Fair and equitable treatment provisions are found in almost all bilateral and multilateral investment treaties and many international investment agreements. Throughout the course of the last decade, this treatment standard has been frequently invoked in investor-State arbitrations. Under its aegis, tribunals have developed a number of vaguely defined sub-categories, or what have been referred to as ‘facets’ or ‘components’ of the standard, such as the obligation of the State to refrain from acting in an arbitrary manner, to afford justice and due process to foreign investors, to act transparently, and to respect the legitimate expectations of the investor (see comment entitled ‘Fools Gold? Legitimate Expectations as Understood in Glamis Gold v USA‘). Despite such attention, the precise application of and relationship between these components remains vague and elusive.

The task of interpreting and applying fair and equitable treatment was made more complex by the following series of events.

In 1999, an American investor brought a claim under NAFTA‘s investor protection provisions. The investor alleged, inter alia, that Canada’s regulations with respect to the importation of softwood lumber violated Article 1105 of NAFTA. Article 1105(1) provides that ‘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.’ At the time of the arbitration, trends in the decisions of arbitral tribunals favoured interpreting fair and equitable treatment provisions as either an autonomous treaty provision or a standalone principle found in customary international law. The tribunal favoured the former, finding for the investor, but leaving the question of damages to be assessed at later date by a new tribunal.

Following the decision, and in a dramatic twist, the NAFTA parties issued a joint interpretive note clarifying their view of both Article 1105, and fair and equitable treatment and full protection and security. The note read as follows:

B. Minimum Standard of Treatment in Accordance with International Law

1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.

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.

Many viewed this as a radical departure from settled practice. The note was likely prompted by the anticipated constraint the international minimum standard might impose on the expansion of fair and equitable treatment. The tribunal constituted to assess damages considered the interpretive statement binding, but nonetheless still found for the investor.

Insofar as the reasoning of subsequent tribunals was concerned, the statement’s effect on the litigation of fair and equitable treatment provisions was not insignificant. A number of tribunals, both within and without NAFTA, began employing the international minimum standard as an additive element of fair and equitable treatment; in determining a fair and equitable treatment claim, not only did the tribunal have to be satisfied that the acts complained of were, for example arbitrary or lacking in transparency, but also that they constituted ‘ … a wilful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith’.

B             The Joint Interpretive Statement

Turning to the wording of the note itself, the two provisions seem to operate independently of one another. The first assimilates Article 1105 to the international minimum standard. The purport of the second is less clear. It states that fair and equitable treatment does not require treatment ‘in addition to or beyond’ that provided by the minimum standard. This may suggest one of two things:

(1) fair and equitable treatment and full protection and security are to be equated to the minimum standard; or

(2) fair and equitable treatment and full protection and security are to be limited by the minimum standard.

On the second reading, the acts complained of would need to both fall foul of the international minimum standard and fair and equitable treatment to be actionable.

Either reading may be correct, and for the purposes of this comment the resolution of this question is not crucial. That said, there are good reasons to favour the latter. First, as pointed out by UNCTAD, it seems illogical that States would employ the term fair and equitable treatment when they truly mean the international minimum standard. Second, the jurisprudential trends in interpreting fair and equitable treatment, both before and after the note, seem more generous to investors than the international minimum standard. The latter point will be addressed below in ‘C  The Investment Context’.

On either reading the claimant will need to prove that the acts complained of have violated the minimum standard. This raises the question as to what application it might have to international investment. To answer this question, two matters must be addressed. First, a framework of the general standard must be sketched. Second, this general framework’s applicability to the investment context must be considered. These two matters will be dealt with in the next two sections, respectively.

C             The International Minimum Standard

Twentieth century commentary on the standard emerged with Sir Elihu Root’s paper entitled ‘The Basis of Protection to Citizens Residing Abroad’. This was shortly followed by enthusiastic (and sometimes disappointed-especially with regards to the failed Hague Conference of 1930) commentary by Borchard in both his 1914 paper on diplomatic protection of citizens abroad and 1940 article focusing on the standard itself. The only monograph written on the topic was published in 1949 by AH Roth, and followed in 1961 by Roha’s vociferous criticism of a truly international minimum standard. Over the course of the 20^th Century, judicial and academic commentary all but petered out, with the increasing focus placed on universal human rights following WWII; discourse became more interested in the rights of all as opposed to the rights of foreign aliens to the exclusion of locals.

A review of this literature is revealing. It paints a picture of an international norm that operates somewhat differently to that of traditional legal norms. AH Roth states:

The law of the treatment of aliens, as part of international law, lacks uniformity, not only with regard to the rules of positive law but still to a greater extent as regards the fundamental concepts underlying its structure. (p 61) (emphasis added)

Roth continues:

Through the fact that this standard has evolved on the legal conscience of civilized nations and is more or less identical with what is considered a normal situation in an organic community, its precise limits are necessarily ill-defined. It appears to be useful therefore to interpret its fundamental idea in the light of the ‘general principles of law recognized by civilized nations. Consequently, in case of doubt, the content of the fundamental idea must be determined by the principles which the civilized nations recognize in general in their municipal organization.

The minimum standard is the expression of the common standard of conduct which civilized States have observed and still are willing to observe with regard to aliens … (p 87) (emphasis added)

Borchard, in his 1914 work states:

[T]he standard of a duty of the State towards aliens and its international responsibility for violation of its obligations may be considered the result of a gradual evolution in practice, States having in their mutual intercourse recognized certain duties incumbent upon them. (p 177) (emphasis added)

On the basis of these passages, it seems that a determination of the minimum standard might be characterised by two stages. First, as was famously laid down in Commissioner Neilson’s oft-quoted passage in the Neer decision, the acts ‘… should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.’ Second, the treatment should be reflected in the practice of States.

A few observations might be made about this process.

First, looked at in isolation, it seems unlikely that mere shock or outrage on the part of a tribunal can ground a finding that the international minimum standard has been breached; it can only give context to the practice of States. This is best illustrated by way of example. For over a century States have paid compensation for outrages committed against foreigners in the context of mob violence; to do so is to satisfy a legal obligation, and is not merely a diplomatic nicety. Permitting such violence does not conform to the ‘established standard of civilization’. This, fact, in combination with the practice of States in satisfying such claims, permits us to conclude that it constitutes a positive principle of customary international law binding on all States. The suggestion of some that an international delinquency can be based solely on the general statement in Neer seems unpersuasive. It should be noted that a majority of the cases drawn on in support of this proposition (such as Neer) deal with denials of justice-a manifestation of the international minimum standard that had an established pedigree, even in the 1920s.

Second, as has likely become obvious by this point, the international minimum standard is not a substantive norm. It is instead a means by which substantive norms might emerge. Thus, in the beginning of the 20^th Century, much of the commentary dealing with the standard contained chapters on expropriation and denial of justice. Since that time these norms have become somewhat disassociated with the minimum standard.

The understanding laid out above is confirmed by other sources as well. The Encyclopedia of Public International Law defines the international minimum standards as a:

‘… concept (sometimes called the international standard of justice) [which] affirms that there are rights created and defined by international law that may be asserted against States by or on behalf of aliens [that includes] … the rights of aliens to fair civil or criminal judicial proceedings (i.e. not to be subject to denial of justice), to decent treatment if imprisoned, and to protection against disorders, violence, and against deportation in abusive ways, and to the enjoyment of their property unless taken for a public purpose with fair compensation. (vol 3 p 408-9) (emphasis added)

The understanding of the minimum standard outlined above accords with common sense, and a consent-based theory of international law.  Identifying what shocks or outrages the sense of justice of every reasonable man allows us to put into context the practice of States, especially in the case of acquiescence.  Thus, when we face situations in which a State has refrained from denying access to courts for foreigners, we might say, based on principles of civilized justice, that this has become a positive obligation under customary international law.

C             The Investment Context

With this general understanding of the international minimum standard in hand, the task then begins of understanding what application it might have in the international investment context, especially in light of the interpretive note outlined above. Three observations might be made.

First, the international minimum standard knows no ‘investor’. It knows aliens and their property. As such, it is somewhat meaningless to talk of the international minimum standard with respect to the investor’s investment in the host State. Instead, any claim brought under the minimum standard would need to be asserted with respect to foreign aliens and their property within the host State. It seems fair to assume that most investment claims that arise will be primarily concerned with the foreign alien’s property, with some limited exceptions (such as in the case of Biwater v Tanzania, where the tribunal applied investor protections with respect to the persons of employees of the investor [709]). It is important to note that this might make some difference with respect to certain investment claims. Because of the focus on alien rather than investor, the international minimum standard may exclude cases such as Tokios Tokelés v Ukraine, in which a shell company had been incorporated in a foreign jurisdiction by a local investor (mentioned in comment entitled ‘International Investment: Poisoned at the Root?‘).

Second, it seems bullish to suggest, in light of both the statement in Neer and the existing established components of the international minimum standard, that in the absence of a treaty obligation, most investor protections would constitute a violation of customary international law. Turning first to Commissioner Neilson’s statement in Neer, it seems speculative to suggest that ‘… every reasonable and impartial man would readily recognise …’ most of the facets of fair and equitable treatment as amounting to ‘an outrage, to bad faith, to wilful neglect of duty or an insufficiency of governmental action … far short of international standards.’ Such a suggestion becomes even more unsustainable upon examination of the types of established norms the minimum standard already provides for. They tend to resonate with very basic conceptions of justice, such as the right to a fair trial, decent treatment if imprisoned, protection from mob violence, treatment during deportation, and enjoyment of property unless taken for a public purpose with fair compensation. Considered alongside investment protections such as ‘respect for the investor’s legitimate expectations’ or ‘freedom from arbitrary State conduct’ it becomes immediately apparent that the two categories are not of the same ilk.

Third, even when one considers the status of expropriation as a component of the standard, the conclusion remains somewhat unclear, with the Encyclopedia of Public International Law stating:

The question of property rights of aliens has become rather separated from that of the minimum standard as a whole, being involved in the economic stresses that run between the industrialized States and the developing countries. The case for the survival of the classical prompt, adequate and effective compensation rule on expropriation of foreign property has been eroded to a degree. However, the case for the proposition that there is still some minimum standard remains strong. Few States have asserted that they are not obliged to justify their compensation programmes as in keeping with international law, even though they have sought to broaden the list of factors to be taken into account in assessing the adequacy of that compensation. (p 410)

The hesitation expressed with respect to the existence of expropriation as a component of the international minimum standard does not bode well for its extension to other property rights. Whilst a tribunal might readily say that the confiscation of property without any sort of justification by the State would seriously outrage notions of justice of civilized nations, and that such outrage is reflected in the practice of States, and as such constitutes a component of the internationals minimum standard of treatment to be accorded to the property of foreign aliens, the suggestion that it would identify another property-related norm so basic that it would also constitute a component of the international minimum standard seems sanguine.

It is, therefore, unlikely that the minimum standard has much to offer in terms of substantive investor protection, above and beyond expropriation and denial of justice.

D             Conclusion

It seems fair to conclude that the interpretive note imposes the international minimum standard upon the determination of fair and equitable treatment, whatever reading one might take of the s B(2). The application of this provision to general international law is not considered here. It suffices to say that for the purposes of the NAFTA parties, either the equation to or circumscription by the international minimum standard holds the potential to severely curtail investment protection. We might be fortified in this view if we consider a hypothetical. The minimum standard is, by definition, a principle of general international law, and as such binding on all States irrespective of their bilateral or multilateral treaty obligations. It would seem unlikely that in the absence of treaty obligations States would feel entitled to exercise diplomatic protection on behalf of one of their citizens for the failure of a host State to treat that foreign citizen’s property fairly and equitably. Admittedly, the international minimum standard has been characterised as ‘evolutionary’, and as such represents the ability to respond to developments both within and outside of the law. However, it seems overly optimistic to suggest that the protection of private enterprise operating in foreign countries has so permeated the consciences of the reasonable man so as to form a positive legal principle of the minimum standard.

However, on review of Ecuador’s international legal position, and, more specifically, international legal obligations generated by her outstanding bilateral investment treaties, it seems that withdrawal from ICSID, whilst perhaps remaining a poignant political statement, offers less than might first be thought in terms of radical change with respect to the country’s exposure to investment claims.

By way of background, the ICSID Convention provides one mechanism by which an international arbitral tribunal might be seised with jurisdiction to hear a claim brought by an investor against a host State. Rather than offering any substantive protections to the investor, it merely provides a forum within which to bring a particular dispute, by arrogating jurisdiction to a tribunal in particular circumstances according to a set procedure. In order for a tribunal to be duly seised, the State subject to a claim must have given its consent to jurisdiction. As pointed out by Gaillard in his considered article relating to Bolivia’s denunciation of the Convention, consent can be given in a number of ways. Foremost among these is via a bilateral or multilateral investment treaty (‘BIT’ or ‘MIT’). As Gaillard interestingly points out, at the time the ICSID Convention was negotiated, BITs and MITs were ‘not common in state practice’. In line with their subsequent proliferation, this article is primarily concerned with what Ecuador’s obligations under her BITs tell us about the efficacy of denunciation of the ICSID Convention on the enduring nature of international investment arbitration.

According to UNCTAD, as of 1 June 2008, Ecuador had signed a total of 29 BITs. However, after terminating eight of these agreements—mostly with Latin American States-this number was reduced to 21. A review of these treaties* provides two interesting insights. First, the withdrawal from ICSID has less impact than the fanfare surrounding it suggests. Second, in light of the present Ecuadorian Government’s views on international investment arbitration, there are a number of other immediate options that it might take.  In order to demonstrate these two points, Ecuador’s currently existing BITs must be examined.

For the purposes of this paper, two aspects of her BITs are relevant: the dispute settlement mechanisms that the investor might avail itself of and the provisions that are usually refereed to as ‘entry into force’.

In relation to the dispute settlement mechanisms available to an investor, they consist of a number of various combinations of ICSID, the Additional Facility under ICSID, UNCITRAL, ad-hoc arbitration and the domestic courts of the State in which the investment is made. Ecuador’s BITs are interesting, in that there are only two countries that provide for sole recourse to ICSID-Chile and France. The rest provide for a menu of options to the investor, such as:

(1) ICSID or UNCITRAL (Argentina, Bolivia, Finland, Netherlands, Romania, Sweden, and Venezuela)

(2) ICSID, the Additional Facility, or UNCITRAL (Canada, Cost Rica, and the United States)

(3) solely ad-hoc arbitration (China)

(4) ICSID, UNCITRAL or ad-hoc (Netherlands)

(5) ICSID or domestic courts (Germany, Peru)

(6) ICSID or ad-hoc (Spain)

Thus, even after withdrawal from ICSID, Ecuador remains subject to arbitration in a number of fora for violations under her bilateral investment treaties.

In relation to entry into force and denunciation, her treaties might be broken down into a number of different categories:

(1) treaties that have no initial term of operation (and by definition, operate indefinitely), with the Contracting Parties enjoying the right to issue a notice of termination that takes a particular period to become effective

(2) treaties with an inaugural term, that, once they have passed that term:

a. continue in operation until such a time as one of the Contracting Parties issue a notice of termination, which takes a specified period to become effective

b. renew for a specific term, with the Contracting Parties enjoying the right to issue a notice of termination prior to a prescribed time period before to the expiry of the term

All of her treaties provide a grandfathering provision for investments made either before the termination becomes effective or after the notification of termination, with any substantive rights arising under the treaty extended for a set period of 10 or 15 years.

When one looks at the above treaties, some aspects become immediately obvious. First, the only treaties whose initial term is still yet to expire are those with Finland, Netherlands, Peru and Sweden. The remaining treaties (those that have exhausted their initial term) are with Argentina, Bolivia, Canada (although Canada’s treaty has always operated on an indefinite basis), Chile, Costa Rica, France, Germany, Romania, Spain, Switzerland, the United Kingdom, the United States and Venezuela. Out of these States, only Bolivia, Costa Rica, Romania, Spain, and Switzerland operate on a term renewal system. This means that Ecuador is entitled to issue a termination notice that would become effective after one year for Argentina, Canada, Chile, China, France, Germany, Venezuela, and very importantly the United Kingdom and the United States. Even the obligations under treaties operating on term renewals could be terminated relatively quickly-Bolivia by 15 August 2017, Spain by 18 June 2012, and Switzerland by 9 November 2010. If Ecuador took such steps she could limit the accretion of new investment claims being made for investments made after 18 June 2012 to Bolivia (until 15 August 2017), Finland (16 December 2010), Netherlands (1 July 2011), Peru (9 December 2014) and Sweden (31 May 2011). Admittedly, in relation to these countries, investment claims might continue to accrue, as all BITs provide for the extension of investor protection for investments made prior to either the termination of the treaty, or in the case of Bolivia receipt of the notice, for a period of either 10 or 15 years.

In light of the fact that Ecuador seems stalwartly opposed to international investment arbitration, and the fact that by remaining bound by these treaties she continues to be exposed to the majority of claims that might be brought against her, and in light of the ease with which she could begin to truly dismantle the system of international investment arbitration by issuing notice under the vast majority of her BITs, the question remains as to why she has not decided to do so. The reality is that although the denunciation of ICSID may signal a political change that combines well with the rhetoric of the current Government, and offers a convenient jab at the World Bank, one must question the real efficacy it has on the international legal position of Ecuador. Indeed, the multipolar character of international investment law, and its web of BITs and competent fora are in line with the empirical conclusions of this paper-dismantling this web takes more than merely denunciation of one convention. As has been demonstrated in the empirical investigation in this paper, denunciation of ICSID is but one step in Ecuador escaping her international investment obligations.

It goes without saying that the Ecuadorean Government is free, as is any other government, to pursue policies (such as the temporary retention of bilateral investment treaties) in circumstances where to do so suits the national interests of the State. However, the way in which events have developed might give us pause to consider Ecuador’s underlying motivations; in light of the fiery rhetoric of the current Government-the likening of international investment arbitration to colonialism and slavery-and the relative ease with which it terminated existing bilateral investment treaties with fellow Latin American countries on the basis that the were not brining in enough investment, we might wonder why it has chosen not to do the same to the western countries with which it currently has BITs.

* The only treaties no included in this analysis were those with Russia and Italy. The Russia-Ecuador BIT has not yet come into force. The Italy-Ecuador BIT was not readily available.

The obligation on the host State to respect the legitimate expectations of the investor constitutes what has been variously referred to by tribunals as a ‘facet’, ‘component’, or ‘sub category’ of the fair and equitable treatment provision commonly found in a number of bilateral and multilateral investment treaties. This provision has been elaborated by international investment tribunals over the course of the last four decades, and, in addition to legitimate expectations, has been found to include an obligation to not act in an arbitrary manner, to afford justice and due process to foreign investors, and to act transparently.

In Glamis, the investor argued that a violation of NAFTA’s fair and equitable treatment provision (Article 1105) had been occasioned by the failure of the United States (through its competent agencies) to respect its legitimate expectations. Ultimately, the Tribunal concluded that the claim was not made out. In reaching this conclusion, it introduced two interesting developments to the debate:

(1)    an unambiguous statement that legitimate expectations can only be based on a ‘quasi-contract’; and
(2)    the suggestion that expectations can be reasonable but not legitimate.

This comment will both outline and consider these two developments.

Turning to the first, although the ‘quasi-contract’ notion of legitimate expectations has been alluded to in a number of cases, such as Enron v Argentina, where the tribunal stated, ‘what seems to be essential [was that the] expectations derived from the conditions that were offered by the State to the investor at the time of the investment and that such conditions were relied upon by the investor when deciding to invest’ [626], and Metalpar v Argentina where the Tribunal stated that, ‘[i]n this specific case, there was no bid, license, permit or contract of any kind between Argentina and Claimants, and the Tribunal considers that there were no legitimate expectations entertained by Claimants that were breached by Argentina’ [186], it has never been as unequivocally stated as in the Glamis decision. The Tribunal stated in no uncertain terms that ‘the quasi-contractual inducement … is a prerequisite for consideration of a breach of Article 1105(1) based upon repudiated investor expectations.’ [767] In line with this assertion, the tribunal stated that:

[A] violation of Article 1105 based on the unsettling of reasonable, investment-backed expectation requires, as a threshold circumstance, at least a quasi-contractual relationship between the State and the investor, whereby the State has purposely and specifically induced the investment. [766] (emphasis added)

In assessing whether there had been a breach in the particular context of legislative changes introduces by the state of California, the Tribunal stated in even clearer terms:

Whether these expectations were reasonable or not is not an inquiry that the Tribunal need make, however. The inquiry, as explained above, is solely whether California, or the federal government, made specific assurances to Claimant that such a requirement would not be instituted in order to induce Claimant’s investment in the Imperial Project.

Turning to the second point, Glamis also exhibits a marked departure from past practice in stating, somewhat paradoxically, that an investor might have reasonably relied upon a representation made by the State, but that nonetheless, the expectation will not, strictly speaking, be legitimate:

The issue presented to the Tribunal therefore is whether a lengthy, reasoned legal opinion violates customary international law because it changes, in an arguably dramatic way, a previous law or prior legal interpretation upon which an investor has based its reasonable, investment-backed expectations.

The tribunal effectively mitigated the right of the investor to rely on its legitimate expectations because of the absence of a gross denial of justice [762], a complete lack of due process [762], a manifest lack of reasons [762], arbitrariness [763], blatant unfairness or evident discrimination [765], and the existence of a quasi-contractual relationship [766]. Thus, in the very same breath the Tribunal found the expectation reasonably held by and relied upon by the investor but its frustration to not attract international liability.

A few brief observations might be made about these developments.

At first blush it might seem that the first constitutes a significant advancement of the rights of host States, and concomitant diminution of the rights of investors. The logic goes that in disciplining what has been regarded as a normatively shaky investor-based protection, it winds back the generous rights granted to investors under the banner of legitimate expectations. By requiring, in no uncertain terms, a specific guarantee intended to induce investment, a number of claims brought under the doctrine of legitimate expectations might be barred. This is precisely what happened in relation to the acts of the state and federal entities examined by the Glamis tribunal. Nonetheless, it does not seem entirely clear why, reasoning from first principles, specific guarantees should constitute a condition precedent to a finding of legitimate expectations. Quite the contrary, there are a good normative arguments as to why it might not be so. First, the doctrine should be differentiated from obligations elevated by operation of an umbrella clause. Second, to do so excludes circumstances in which no specific guarantee is provided, but where the State has nonetheless clearly misled the investor. Third, the pre-Glamis jurisprudential trends contain sufficiently robust protections for States fearing willy-nilly subjection to the doctrine. The next paragraph will address this third point in relation to the second point.

The second development outlined above seems unnecessary when one considers the alternative way in which the Tribunal could have articulated the standard. Instead of saying that the expectations were reasonable, but not legitimate, it might have taken a different course, and achieved the same outcome. This solution lies in the articulation by the tribunal of the expectation itself. In order to have been frustrated in the case at hand, the expectation of the investor would have had to have been that its mining rights would not be diminished in a way consistent with natural justice, the rule of law, due process, etc. Such an expectation in the context of mining and environmental regulations would indeed be objectively unreasonable. Such a course of reasoning would effectively avoid the paradox mentioned above.

Presumably, the pursuance of a quasi-contractual obligation will increase legal certainty, and reduce the number of fallacious fair and equitable treatment claims brought by investors. However, there is a real question as to whether this is the case. To a certain extent the resolution of a normative question of legitimate expectations will be a difficult one, clouded with some degree of uncertainty. To a certain degree this is unavoidable. The question then becomes whether the introduction of a quasi-contractual requirement really limits this inquiry, and at what cost. The answer to this question will only be borne out in the decisions that will follow, and may never be fully understood nor affirmatively proven.

In conclusion, although the Glamis Tribunal might be lauded for winding back investor rights, the providence of the imposition of the quasi-contractual requirement and the paradox of reasonable yet illegitimate expectations remain in question.

 Tolga R Yalkin is a graduate student in the Faculty of Law, University of Oxford and President of Oxford Pro Bono Publico, a public interest law program of the Oxford Law Faculty. His Oxford thesis considers the international minimum standard of treatment in international investment law.

 Earlier this month, the British Institute of International and Comparative Law (‘BIICL’) held its annual conference in London and focussed on the theme of “Business and International Law” in London on 5 June 2009. Together with Professor M Sornarajah (National University of Singapore), Professor Peter Muchlinski, (University of London) and Sylvia Noury (Freshfields Bruckhaus Deringer), I spoke on one of the panels. The discussion in our panel revolved around international investment arbitration, with the two senior panellists focusing on broader systemic developments, and the latter two on specific technical areas of international investment law. In this post, I wish to reflect on the proposition by Professor Sonarajah-one of the doyens of international investment law-that the expansion of jurisdiction by international investment tribunals offers evidence that the investment treaty system is intrinsically pro-business.

Sornarajah advanced the proposition-enjoying increasing purchase in the international legal community-that bilateral and multilateral investment agreements and the system of international investment arbitration was conceived, and indeed continues to operate, on a number of false assumptions. Foremost among these is the ‘hunch’ that a system of international investment arbitration would significantly increase the inflow of capital to developing countries, bringing with it wealth and development to some of the world’s poorest citizens. According to Sonarajah,this justification has been promoted by neo-liberal business interests-rather than arising from genuine social concern, Furthermore, he claims that the system has ‘entrenched’ itself by providing arbitrators and international law firms-for whom the system ‘produces golden eggs’-with vested interests. The result, as he sees it, is that the system is intrinsically geared towards the interests of business and capital-exporting States. In support of this contention he provides examples that illustrate the expansion of jurisdiction enjoyed by tribunals.

Sornarajah believes that the examination of the way in which jurisdiction has been expanded will permit us to determine: (1) whether the system can be ‘salvaged‘; and (2) what measures might be adopted it this respect.

Despite painting a compelling picture of what he sees as the true nature of international investment arbitration, Sornarajah’s submission must be seen, at best, as a starting point for further inquiry. The main flaw of his approach is that reaching firm policy conclusions requires more than polemic arguments and anecdotal examples; it requires a solid and rigorous analytical approach to considering both:

(1) the outcome of investment decisions; and

(2) the legal reasoning engaged in by investment tribunals.

In order to ground any policy imperative, the way in which these two elements are considered is critical. First, they should be analysed separately. This means that it is possible that we might decide that although the legal reasoning adopted by tribunals be sound we are unhappy with the substantive outcomes of the decisions they have reached. Second, both considerations must receive sufficiently comprehensive treatment. It is not enough to point to anecdotal examples of an outcome we are dissatisfied with, or some legal reasoning that is flawed or that conflicts with first principles. Such anecdotal reasoning may be sufficient for the purposes of tracing the contours or general trends of international investment arbitration, in a descriptive sense, but cannot form the basis for crafting policy treatments.  Tailored and concrete proposals on how to reform the system cannot be developed without isolating and dealing with the two above considerations in full. Only then can effective policies be proposed-identifying not merely that action is called for, but what form it should take.

To a certain extent, Sornarajah’s argument touches on both these elements, but considers them neither separately nor in full. He takes particular exception to the definition of ‘investor’ expounded in Tokios Tokelés v Ukraine and also the treatment of most-favoured nation clauses (‘MFNs’) in Maffezini v Spain. His analysis fails in a number of respects.

The thrust of his illustrations might be criticised on two counts. First, by his own admission, the decisions chosen constitute ‘high water marks’ vis-à-vis the supremacy of investor’s interests. If this is the case, we ought to look to the average, rather than the most extreme examples, for evidence of system failure. Turning first to the example of MFN clauses. Broadly speaking, a MFN clause is a promise from one state to another that it will not treat the investments of nationals of the other State any worse than those of any other nation. MFN clauses have been the darling of investors, as they constitute an absolute standard that is easily comparable and that avoids variability inherent in other non-discrimination clauses. A number of cases have dealt with their treatment over the years, APPL v Sri Lanka in 1990, Maffezini v Spain in 2000, CMS v Argentina in 2003, Salini v Jordan in 2004, Siemens v Argentina also in 2004, and Plama v Bulgaria in 2005, to name just a few. Out of this handful of cases selected, Maffezini v Spain unquestionably constitutes the high-water mark in the expansion of MFN clauses. Since then, there has been an observable retreat, with expansionist decisions receiving openly hostile criticism in the decisions of some tribunals (see, eg Plama v Bulgaria). The conclusion that might be drawn on reading all of the cases is that MFN clauses can offer procedural advantages, even when the comparison is the relative silence in the other instruments (Maffezini v Spain, Siemens v Argentina) providing to do so falls within the wording of the provision interpreted on principles in the Vienna Convention (Plama v Bulgaria, Salini v Jordan) and the application of the clause does not lead to an artificiality of consent (Plama v Bulgaria), and that they can offer substantive advantages, but not where the benchmark is silence in the other instruments (APPL v Sri Lanka, CMS v Argentina). The outcome is really a mixed, bag, and far less uniform in its treatment of the standard than is suggested by Sornarajah.

Second, Sornarajah does not consider to any extent the legal reasoning found in the decisions. There very well may be cases in which the outcomes are so manifestly egregious that they could not possibly be based on sound legal reasoning. But more often than not, when decisions dictating ostensibly unacceptable outcomes emerge, evidence of their flaws will be found within their passages, rather than solely in the substance of their orders. It is rare to be faced with a manifestly incorrect outcome without some incorrect legal reasoning. He cites the example of Tokios Tokelés v Ukraine, in which ‘local’ Ukrainian investors were able to obtain the benefit of an investment treaty by incorporating a shell company in an overseas jurisdiction, and the explicit endorsement of this proposition by the tribunal in Aguas del Tunari v Bolivia. With reference to Tokios Tokelés v Ukraine, the Tribunal seemed to adopt a rather literal interpretation of the treaty, with Professor Weil’s vigorous dissent preferring a teleological interpretation. Sornarajah does not address the legal analysis-only the outcome. this might be likened to the situation  of the victim of a crime who is outraged at the mistrial. It might be observed that although in this particular situation the decision may appear unjustified, especially from the perspective of particular individuals or stakeholders, when one looks to the broader principles at play the case may not be so straightforward. Careful review and criticism of the legal analysis would likely help us better decide both whether the case is an outlier and what aspects of it we might like to retain in any policy changes we make. For example, it could be that the legal reasoning is sound and that we are just unhappy with the legal rules that direct the arbitrator. In such a case we might simply consider providing different instructions to arbitrators, rather than abandoning the system altogether.

Sornarajah’s position that neo-liberalistic ideology took root in the context of international investment arbitration, perpetuating business interests to the detriment of the developing countries, has merit. However, this merit only extends to suggesting that we carefully consider whether we are happy with the status quo. That is where its indicative value stops. Only with carefully drawn distinctions between law and policy, reasoning and outcome, will we be able to identify the nature and character of measures that should be adopted. The only alternative to such measured analysis is the same ideologically driven solutions that Sornarajah himself advocates against.