In my last post I discussed the different options for reforming investor-state dispute settlement put forward in a recent UNCTAD policy paper and argued that enacting institutional reforms without addressing substantive law is unlikely to fully address investment law’s legitimacy problems. Instead, I suggested that the current regime could be reformed from within, that is, by arbitrators bringing their conduct in line with public law values, in particular the idea of the rule of law. Today, I want to discuss the virtues of investor-State arbitration in order to show why reforming this institution from within, rather than restricting access to it, or completely overhauling it, makes sense.
The Importance of Individual Recourse to Investor-State Dispute Settlement
Investor-State arbitration is important because, above all, it offers foreign investors a mechanism to hold States accountable for breaches of the promises they make in investment treaties. This transforms investment treaties from political declarations into readily enforceable rules to stabilize investor-State relations. Conversely, from the host State’s perspective, the investor’s access to arbitration enables States to make the commitments vis-à-vis foreign investors under investment treaties credible. This, in turn, reduces the political risk of foreign investment, lowers the risk premium connected to it, and makes foreign investment projects more cost-efficient. This benefits investors and host States, as the products and services offered become cheaper.
Certainly, the credibility of commitments of the host State is not only a matter of the availability of dispute settlement. Reputation, community pressure, the moral obligation to keep promises, or host States’ self-interest may also contribute to its living up to promises made in investment treaties. A host State will also be restrained in its treatment of foreign investors as mistreatment of one investor may keep others from investing. Yet, such mechanisms only work imperfectly because host States can benefit by unilaterally breaching their original obligation after an investor has made its investment, for example the construction of a power plant or factory, by imposing additional obligations or even expropriating the investment. For host States to make credible commitments and to offer ways to be held accountable, independent third-party dispute settlement mechanisms are necessary.
Domestic and International Fora and Their Limits
Such mechanisms can be set up at the domestic and/or the international level. However, host State courts are often not well-positioned to enforce governments’ promises vis-à-vis foreign investors. Read the rest of this entry…