations (Rome I) 65 European Union (EU) iv, 51, 192, 252, 258, 314, 318, 444, 474, 495, 500, 506 European Union Law Extra-EU BITs versus intra-EU BITs 495 Free movement of capital 497–499 Relationship between intra-EU BITs and European law 497 Evidence Evidentiary privilege 535 Illegally obtained evidence 532–533 State secrets 534–535

582

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Ex aequo et bono 548 Exhaustion of local remedies 351, 450 n. 45, 477 n. 154 Expropriation Conditions 74, 277, 367–368 Direct expropriation 31, 125 n. 55 Indirect expropriation 31, 33, 36 n. 52, 117, 122, 123 n. 47, 123 n. 48, 124, 125 n. 55, 247, 321, 70, 327 n. 115 Regulatory expropriation 511 Extractive Industries Transparency Initiative (EITI) 252 Exxon US Oil Industry Code 543 Fair and equitable treatment Legitimate expectations 321, 428 See also Legitimate expectations Minimum standard of treatment 30, 317 n. 47, 318 n. 49 See also Minimum standard of treatment Good faith 368 See also Good faith Transparency 326 n. 110–111 See also Transparency Rule of law 319–320 See also Rule of Law Fiduciary obligations Good faith 54 See also Good faith First Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) 245 Force majeure 68–69, 84 n. 23, 87 n. 39, 88, 103, 467 n. 99, 478 Foreign direct investment (FDI) Balance of costs and benefits 183–184 Foreign investment 118 n. 34, 119–120, 186, 278–279, 281 n. 42 See also Foreign investment Foreign investment Capital flow 119 Investment flow 119 Mid-tier risks 246 Traditional risks 246 Foreign investor Rights 233 Prioritisation 230 Legitimate expectations 321 Social licence to operate 231 Fourth Anglo-Dutch War (1780–1784) 340 Fragmentation Of international investment law 27, 318 Constitutionalisation 445 See also Constitutionalisation

Inter-nuclei communication model 452–453, 456–459, 461, 466, 480 Specialization 441 Of legal theories 441 Types of fragmentation Fragmentation of venues of decision-making 558 Fragmentation of jurisprudence 558 Fragmentation of substantive principles 558 Fraser Island Case (Murphyores v Commonwealth of Australia, 1976) 255 Free trade agreements (FTA) (See International Investment Agreements (IIAs)) Friendship, Commerce and Navigation Treaties US/Nicaragua FCN Treaty of 1956 144 Full protection and security 31, 278 n. 15, 317 n. 47, 319, 346, 349, 369 n. 122, 454 n. 58, 456–457, 523 General Agreement on Trade in Services (GATS) 191 General Agreement on Tariffs and Trade (GATT) 260 n. 55, 360, 363, 442, 444 n. 21, 474 n. 137 General principles of law Dolo agit, qui petit, quod statim redditurus est 92 Clausula rebus sic stantibus 93 Genetic function 94 Good faith 91, 93 See also Good faith Pact sunt servanda 311 n. 9 Promissory estoppel 92 Role 91, 93 Venire contra factum proprium 92–93 Volenti non fit iniuria 92 Geneva-based Association for the Protection and Promotion of Investments 359, 361 Genocide Convention 419–420, 422 German arbitration German civil code 526 German judicial system 526 Germany-Czech BIT 497 Germany-Greece BIT 507 Germany-Portugal BIT 507 Globalisation 8 n. 18, 80, 223 n. 1, 233, 235, 401, 562 Global administrative law 128–129 Global civilization 145–146 Global Compact Initiative 387 Global financial crisis (GFC) Causes of the GFC 264 Immediate effects of the GFC 264

index Long-term significance of the GFC 266 Pre-GFC situation Capital resources 264 Demand growth 263 Environmental issues 263 Growth in energy intensity 263 Investment needs 263 Savings rates 263 Guidelines on the Treatment of Foreign Direct Investment 192, 253, 276, 328 Good commercial practice 52, 56 n. 33, 57, 75 Good governance Good faith 313, 320, 489 See also Good faith Legitimate expectations 313, 320–321, 488 See also Legitimate expectations Non-discrimination 313, 488 See also Non-discrimination Predictability and stability 40–41 Procedural fairness 313 Proportionality 313 Transparency 313, 320, 488–489 See also Transparency Good faith 50 n. 11, 53–59, 61–63, 67, 76, 88, 89 n. 53, 91–94, 103, 124, 226, 313, 320, 335, 339–341, 368, 372, 375–376, 378, 390, 450, 489, 518, 538 Governing law 23 n. 2, 35, 36 n. 52, 46–51, 54 n. 24, 58 n. 43, 59–60, 63–69, 71–77, 96 Government (See Host State) Greenpeace rules for international investment 543 Gross domestic product (GDP) 202, 235 n. 43, 263, 511 Harmonisation Harmonisation of legal traditions 49 Convergence between civil law and common law contract law 52 Hart, H.L.A. 447 n. 33 Havana Charter for an International Trade Organization 183, 356 n. 79 Host State Discretion 251, 341, 465, 487 Foreign direct investment 276–277, 278 n. 14, 278 n. 16, 279, 281 n. 44, 282 See also Foreign direct investment Government onus 260, 274 Policy space 147 n. 122 Responsibilities 128, 231 Right to regulate 123–124, 375, 511 Human rights Corporate governance 225–228, 239, 241, 517, 519 See also Corporate Governance

583 Applicability of human rights jurisprudence in international investment law 316 n. 40 Distinct functions of investment tribunals and human rights organs Public versus private divide 11 n. 35, 12 n. 37 Institutional features of human rights and investment law 12 Enforcement of human rights obligations Politics of shame 14 Similar approach of investment tribunals and human rights organs 17, 21–22 Public private interest balancing 125 n. 54 Human Rights Council 228, 384, 404, 514, 520 Human Rights Commission 238, 514, 521 Human rights instruments European Convention on Human Rights 6, 9, 407, 454–455 International Covenant on Civil and Political Rights 460 United Nations Charter (UN Charter) 7, 167, 430, 567 Human rights tribunals European Court of Human Rights 22, 559 Inter-American Court of Human Rights 559 South African Development Community Tribunal 16

ICSID Convention 13, 23 n. 2, 28 nn. 19–20, 29 n. 27, 36 n. 51, 36 n. 51, 37, 38 n. 57, 130 n. 75, 220, 278, 279 n. 28, 301, 331 n. 142, 363, 375, 554 ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy Tripartite framework on business and human rights 383, 384, 400 Principles Duty to protect 240, 401, 516–517, 519–520 Duty to respect 228 n. 16, 516–520, 524 Duty to remedy 519 Remedies 49, 54, 57, 175, 228, 238, 240, 244, 310, 323–333, 403, 406–408, 450 n. 45, 474, 477 n. 154, 490, 514, 516, 520–521 Responsibility of corporations 401 State responsibility 8, 21, 118 n. 33, 133 n. 35, 138, 336, 345, 356 n. 81, 357, 362, 377, 446, 453, 466, 469, 471 n. 119, 472, 478, 563, 569 Underlying Interests 184, 197

584

index

Inter-American Court of Human Rights 559 Intergovernmental organizations (IGOs) 153, 223 n. 1 International Association of Providers of (Renewable and Non-Renewable Resource Development Assistance (IAPRDA) 308 International business law (See International investment law) International Center for Settlement of Investment Disputes (ICSID) ICSID Conciliation 283 International Chamber of Commerce (ICC) ICC Dispute Resolution Service (ICC DRS) 286–287 Mediation 199, 275–276, 281–302, 407, 501, 518, 521, 528, 532 See also Mediation International commercial arbitration Inter partes model 13–14, 22 Confidential proceedings 14, 29, 297 Lack of public interest participation 6, 14, 17, 20–22, 27, 211, 239, 297, 311, 318, 375, 451, 513, 518 International Commercial Terms (INCOTERMS) Cross-border delivery of goods 47 Liability for damages to the goods 47 International contract law European contract law Harmonisation of contract law in Europe 63 Principles of European Contract Law (PECL) 50, 104 International Convention for the Mutual Protection of Private Property Rights in Foreign Countries 358 International corporate social responsibility (ICSR) Corporate governance 225–228, 239, 241, 517, 519 See also Corporate governance Soft law instruments Role of international investment agreements 143, 180, 183, 189, 197, 229, 251, 318 n. 51, 370, 443 International Court of Justice (ICJ) 7 n. 9, 38, 41, 140, 148, 364, 443, 445–446, 447 n. 35, 450 n. 45, 456, 468, 476, 477 n. 154, 560, 563, 567 International Covenant on Civil and Political Rights (ICCPR) 460 International Criminal Court 559, 563 International customary law Denial of justice 322, 376, 453–456, 458–464, 466 See also Denial of justice

Minimum standard of treatment 317 n. 47, 318 n. 49, 320, 335–377, 372, 455, 457, 490 See also Minimum standard of treatment Necessity 36, 40, 61, 73, 126, 132, 220, 449, 450, 453, 466–473, 475, 477, 478, 508, 536, 569 See also Necessity International Energy Agency (IEA) 245 n. 3, 246 International Finance Corporation 393 International human rights law (See Human rights) International investment arbitration Competing rights and interests 14, 371 Concerns about independence Issue conflicts 35–36 Inequality of arms 551 Legal reasoning Independent legal research 38 Fact-finding powers 38 Dissenting opinions 556 Precedent 29, 31, 40, 439, 450, 566 See also precedent Qualifications NAFTA qualifications 14 n. 47, 29, 31, 109 ICSID qualifications 9 n. 24, 13–14, 29, 31, 40 n. 64, 469, 471 International investment agreements (IIAs) Impact on international investment law 117 n. 32, 138 n. 100, 197, 251, 318, 326 Soft law 251, 326 International investment law As an external discipline 310, 330, 487–488 Conflict resolution mechanism 277 See also Conflict resolution mechanism Evolution 138 n. 100, 184, 335 Function 42, 333, 335, 337 Good governance 117 n. 32 See also Good governance International investment agreements 250 n. 15, 251 See also International investment agreements Species of administrative law 313, 332 Rule of law 117 n. 33, 312, 332, 488, 490 See also Rule of law International investment regime (See Foreign Investment) International judicial review Compared to domestic administrative law 546 See also administrative law

index Compared to human rights judicial review Canadian Charter of Rights and Freedoms 555 European Convention 555 International Labour Organisation (ILO) Declaration on Fundamental Principles and Rights at Work 387 International Law Commission Draft Articles on State Responsibility 563, 569 International legal theories New Haven School 413 See also New Haven School Policy-oriented jurisprudence 412–413 See also Policy-oriented jurisprudence Positivism 412–413 See also Positivism Value of semantics 428, 433–435 International Law Association Resolution on Transnational Legal Principles 90 International Law Commission (ILC) 357, 440, 454, 468–469, 478 n. 157, 563 International Law Commission’s Special Rapporteur Francisco Garcia-Amador’s Reports 357 International minimum standard of treatment (See Minimum standard of treatment) 320 International Monetary Fund 265 n. 68 Internet Creeping codification 80–85, 87, 95, 97–101 See also Creeping codification Inter-nuclei communication model Fragmentation 439–442, 445–446, 449, 454–455, 468, 479–480 See also Fragmentation Methodological approach 545 Interpretative methods BIT interpretation versus treaty–overarching framework 32 Comparative public law 313 See also Comparative public law Lex specialis derogat generali 7 Lex posterior derogate priori 7 In pari material 33–34 Intentions of the parties 7 Vienna Convention on the Law of Treaties (VCLT) 7, 24, 92, 430, 446, 451, 479, 538 See also Vienna Convention on the Law of Treaties Investor protection (See Foreign investor) 229–230, 325, 478, 490, 497

585

Investor-State arbitration (See Conflict resolution mechanisms) 25, 193, 281, 289, 335, 442–443 Investor-State Dispute Settlement (ISDS) (See Conflict resolution mechanisms) 191, 193, 275, 283, 359, 361, 365, 370, 451 Invisible college 147 Iran-US Claims Tribunal 158–159, 177, 459 ISO 26000 252, 409 Jackson-Vanik Amendment Freedom of immigration 510 Judicial review Due process 250, 570 Arbitrariness 570 Jus cogens See also Peremptory norms 7 See also erga omnes 12 Kelsen, Hans 412 n. 3, 425 Kyoto Protocol 257–258, 385 n. 9 LANDO Commission 97, 104 Lauterpacht, Hersch 339 n. 14, 378 n. 157, 447, 448 n. 38, 450 League of Nations 1927 Guerrero Report 352, 356 Counsel 352 Committee of Experts 352 League of Nations Covenant 352 Legitimacy 35, 82, 95, 112, 114, 117, 194 n. 56, 325, 377, 452, 476 n. 145, 490, 504, 530, 552, 553 Legitimacy crisis Battle for language 110 Bilateral investment treaties (BITs) 107–108, 111 n. 10, 117 n. 32, 118 n. 34, 119 nn. 36–37, 121 n. 41, 126 n. 58, 140 n. 105, 146–147 n. 122, 148, 186, 250, 318 n. 53 See also Bilateral investment treaties (BITs) BIT arbitration 108–111, 113–118, 123–124, 126–130, 132, 134, 136–139, 140 n. 105, 143, 148, 150 See also BIT arbitration BIT awards 114 See also BIT awards Crisis 112–113, 116, 148 Four images of BITs Economic view 118, 122 See also Economic view Normative view 122, 127–128 See also Normative view Political view 126, 132, 137, 140 See also Political view

586

index

Universal View 136 See also Universal view Language 108, 110, 113–116, 123, 126, 140 n. 105, 145 n. 117, 149 Legitimacy 109 n. 8, 112, 114–115, 117 n. 32 Origins of phrase 000 Policy agenda 110 War of issues 116 Legitimate expectations Fair and equitable treatment 314, 316–317, 318 n. 49, 319–321, 326–327, 332–333, 336, 368, 428–430 See also Fair and equitable treatment Expropriation 219–220, 250, 256, 273, 277, 312, 319–321, 483, 485 See also Expropriation Transparency 313, 320, 326, 330, 406, 488, 489, 490, 492 See also Transparency Rule of law 313, 319–321, 323, 351, 376 See also Rule of law Letters of credit Uniform Customs and Practices for Documentary Credits (UCP 600) 46–48, 66 See also Uniform Customs and Practices for Documentary Credits (UCP 600) Lex posterior 7, 441 Lex specialis 7, 21, 140 n. 105, 336, 440, 471 Lex mercatoria Ancient law merchant 85 Catalonian compilation 85 The Consulate of the Sea 85 Little Red Book of Bristol 85 Rôles d’Oléron 85 Creeping codification See also Creeping codification 45 n. 1, 55, 79–85, 87, 95, 97–101, 388 Liberalism 339, 555 London Court of International Arbitration (LCIA) 287, 291, 529–530, 572 London Interbank Offered Rate (LIBOR) 201, 206–209 Lord Ackner 57 Lord Mustill 55–56 Magna Carta 1215 485 Margin of appreciation (MOA) doctrine 10, 130, 327 n. 115, 472, 476–447, 479 Marshall Plan 355 Mediation Civil versus common law mediation approaches German approach versus English approach 532

Confidentiality 288, 297 See also Confidentiality Mediation versus conciliation See also ICSID Conciliation 278, 283 See also Alternative dispute resolution 283 n. 59, 285, 293 n. 141 Neutral third party 282 Non-binding agreement 252, 258, 283 Third party participation 298 Transparency 281, 297, 298 n. 164, 299–300, 308, 313, 320, 326, 330, 386, 406, 408, 486 See also Transparency Military intervention 344, 346, 376 Minimum standard of treatment Protection and security for persons and property 341 Equal access to justice 341 Most-favoured nation treatment (MFN) Good governance 487–489 See also Good governance Mergers and acquisitions (M&As) 266 Multilateral Investment Guarantee Agency (MIGA) 191–192, 282, 287–288 Multilateral Agreement on Investment (MAI) 15 n. 53, 193, 234, 365, 448, 543 Multinational enterprises (MNE’s) Balance of costs and benefits 183–184 Foreign investor 233 See also Foreign investor Importance 181–182, 191, 196 Lobbying power 236 Multilateral Framework for Foreign Direct Investment (See Multilateral Agreement on Investment) 179–180, 183, 192 NAFTA (North American Free Trade Agreement) Free Trade Commission 19 n. 71, 317, 535, 547 Note of Interpretation 19, 451 n. 47 Precedent 31 See also Precedent Transparency versus confidentiality 14 n. 47, 29 n. 25 National Contact Points (NCPs) 408 National Environmental Policy Act (NEPA) 503 National treatment 31, 188, 319, 327, 343, 347 n. 47, 365, 367, 372, 573 Necessity Economic emergency powers 467–468, 471 Argentina 467–468. 471 Customary international law 469–472, 477–478 Treaty versus customary international law 468, 471, 477

index Conflationary approach 470–471 Discrete approach 470 n. 116, 471 Netherlands Model BIT 536 New International Economic Order (NIEO) 187, 189, 370 New Haven School Authoritative and controlling decisions 420 Policy-oriented jurisprudence 413, 437 See also Policy-oriented jurisprudence New Lex Mercatoria (NLM) Bottom-up approach 79, 105 Choice of law 90, 96 Creeping codification 80–85, 87, 95, 98–101 See also Creeping codification Comparative public law 99, 105 See also Comparative public law Dialectical process 97 Dutch Civil Code 94 Battle of lists 84 Flexibility 101 General principles of law 87, 91, 93–95 See also General principles of law History 105 Latin approach 94 Law in action 83–84 List 81–101, 103, 105 Legal certainty 98 NLM theory 79 NLM doctrine 82, 87, 90–91, 95, 98–99, 106 Online codification 102, 105 Prescription 95 Process of refinement and consolidation 88 Roman origins 94 Systematization of NLM 104 Topical approach 96–97 TransLex ‘www.trans-lex.org’ 80, 88, 98, 102 See also TransLex ‘www.trans-lex.org’ TransLex principles 80, 88, 98–99, 101, 103–106 See also TransLex principles UNIDROIT 83–84, 86, 93, 96–97, 103–104 See also UNIDROIT Valuation processes 93 New York Convention 130 n. 75, 188 n. 34, 529, 549–551 Non-discrimination National treatment 327 See also National treatment Arbitrary/impairment 327 Non-governmental Organizations (NGOs) Accountability 330, 384 Role 234, 329 Transparency 326, 330

587

Non-investment treaties Interaction between investment and non-investment treaties 5 Non-precluded measures (NPM) clauses Argentine cases 467, 477 Non-state actors 233, 236, 238, 242, 442, 446 See Non-governmental organizations (NGOs) See Intergovernmental organizations (IGOs) Normative view 2010 Public Statement 123–124 Bilateral investment treaties (BITs) 122, 126–128 See also Bilateral investment treaties (BITs) BIT arbitration 122, 126–128 See also BIT arbitration Dynamic view 122 Fair and equitable treatment 122 Good faith 124 Indirect expropriation 122, 124 Legitimacy crisis 128 See also Legitimacy crisis Norm generation 127–128 System bias 122–126 OEEC Committee for Invisible Transactions 361 Organisation for Economic Co-operation and Development (OECD) Declaration on International Investment and Multinational Enterprises 188, 327 Draft Convention on the Protection of Foreign Property 362 Guidelines for Multinational Enterprises 188, 224, 225 n. 6, 229, 236 General Principles 224 Guideline on Employment and Industrial Relations 236 Revised Guidelines on Employment and Industrial Relations 236 Principles of Corporate Governance 227 Open access environment 80, 101 Open legal system Creeping codification 84 See also Creeping codification Organization of the Petroleum Exporting Countries (OPEC)181, 245 n. 3, 254 Pacta sunt servanda 55, 66, 88, 91, 93, 336 Party autonomy 25, 65, 552 Peremptory norms 7 See also Jus cogens Permanent Court of Arbitration xi, 162, 287 Political agenda 119, 128–129, 139, 142, 245

588

index

Policy-oriented jurisprudence Criticisms 413 Law1 versus Law2 436–438 Maximizing human dignity 414, 417–418, 432, 435 Policy-oriented jurisprudence versus positivism 413, 415, 437 Political view Bilateral investment treaties (BITs) xi, 27, 107, 186, 250, 277 See also Bilateral investment treaties (BITs) BIT arbitration 34, 108–111, 113–118, 122–130, 132, 134, 136–139, 143, 148, 150 See also BIT arbitration Dialectical process 132 Dynamic view 132 Governance 132, 134 Legitimacy crisis 109–110, 112–114, 116, 128, 147–148 See also Legitimacy crisis Norm generation 127–130, 132, 135 Politico-normative perspective 131, 136, 146 Rational choice 133 Politics of shame 14 Positivism Hard positivists 414, 424, 426, 428–429 Classical positivists 427–428 Concept of law 414–418, 422–431, 436, 438 Legal validity 414, 417, 424, 427–428, 435 Legal pedigree 415, 425, 432, 436 Modern positivists 427–428, 430, 435 Secondary rules and rule of recognition 415, 418, 425, 431, 435–436 Soft positivists 414, 424, 427–430 Value of semantics 428, 433–435 Policy-oriented jurisprudence 412–413, 437 Pre-concept commitments Positivism versus policy-oriented jurisprudence 413, 437 See also international legal theories Value of semantics 428, 433–435 Predictability 40–41, 98, 122, 278, 486, 492 Principle of legality 299 Principles of European Contract Law (PECL) 50, 104 Private foreign investment (see Foreign investment) 107, 109, 359 Private international law Conflict of laws 76, 84, 103 See also Conflict of laws

Privatisation 80, 249–250 Precedent Fair and equitable treatment 30–31, 33, 40 n.61, 122, 125, 134, 277, 314, 316–317, 319–321, 326–327, 333, 326, 368, 428–430, 450, 453, 457, 484, 489, 523–524, 553, 570 See also Fair and equitable treatment Persuasive versus binding 545 Predictability and stability 40–41 NAFTA approach 565 See also NAFTA Predictable and stable investment environment 231 Production sharing agreements 493, 509 Promissory estoppel 62 Public interest Democratic legitimacy 27 General regulatory policies 27 Environment 27 Human health 27 Anti-discrimination 27 Tax-payer’s interests 27 Budgetary concerns 27 Transparency 17, 20–22, 249, 270, 281, 297, 299–300, 308, 313, 320, 326, 330, 516–517, 535, 551 See also Transparency Public infrastructure dispute Asian financial crisis 200–201, 204, 206, 210, 216, 218 Indonesian experience 205 Project financing 202, 204, 207 Stress Test 201 Leverage 199, 202–204, 209, 213, 218 Independent power projects (IPPs) 200 Subsequent litigation 199 Role of Debt 206 Borrowing short and lending long 207 Debt-to-equity ratio 207–208, 220 Role of Personnel Change 210 Risk of criminal proceedings against counsel 211, 213 Role of Time 213 Accounting Principles 214, 216 Regulatory Accounting (RAP) 214 Generally Accepted Accounting Principles (GAPP) 215 International Accounting Principles (IAP) 214 Non-accrual status 215 United States Federal Deposit Insurance Corporation 214 Changes in External Factors 216 Crystallizing the sum 218

index Change in circumstance 220 Compensation 218–220 Valuation 220 Non-cash compensation 218 Regime change 211, 218 Continuing growth of interest obligations on project debt 213–214 The Obsolescing Bargain 213 Public international law Conflict with commercial arbitration approach 25–26, 34–38, 41–42 Conflict of laws 76, 84, 103 See also Conflict of laws Comparative public law 313, 315 See also Comparative public law Raz, Joseph 426–428, 434 Reisman, Michael 413 n. 7, 417–418, 419 n. 34, 421 n. 39, 423–424, 431–432, 435, 436 n. 92, 437, 558, 562 Rights at Work 226 n. 8, 387, 390 Reciprocal promise-based obligations 11 Regional human rights organizations African Charter on Human and Peoples’ Rights 407 European Convention on Human Rights 407 Regional organizations European Court of Justice 443 European Union 442–443 World Trade Organization 442 Reliance-based obligations 11, 22 Renvoi 415, 430 Remedies Compensation See also Compensation 163, 165–168, 175, 323, 351, 490 Restatements of contract law principles Best rules 56 Ruggie, John ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy See also ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy 229 Rule of law Domestic rule of law 321, 488–489 Good faith See also Good faith 313, 320, 376, 489 Good governance See also Good governance 115, 309–310, 312–313, 320–321, 323, 332–333, 487–489 Soft law See also Soft law 310, 325, 329, 332–333, 487, 490, 514

589 Sovereignty 371 Statism versus liberalism

555

Semantic sting argument 433 Separation Thesis 427 Social Thesis 427 Society to Advance the Protection of Foreign Investments 358 Soft law Hard law 252, 385–386, 389–391, 400, 406, 427, 513 Hard sanctions 383, 386, 513 International Investment Agreements See also International Investment Agreements 251 Restatements 45, 51, 102, 564 Rule of law See also Rule of law 310, 329, 332, 490 Southern African Development Community Tribunal 16 Sovereign equality Calvo doctrine See also Calvo doctrine 371–372, 375 New International Economic Order See also New International Economic Order 370 Splitting the baby 202, 204 Stabilisation clauses Human rights exception 406 Standard terms of contract Governing law See also Governing law 47, 76 State responsibility For injury to aliens 351 n. 63 Statute of the International Court of Justice (ICJ Statute) 86, 98 n. 114, 443, 445–446 Sub-contractors Codes of conduct See also Codes of conduct 387, 391, 395–399 Monitoring process 399 Vicarious liability See also Vicarious liability 397–398 Substantive protections Expropriation See also Expropriation 319–320 Fair and equitable treatment See also Fair and equitable treatment 319–320, 333, 450 Full protection and security See also Full protection and security 319 National treatment See also National treatment 319 Umbrella clauses See also Umbrella clauses 319, 333

590

index

Most-favoured nation treatment See also Most-favoured nation treatment 319–320 Sustainable development 115, 225, 232 n. 28, 256–257, 310, 329–330, 333, 451, 491 Swiss Statute on Private International Law 92 Switzerland-Uruguay BIT 312 Taxation treaties Double taxation treaties 188, 493 Terminating treaties 537 Third parties 26, 29, 34, 71, 241–242, 271, 283, 297–298, 395, 397 n. 55, 516, 532 Access 272 Involvement in proceedings 33, 38 Thomas Wälde Author ix, 3 Dynamic stability 195, 197–198, 505, 519 Professor of law xiii, 3 Centre for Energy, Petroleum and Mineral Law and Policy xvi, 245 OGEMID 80 Service at the United Nations xv United Nations Department of Technical Cooperation and Development (UNDTCD) 305 Transnational Dispute Management (TDM) 80 Trade usages 45, 47, 49, 58–59, 75, 77, 90 n. 60 Transfer of technology 182, 187 TransLex ‘www.trans-lex.org’ Creeping codification 55, 80 See also Creeping codification Purposes 98–99 Features 98 Four areas of TransLex 102 History of online codification platform ‘TransLex’ 100 Multi-functional nature 103 Transnational Law Database (Tldb) 100 See also Transnational Law Database TransLex principles 99, 101, 104–106 See also TransLex principles Transparency 17 Willem C. Vis Arbitration Moot Competition 103 TransLex principles Creeping codification 98–99, 101 See also Creeping codification History of list 100 Content and structure of list 103 Scope of list 103 Transnational Law Database History 55

Transnational commercial law 45 Creeping codification 81–85, 87, 95, 97 See also Creeping codification General principles of law 65 n. 65, 73, 82, 86–87, 91, 93–95, 103 See also General principles of law Restatements of contract law principles 59 See also restatement of contract law principles Sources of transnational commercial law 45 Trade usages 58 See also trade usages Transnational commercial legal system 82, 97–98 See also Autonomous transnational commercial legal system 90 Transnational corporations (TNC) 224, 226, 237, 383–385, 387–388, 391–392, 400–402, 407, 409 Transnationalization of international business 80 Transparency Versus confidentiality 14 n. 47 ICSID approach xi, 29 NAFTA See also NAFTA 30, 297, 326 n. 110 Treaty interpretation (See Interpretative methods) Troika Transnational soft law 51 Unjust enrichment 72, 103 UNIDROIT Franco-Italian Obligation Law 86 Principles of International Commercial Contracts (UPICC) 50–51, 56–57, 64–65, 68–69, 83 Working Group 50, 83, 97, 104, 105 n. 138 Uniform Customs and Practices for Documentary Credits (UCP 600) Letters of credit See also Letters of credit 48, 66 Unilateral declarations Good faith See also Good faith 61–63 United Nations Charter 7, 167, 187, 430, 447, 567 Code of Conduct on Transnational Corporations 179–180, 183, 186 n. 23, 224 Commission on Human Rights 384 Commission on Transnational Corporations 504 Conference on Environment and Development (UNCED) 256 Declaration on the Rights of Indigenous Peoples 252

index Economic Commission for Asia and the Far East 358 Framework Convention on Climate Change (UNFCCC) 252 n. 23, 257–258 General Legal Division 358 Global Compact Stakeholder Model of Corporate Governance 227 International Trade Organization ‘Suggested Charter’ 355 Resolution on the Charter of Economic Rights and Duties of States 187 Resolution on the Permanent Sovereignty over National Resources x, xv, 187, 370 Resolution on the Declaration on the Establishment of a New International Economic Order 187 n. 26 Universal Declaration of Human Rights 226 n. 8, 387, 390 United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, 1976 46 Commercial mediations 294 Model Law on International Commercial Arbitration 46 Model Law on International Commercial Conciliation 287 United Nations Office of the Secretary-General Report on the Promotion of the International Flow of Private Capital 359 United Nations Sub-Commission on Human Rights 2003 UN Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights 238 n. 52 Self-regulatory approach 236, 238 United Nations Special Representative of the Secretary-General on the issue of Human Rights and Transnational Corporations and Other Business Enterprises (SRSG) 2008 Report–Protect, Respect and Remedy: a Framework for Business and Human Rights 228 n. 15, 384 n. 5 2010 Report–Business and Human Rights: Further Steps Toward the Operationalization of the “protect, respect and remedy” Framework 243 n. 69, 384 n. 7 Corporate responsibility to respect human rights 241 n. 63 United States Foreign Investment and National Security Act 196 Foreign Corrupt Practices Act 270 Helms-Burton Act, 1996 474

591

United States-Ecuador BIT 455 n. 62, 465 United States-Mexican Claims Tribunal 459 Universal view 136 Bilateral investment treaties (BITs) See also Bilateral investment treaties (BITs) 136–139 BIT arbitration See also BIT arbitration 136–139 Legitimacy crisis See also Legitimacy crisis 148 Marxist vision 136 Socialism 138 Zone of peace 142 Vienna Convention on Contracts for the International Sale of Goods, 1980 (CISG) Contract of sale 46, 49 Formation of contracts 49 Substantive rights and obligations of the buyer and seller 49 Vienna Convention on the Law of Treaties (VCLT) 40 n. 61 Vicarious liability Civil law versus common law approaches 397 Employment contract 398 Sub-contractors See also sub-contractors 397–399 Washington Consensus 190 Washington Convention on the Settlement of Investments Disputes Between States and National of Other States (See ICSID Convention) Westphalian order 442 World Association of Investment Promotion Agencies 190 World Bank xi, 114, 252, 269, 273, 282, 306, 359–361, 393, 530–531 World Bank Guidelines on the Treatment of Foreign Direct Investment 253, 328 World Energy Council (WEC) 246 n. 4, 259, 263–265 World Health Organization (WHO) 187 n. 29, 387 World Trade Organization (WTO) 413 n. 7, 442 Appellate Body 314 n. 28, 444, 475 Dispute settlement 572 Dispute Settlement Body 472 GATT See also GATT 442, 473–475 Least-restrictive-means test 472 Remedies 323, 474 World War Two 277 n. 11, 340, 347, 349–350, 353

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