Justifying privilege in international investment law – a rejoinder to Jurgen Kurtz

In a recent issue of EJIL (EJIL (2020), Vol. 31 No. 1), I have an article on how international investment law privileges foreign investors, to which Jürgen Kurtz in the same issue has written a reply, and in response to which the editors have invited me to provide a rejoinder.

In his reply Kurtz develops one main critical observation towards my article, namely of being “sceptical that law and law alone can offer a determinative answer to whether we can justify or condemn legal asymmetry” (p. 314).

It is not difficult to agree. Obviously, law alone does not determine whether a legal institution is justified. I am however somewhat puzzled that my argument is read in this manner. What I try to argue in the article is that the specific way in which international investment law in its current form privileges foreign investors, provides a challenge to its legitimacy. I argue that this challenge is rooted in a very basic legal concern, conceptualized in one manner or another in most national constitutional laws, that of equality before the law. As a very basic and abstract legal concern, this evidently does not provide a determinative answer. It provides a question. It suggests that providing a select group with something resembling privilege should evoke suspicion and is prima facie problematic if we cannot provide a good justification for it, functionally or otherwise. What I argue is that no such justification is forthcoming and able to justify investment arbitration in its current form of providing a substitute for municipal courts. This is not to say that protection of foreign investment and investor-state dispute settlement per se is unjustified.

Kurtz’ main argument, in contrast, seems more focused on the functional justification of foreign investment protection per se. In this regard, he interestingly proposes a more discerning assessment of different types of vulnerability to host states’ legal and political processes for different types of investments. While I am uncertain whether this in practice has informed the way most investment treaties are drafted, it has much merit as a conceivable and more accentuated justification of “extra-domestic” protection for certain types of investments. As Kurtz argues:

“it may well be perfectly rational for a given state to offer extra-domestic priority for select types of foreign investment because (a) it is a risk borne only by foreign investment in some economic sectors and (b) the state cannot overcome the problem itself using domestic tools and promises” (p. 314).

I am not sure investor vulnerability, even the more sophisticated, discerning approach suggested by Kurtz, resolves my concern however, with the more specific legal characteristics of the current investment regime that I criticize, specifically the way it functions as a substitute for municipal law and courts. Thus, when Kurtz argues that my article relies on a “strawman” to dismiss investor vulnerability as a sufficient justification (p. 316), I wonder whether it might not equally be him who creates one. My argument is essentially that I do not find vulnerability to the host state law and political process a convincing argument for giving foreign investors, as a broad and indiscriminate group, special rights beyond what I term a minimum standard rationale. This is not to say that I disagree with Kurtz about foreign investment being exposed to special risks, and that an “extra-domestic” protective regime to this effect may be justified. However, this does not mean that any kind of protective remedies are justified. The question remains, why should foreign investors not be expected, at least initially and as a main rule, to follow the same rules and legal procedures as any other subjects of the host state’s legal authority? I do find some comfort at least in being told that I share this concern with many of Kurtz’ students. In my experience, there is often much to be learned from critical students.

Through his discerning approach, valuably differentiating between what he terms the political economy of different types of investments, Kurtz provides food for further thought about the general justification of foreign investment protection however. In a sense, he brilliantly responds to what I called for in my article, a critical examination of the justification, functional, legal or otherwise, of the current investment treaty arbitral regime. Kurtz does this by proposing that in order to assess the particular vulnerability of foreign investment in relation to host state laws and political processes, we need to distinguish between at least three groups of foreign direct investment – respectively resource-seeking, market-seeking and efficiency-seeking foreign investments. Somewhat simplified, investments in resource exploitation on one end of the scale, will be more exposed to a shift in power towards the host state, than, on the other end of the scale, investments motivated by e.g. opportunities for more efficient production in a particular location. Market-seeking investments, e.g. investments in public infrastructure or services, would be somewhere along the middle of this scale. This both confirms and strengthens, and further develops in a significant way, the essential argument I try to make in my article. It illustrates that simply singling out the broad category of “foreign investors” as a select group requiring special rights is problematic. But Kurtz’ criticism here also goes further than mine, because it brings into question the very justification of foreign investment protection as such for large categories of investments, in particular those that are not particularly subject to the risks of the “obsolescing bargain.” It suggests, in effect, that the current investment regime has a conspicuous lack of an adequate, unifying rationale. This harbours a potential for critique that, admittedly, goes far beyond the scope and ambitions of my article.

I am however more hesitant as to the adequacy of this perspective for justifying the more distinct legal characteristics of the current investment regime that my article addresses and criticizes. As I argue in my article (p. 308-310), a “contractual” or “bargain” perspective primarily translates into a need for host states to be able to make credible commitments. To this we can add a need, beyond individual commitments, to be able to offer such stability, security and predictability for investments that foreign investors are not dissuaded from investing. No doubt, the “political economy” or obsolescing bargain perspective of Kurtz is relevant also here, because it suggests that where the domestic legal system is unable to deliver credible commitment or some measure of stability and predictability, the risk of such dissuasion is accentuated. It suggests that at least for these kinds of investments, there is indeed a need for some extra-domestic remedy that can promise the needed credibility or certainty. But the argument on its own hardly goes much further than this. It does not explain or justify the particular legal characteristics of the current system, which makes it function, potentially, as a substitute instead of as a supplement and corrective to domestic law. It is not a given that an adequate measure of credibility, stability and certainty might not be provided by a protective regime with a more supplementary and deferential attitude towards domestic law. The question here is of course what is adequate. This in my view is where the need for critical analysis is pressing. A purely “functional” perspective easily becomes blind to the complex impacts investment arbitration may have on domestic law, as shown recently e.g. by Arato (AJIL (2019) Vol. 113 No. 1).

As lawyers, especially in the field of international economic law, we must of course be sensitive to the functional needs and economic realities that the law is there to serve. However, this does not mean we should simply capitulate to such concerns and ignore the inherited wisdom embedded within our laws and legal tradition. A “political economy” oriented, functional perspective may also be one-sided, which perhaps even go some way to explain the many controversies surrounding both international investment law and international economic law generally. From a purely functional perspective, designing a remedy to secure optimally efficient dispute settlement and legal certainty for foreign investment (or certain foreign investments) might seem like a good idea. At the same time, as I point to in my article (p. 303-305) there is little hard evidence to suggest that the way in which the current system is designed to promote efficiency and legal certainty actually does much to attract foreign investment. It is, accordingly, questionable whether a functional rationale actually justifies “overprotecting” foreign investment beyond what would follow from a more common standard of municipal laws (i.e. what I term an “international minimum standard rationale”). By providing a substitute for domestic institution building, the current system might even hurt economic development in the long run, by preventing much needed domestic legal development in host countries. These connections are complex, and difficult to prove, either way. But I would argue that a critical, legal intake to these issues is for that reason particularly appropriate. Its chief merit is of course not that “it alone can offer a determinative answer to whether we can justify or condemn legal asymmetry.” It may, however, evoke some suspicion and make us demand a clearer justification for maintaining unchanged a system that prima facie leaves certain questions unanswered.