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Home International Economic Law From Protection to Governance of Foreign Investment: Vulnerability Theory as a Paradigm Shift in International Investment Law

From Protection to Governance of Foreign Investment: Vulnerability Theory as a Paradigm Shift in International Investment Law

Published on December 27, 2019        Author:  and
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Introduction

The international investment law (IIL) regime is experiencing a series of paradigm shifts in light of ongoing backlash against its alleged lack of interest in public concerns. Increasingly, ‘external’ stakeholders such as NGOs, locals or indigenous peoples adversely affected by the activities of a foreign investor (or the excessive protection and incentives extended to a foreign investor by the host state) are therefore given a voice in arbitral disputes and the public debates surrounding them. While foreign investors virtually never have any international obligations pursuant to international investment agreements (IIAs), there is already a significant shift towards carve-outs, policy exceptions, and provisions safeguarding the regulatory powers of states against the (excessive) limitations imposed upon them by arbitral interpretations that disproportionately favor foreign investors. A plethora of discussions have touched upon the shape of such extra-legal (or extra-economic) considerations – such as human rights, environment, and sustainable development – that might come into play in order to transform IIL into a social justice regime, responsive and reflexive of the injustices suffered by all stakeholders (Baetens, 2013; Linarelli et al., 2018; Arcuri and Montanaro, 2018). Yet, no reform proposal has realistically advocated for a raison d’être shift in IIL.

This contribution seeks to add to the existing strand of scholarship by doing precisely that, via the application of Martha Fineman’s ‘vulnerability theory’ to the IIL context (Fineman, 2008; 2017). Specifically, it elaborates on the theory’s potential for solving some of the long-standing conundrums in IIL, such as its selective protection of certain subjects of law (foreign investors), its formalistic approach to equality embodied in the ‘sameness of treatment’ principle, and its unhelpful designation of interested ‘groups’.

Martha Fineman’s Vulnerability Theory and IIL at a Glance

One of the fundamental features of Fineman’s theory is the replacement of the liberal subject in law with the vulnerable subject (Fineman, 2008). Whilst the former idea portrays human beings as autonomous, rational, and disembodied subjects, the latter is anchored in the human condition; that is, the universal and inherent vulnerability of all human beings by virtue of their embodied and embedded existence. This vulnerable subject requires a very different modus operandi for the institutional and social regimes that surround humans than the liberal subject has required until now. If one accepts the inherent and embedded vulnerability of all human beings, whose precarious nature is further exacerbated by a plethora of exogenous and/or endogenous factors (medical, political, social, psychological or other), one could better understand the inevitable need for ensuring that the protection extended to foreign investors is afforded to all natural persons with an interest at stake.

At first glance, one might think that the foundations and the functioning of IIL go against the notion of vulnerability. Despite being a far cry from the rationale behind Fineman’s theory, the very existence of IIL arguably already stems from some assumption of vulnerability. IIL does not deal with the vulnerabilities of different stakeholders uniformly, but it partly and selectively acknowledges the vulnerability of foreign investors within their own social, political and economic environment. The manner in which foreign investors are regulated and protected from political-economic risks perpetrated or facilitated by states builds upon and around the vulnerable position in which a foreign investor is assumed to be. An IIA, on its façade, aims to do exactly this: work as a ‘state action’ that counters, mitigates or alleviates an impending political risk. This (incidental) acknowledgment of foreign investors’ vulnerability, however, does not extend to any other vulnerability that exists in non-economic, yet interconnected domains. Albeit generously sympathetic towards the vulnerable position of a foreign investor, IIAs are completely blind to the risk of exacerbating the vulnerability of the public caused by the interaction between a foreign investor and a host state. Furthermore, individual IIAs and the IIL as a whole do not generally try to justify this selective acknowledgement of the vulnerable condition beyond vague preambular remarks about how the protection of foreign investors fosters economic relations. Many IIAs currently in force (such as China – Tanzania BIT of 2014) include such language, but only to the extent of stating that protecting foreign investment is necessary because it will increase economic prosperity.

Treating ‘Sameness of Treatment’ as Equality

According to Fineman, society understands ‘equality in terms that are formal, focused on discrimination, and inattentive to underlying societal inequities’ (Fineman, 2008). Taking this as her departure point, Fineman skillfully dissects the current formalistic notions attached to equality and addresses their shortcomings through the core notion of the vulnerable subject.

First, she argues that the traditional equal protection doctrine, which ‘form[s] the main axis around which claims for equal protection can be made’ (Fineman, 2008, p. 3), defines a limited sphere of interest groups aligned with individual legal identities and exclusively operates within this sphere. It further considers different persons equal (or unequal) based on the sameness of formalistic features (incorporation, seat of business, etc.) and the treatment that they are accorded. Not only does this rather superficial categorization of subjects entitled to protection or ‘fair’ treatment fail to fully respond to real life injustices, but it also treats seemingly similar, but fundamentally different contexts as the same (and vice versa).

As Fineman further notes, ‘[u]nless some distortion is perceived to be introduced by impermissible bias, the state is not accountable’ (Fineman, 2008, p. 3). Indeed, IIL is one of those legal domains in which the ‘sameness of treatment’ modus operandi is prominent. This is most visible in the National Treatment and the Most-Favored-Nation principles. A ‘sameness’ analysis, studies the presence of ‘like situations’ or comparable subjects (primarily on the basis of their status as foreigners and investors) and identifies whether a foreign investor receives (at least) the same level of favorability or leniency as the one enjoyed by nationals or the most favored third-nation investors. That being said, this ‘equality’ does not extend to the treatment of national investors. Indeed, the arbitrary asymmetry engrained into its raison d’etre has been a prevalent element of the collective systemic backlash targeting IIL. It is also noteworthy that as far as foreign investors are concerned, the bar set by the treatment extended to national investors is only a lower threshold; therefore, treating foreign investors more favorably vis-à-vis nationals does not technically disrupt this particular notion of ‘equality’.

Another highlighted feature of the ‘sameness of treatment’ analyses is the focus on:

‘individuals and individual actions … to identify the victims and the perpetrators of discrimination, as well as to define what were the prohibited activities, the individual injury, and the specific intent involved in each occurrence […] [S]ystemic aspects of existing societal arrangements are left out of the picture’ (Fineman, 2008, p. 4).

Her observations regarding extra-legal considerations are illuminating in the context of IIL:

‘It is as though existing material, cultural, and social imbalances are the product of natural forces and beyond the ability of the law to rectify. While it may be beyond the will of the law to alter, existing inequalities certainly are not natural’ (Fineman, 2008, p. 5).

The exclusive focus on the protection of foreign investors and their investments in IIL creates this precise situation. Despite operating at the heart of a controversial nexus between economic and public interests, IIL does not concern itself with the broader cultural, social and even macroeconomic factors applicable to an arbitral dispute beyond using them as voluntary counter-balancing considerations vis-à-vis foreign investment protection. The relatively recent situations where extra-legal considerations are included in applicable instruments via carve-outs or clauses that seek to ‘balance interests’ of investors and the public/state (e.g, CETA) are but an exception to the rule.

States’ Responsibility: Restrained or Proactive?

Fineman’s analysis of states as non-intervening and restrained overseers and regulators demonstrates another downside to the formalistic and unjust manifestations of ‘equality’. As a point of departure, she rightly associates the detachment of the state as a proper ‘monitor or guarantor of an equal society’ (Fineman, 2008, p. 6) with the fact that multinational corporations and other large-scale international investors operate in a fundamentally lenient global framework. In fact, given the complete absence of obligations for investors in IIL and IIAs vis-à-vis the exclusive focus on states’ obligations and responsibilities with regard to economic rights and interests of foreign investors, IIL seems to follow this model. PPPs and similar (contractual) arrangements tasking private contractors to undertake public duties further complicates the situation. As profit-generating entities, corporations are not in a position to achieve ‘ambitious, even if ultimately immeasurable and illusive, goals’ (Fineman, 2008, p. 8) entrenched in public values and the so-called unquantifiable interests – but states are. Her elaboration on the state’s role in alleviating vulnerability is more holistic than the one that can currently be envisaged in IIL.

IIL Reform and Vulnerability?

Finally, Fineman’s theory provides an illuminating discourse for understanding how and why IIL falls short of addressing its systemic problems despite its ongoing reform process. Under the auspices of the Working Group III of the UNCITRAL, states are discussing how the Investor-State Dispute Settlement (ISDS) system should be reformed. Even though they seem to consider a reform of the ISDS ‘desirable’, what that reform should encapsulate remains controversial. The reform options are broad and aim for more institutional reflexivity, accountability and transparency, and yet, no reform proposal realistically considers a raison d’être shift, nor expressly brings the broader, foundational concerns outlined above to the table. The ongoing reform process is confined to the traditional ‘investor-to-state’ formula. Proposals do not alter the remedial methods already adopted in IIL, and are often conceived from the perspective of limiting a state’s responsibility vis-à-vis foreign investors, rather than attesting responsibilities to both states and foreign investors vis-à-vis the public. In other words, even the most ambitious reform initiatives leave the raison d’être of IIL untouched, when a shift from the protection to the governance of international investment could reveal a wealth of opportunities for addressing the current wave of backlash against the regime.

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4 Responses

  1. Cathal Kelly

    Your link for the term “social justice” in the first paragraph is to a password-protected database.

  2. Günes Ünüvar

    It seems the library DOI link was included by mistake. I have notified the editors and hopefully we will get it fixed soon. It is to an essay entitled ‘Responsibility and Global Justice: A Social Connection Model’ by Iris Marion Young, discussing moral agents’ responsibilities in constructing global structural social processes.

    Thanks for pointing it out!

  3. Kishor Dere

    Thank you Dr. Güneş Ünüvar and Aysel Küçüksu for highlighting finer aspects of Prof. Martha Fineman’s Vulnerability Theory vis a vis international investment law (IIL). In fact, Prof. Fineman deserves to be commended for salvaging the international investment law discourse from becoming hyper-Kelsenian i.e. ignoring (impure) factors other than law to protect the so-called ‘purity’ of law. Like any other branch of knowledge, law – including IIL, ISDS – is meant for society and world. One can ill-afford to exclude non-legal or extra-legal dimensions in the process of policy-making, dispute resolution, interpretation and analysis. Thus, it is pertinent to follow Roscoe Pound’s path of ‘social engineering’ to reduce friction in enforcement of the IIL, ISDS and allied matters. meaningful and fruitful.

  4. Kishor Dere

    Thank you Dr. Güneş Ünüvar and Aysel Küçüksu for highlighting finer aspects of Prof. Martha Fineman’s Vulnerability Theory vis a vis international investment law (IIL). In fact, Prof. Fineman deserves to be commended for salvaging the international investment law discourse from becoming hyper-Kelsenian i.e. ignoring (impure) factors other than law to protect the so-called ‘purity’ of law. Like any other branch of knowledge, law – including IIL, ISDS – is meant for society and world. One can ill-afford to exclude non-legal or extra-legal dimensions in the process of policy-making, dispute resolution, interpretation and analysis. Thus, it is pertinent to follow Roscoe Pound’s path of ‘social engineering’ to reduce friction in enforcement of the IIL, ISDS and allied matters.

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