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The Public Law Approach in the Practice of Investment Treaty Arbitration

Published on January 22, 2014        Author: 

In my last post, I discussed how comparative public law methodology could inform the resolution of investor-State disputes and thus help to reform the system from within. This may sound like a view from the ivory tower. In this post I will first discuss why arbitrators have an incentive to make use of such a methodology and, second, point to existing cases in which tribunals have already adopted a comparative public law framework.

System-Internal Reform and Identity Change

The success of using comparative public law as a system-internal reform strategy depends on the extent to which those active in practice endorse it. Enculturating public law thinking will need an identity change among arbitrators, arbitral institutions, annulment committees, and disputing parties. But why should a change in thinking take place, if there is nobody who coerces arbitrators to incorporate public law thinking or parties to develop their submissions on the basis of comparative public law? Do arbitrators not even have an incentive to keep the system running in a way that it maximizes the benefits of investors as claimants, and in turn, the arbitrators’ own interest in being reappointed? This is what critics like Gus Van Harten argue. In his view,

the novel situation in which claims can be brought by only one class of parties, and only the other class can be found to have violated the treaty, provides investment treaty arbitrators (including those who are state-appointed) with an incentive to favour claimants in order to advance the interests of the industry and their position within it.

Appointment of Arbitrators as a Source of Change

My view is different. I think that the one-off nature of arbitration and the appointment mechanism for arbitrators have a great potential for bringing change to the system. Certainly, arbitrators have an incentive to keep the system running and keep themselves running within that system. But if they seek continuous reappointments, they will need to react to outside criticism and adapt their behaviour and decision-making accordingly. Precisely because of their interest in being reappointed, arbitrators have an incentive to incorporate comparative public law thinking if this is increasingly expected of them by both disputing parties and the wider public.

Appointment Process and Legitimacy

The appointment process in arbitration may there be much less of a threat to balanced decision-making, but a mechanism that allows new ideas to seep into the system and arbitrators to adapt to changing expectations. If arbitrators fail to meet these expectations, they will receive less and less appointments and be phased out as influential arbitrators The reappointment process can therefore work as a means for the system to accommodate and process changes in its environment, including the mounting criticism of the current functioning of investor-State arbitration. Ultimately, the reappointment process itself, and the way it helps the system of investor-State arbitration to adapt to the evolving expectations of the international community, can therefore be a source of legitimacy in aligning the decision-making of arbitrators with the wider public and its values, including the rule of law and democracy. What is more, the reappointment process in investor-State arbitration may allow more flexible and quicker adaptation to the outside than the appointment processes in standing international courts where fewer decision-makers are appointed for a longer period.

Comparative Public Law in the Practice of Investment Treaty Arbitration

That arbitrators are capable of drawing on comparative public law is not an idle hope, or esoteric and unworkable academic idea. Instead, there are several recent cases where comparative analysis has played a significant role. The Tribunal in Total v. Argentina, for example, observed:

In determining the scope of a right or obligation, Tribunals have often looked as a benchmark to international or comparative standards. Indeed, as is often the case for general standards applicable in any legal system (such as “due process”), a comparative analysis of what is considered generally fair or unfair conduct by domestic public authorities in respect of private firms and investors in domestic law may also be relevant to identify the legal standards under BITs. Such an approach is justified because, factually, the situations and conduct to be evaluated under a BIT occur within the legal system and social, economic and business environment of the host State (see para. 111).

Similarly, the Tribunal in Toto v. Lebanon stated that “[t]he fair and equitable treatment standard of international law does not depend on the perception of the frustrated investor, but should use public international law and comparative domestic public law as a benchmark” (para. 166).

And as a final example, the Tribunal in Occidental v. Ecuador applied the principle of proportionality to determine the legality of a revocation of an operating license by the host State and expressly placed it into a comparative public law context. It stated:

The application of the principle of proportionality may be observed in a variety of international law settings, including cases in which the proportionality of countermeasures taken in trade disputes is challenged before a WTO Panel under the General Agreement on Tariffs and Trade (“GATT”).

On the application of proportionality generally in the context of administrative action, the most developed body of jurisprudence is in Europe. It is very well-established law in a number of European countries that there is a principle of proportionality which requires that administrative measures must not be any more drastic than is necessary for achieving the desired end. The principle has been adopted and applied countless times by the European Court of Justice in Luxembourg, and by the European Court of Human Rights in Strasbourg.

Against that background, the Tribunal observes that there is a growing body of arbitral law, particularly in the context of ICSID arbitrations, which holds that the principle of proportionality is applicable to potential breaches of bilateral investment treaty obligations (see paras. 402-404).

All these examples indicate the willingness and capability of arbitral tribunals to adjudicate and reason their awards in line with the public law paradigm and comparative public law methodology.

Beyond Dispute Settlement

Yet, reconceptualizing international investment law and making use of comparative public law should not be limited to dispute settlement institutions. Rethinking investment treaty standards in line with comparative public law reasoning could also be pushed by treaty parties, for example, by including treaty provisions that mandate tribunals to take into account insights from comparative law analysis in interpreting investment treaties. In any event, increasing public law thinking in international investment law is also a call for more comparative law capacity-building and research, both by academics but also national institution and international organizations. States and international organizations interested in reforming investor-State arbitration along these lines could and should support such research through appropriate funding and capacity-building programs.

Comparative Public Law and Multilateral Consensus Building

All of this does not mean that institutional reforms of investor-State arbitration should not be considered and discussed. On the contrary, these reform debates are highly important in making informed and considered decisions about the future of international investment law and investor-State arbitration. But, in my view, such reforms need to be accompanied, if not preceded, by multilateral consensus-building processes on substantive law that go beyond the level of abstract investment law principles and that help to concretize these principles for more concrete areas of policy-making. Comparative public law analysis, in my view, is the most promising way to develop standards that are common to domestic public law systems and existing systems of international judicial review, and to analyse how they apply to specific policy fields. Helping to align investment arbitration with the functioning and the results of other systems of public law adjudication can contribute to forming an emerging consensus on the many contested issues in international investment law and afford legitimacy to the dispute settlement activity of investor-State arbitral tribunals.

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