The Future of Investment Treaties: Metamorphosis or Deconstruction?

by Horia Ciurtin LL.M, Managing Editor of the EFILA Blog*

Traditionally, the sole subjects of public international law are sovereign states. Therefore, in the Westphalian system, only statal political entities are able to assume obligations and benefit from certain rights at an international level. As a consequence, under this classical approach, only such actors can initiate and can take part in this type of disputes, even though the prejudiced part might not be the entire state, but an administrative division, a group of citizens or a company incorporated in that state.

However, in the aftermath of World War II, public international law suffered structural metamorphosis, allowing both natural persons (due to the human rights theory and its accompanying charters) and legal entities (due to the various bilateral or multilateral investment agreements) to challenge the abusive conduct of a state, without needing the diplomatic intervention of their state of origin. Therefore, in the post-Westphalian international law system, the sovereign entities are no longer needed as ‘procedural proxies’ for aggrieved investors, being able themselves to directly involve in international litigation and be compensated for their losses.

The central element of this new legal configuration is constituted by the depoliticization of disputes and the demise of strictly diplomatic negotiations, which tended to favour states in reaching a strategic compromise even though it might have further prejudiced the aggrieved investor. Thus, when signing the 1965 Washington Convention (i.e. Convention on the Settlement of Investment Disputes between States and Nationals of Other States, or – simply put – the ICSID Convention), it was genuinely believed that such a legal instrument would solve both the logistical problem of an arbitration centre and the procedural issue of unitary rules and award enforcement.

More precisely, the Convention established that the member states undertake to recognize any such award as final and binding on their territory, not necessitating a prior recognition procedure, as in the case of other arbitral awards ruled by the 1958 New York Convention. Thus, it was assumed that not only the litigation itself would be more predictable, but also its end-result: either voluntary abiding to the award or swift enforcement.

Analysing this system from a historical perspective, it can be argued that it already became fully functional in the last decades, as presently there are several thousand Bilateral Investment Treaties in force and around 400 (known) finalized investment arbitrations. Usually, states (mostly from the ‘developing states’ group) have been challenged by numerous investors (mostly originating from the ‘developed states’ group), being forced to pay compensation of several hundred million dollars or even billions for their abusive treatment toward the investors.

However, with all the system’s implicit efficiency, the last decade presented itself with a contestation of the established arbitration regime. More precisely, some scholars – dissenting, albeit not marginal – raised suspicions that the functioning of the system subversively favours capital-exporting states against capital-importing states. This argument was not a novelty in international law, as it continuously accompanied the evolution of UN Resolutions all along the Cold War. However, in the strict sector of investment arbitration, such a stance appeared – for some analysts – more convincing in the circumstances of numerous controversial awards rendered by tribunals, which appeared to neglect the need for equilibrium between investor rights and the public interest of host states.

Thus, following the (in)famous defeat of several Central- and South-American states in front of arbitral tribunals, both sovereign entities and various NGOs or legal academics emphasised that the functioning of the present system could lead to statal incapacity to issue public interest norms. More precisely, developing states argued that they were ordered to pay damages for the revocation of licenses for companies that acted in a detrimental manner toward public health and the environment (see, for example, the renown Tecmed v. Mexico case), perceiving such award as an unpredictable extension of the obligations undertaken in the Treaties.

In this context, a series of countries – of which Argentina is the most prominent example, but closely followed by EU Member States such as Romania and the Slovak Republic who argued EU law requirements – explicitly refused to voluntarily compensate the investors, practically denying the effects of the arbitral awards. Other countries – such as Australia – decided to include only inter-state arbitration clauses in their future investment treaties, readopting the classical international adjudication system.

Even strong capital-exporting states such as Germany issued the opinion that the direct dispute resolution system should be discarded in the new TTIP agreement between the EU and the US, while India – in its 2015 Model BIT – offers an increased role of the state in ISDS, while cutting back on the protection standards (no MFN or FET is available for foreign investors). Thus, without affecting the stability of the Investment Treaty network, these states promote only a reform concerning the methodology of litigation, aiming to avoid an autonomous decision of private parties to begin arbitral proceedings against another state without the close supervision of their state of origin.

A different stance towards the international invest regime – of a more radical nature – was exposed by Indonesia which aims at terminating its existing Bilateral Investment Treaties and – thus – totally exiting the self-referential treaty network. Not negotiating a different model within the system, but leaving it altogether. Thus, the first step in this direction was taken in 2014 when the Dutch authorities were informed that the Indonesian government decided to terminate the existing Bilateral Investment Treaty between the two states from 1st July 2015. In the same context, it was shown that “the Indonesian Government has mentioned it intends to terminate all of its 67 bilateral investment treaties” (this stance was also taken by South Africa who terminated its BITs with several EU Member States). The origin of such an attitude can be followed to the last challenge toward Indonesia’s conduct in relation to a British-Australian investor – i.e. Churchill Mining –, arbitration that already passed over the jurisdictional phase and is approaching the merits phase, with claims to compensation for over 1 billion dollars.

Therefore, Indonesia takes the already existing ‘rebellious’ attitude against the present system a step further, challenging not only the legitimacy of investment arbitration (as a dispute resolution method), but also the entire global network of Investment Treaties. In a symbolic manner, the first terminated international agreement is that signed with its former colonial metropolis – the Netherlands. Following this hermeneutical perspective, the first Investment Treaty signed is also the first one terminated, revealing the ideological position (often met in certain academic circles) that the present system represents only a legal continuation of the former political dominance.

In this context, it remains to be seen whether the Indonesian attitude will be marginalised by the international community and – even more important for the long-term survival of investment law – if the absence of such treaties will lead to a diminishment of foreign direct investment in the archipelago. If this is not the case, there is the risk of reverberating such a position in more developing states and, consequently, a re-politicisation of investment disputes.

However, even if the Indonesian position shall remain an isolated example of explicitly reintroducing ‘grand strategy’ into international law, the other ‘deconstructive’ stances pose a more serious challenge to the investment law regime. Altering the basis on which it operates or introducing different justificatory discourses (such as EU law) into its own hegemonic assumptions, while redefining the previously indeterminate clauses, appears as a less intrusive, but more comprehensive metamorphosis. What is not – yet – clear if this improbable ‘alliance’ between Westphalian sovereigntists and post-Westphalian europeanists will eventually lead to a new investment law paradigm or to a conceptual stalemate. Perhaps, once again, only geopolitics will provide a definitive answer.


* Horia Ciurtin, Legal Adviser – International Arbitration, Scandic Distilleries S.A; Editor, VERSO Journal [Romania].