Towards a Constitutional Law Framework for Investment Law Reform

Reforming international investment law and investor-state arbitration is a widespread concern. This is nowhere more manifest than in the heated debates (in Germany and elsewhere) about the EU-Canada Comprehensive Economic and Trade Agreement (CETA) and the Transatlantic Trade and Investment Partnership (TTIP). Should there be investor-state arbitration between economies with well-functioning legal systems? Do we need an appellate mechanism to control arbitral tribunals? Who should serve as arbitrator and what ethical standards govern? And how should the substantive standards of investment protection be formulated in order to safeguard policy space for host states? These are some of the questions debated. At the same time, reforming international investment law is not only on the agendas of contracting parties, it also plays an important role for international organizations, such as the United Nations Conference on Trade and Development (UNCTAD), the Organisation for Economic Co-operation and Development (OECD), or the Southern African Development Community (SADC).

The Need for a Normative Framework for Investment Law Reform

The reform proposals that result from these various initiatives reflect the political pressure international investment law is facing; they also put pressure on states to remedy the discontents with the current system (see my earlier post on EJIL: Talk!). At the same time, the large number of reform proposals currently floated risk fragmenting investment law even further. This can be counterproductive if the aim is to arrive at an investment law regime that is both balanced and predictable. Furthermore, reform proposals themselves reflect underlying political and ideological preferences that may not be globally shared. What is needed therefore is a debate about these preferences and their impact on investment law reform. In other words: we need a broader debate about the normative framework for investment law reform.

As I argue in my Editorial of the latest Special Issue of the Journal of World Investment and Trade (entitled ‘Towards Better BITs? – Making International Investment Law Responsive to Sustainable Development Objectives’), this framework should not be seen only as a matter of (potentially short-lived and changing) economic policies that differ from one country to another. Instead, we should develop a framework for investment law reform on the basis of more fundamental principles, in particular if we are looking for ‘systemic reform’ that makes international investment law acceptable to all states. This requires – as Karl Sauvant and Federico Ortino rightly point out in a recent study – consensus-building processes about underlying assumptions and objectives for investment law reform.

Constitutional Law Approaches to Investment Law Reform

In my view, such a normative framework is best developed on the basis of a constitutional law analysis of international investment relations. This perspective is mandated for the European Union (EU) by Article 21 TEU which requires the EU’s external action to be guided by its own constitutional principles, namely ‘democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect for the principles of the United Nations Charter and international law.’ But constitutional law is equally relevant for other states, given that international investment treaties become legal yardsticks for domestic law and policy generally and therefore have a quasi-constitutional function.

Yet, in order to serve as a basis for global consensus, constitutional analysis cannot draw on specific national constitutional understandings. Instead, a broader and more comprehensive constitutional framework is necessary. Two sources of constitutional norms and values are particularly apposite in this context: first, principles of comparative constitutional law and, second, multilaterally consented principles of United Nations law.

Comparative Constitutional Law

The first set of principles providing a normative framework for investment law reform stems from a comparative analysis of how domestic constitutional law, and potentially other regimes of regional governance, envision the relationship between the state and private economic actors and circumscribe the proper role for dispute settlement institutions in reviewing government conduct. Principles that are broadly recognized in domestic constitutional law in a large variety of countries across all regions of the world encompass the principles of democracy, the rule of law, and human rights. These principles could be used not only to provide a more balanced interpretation of investment treaties (as I have suggested elsewhere), but also to structure a global investment law reform agenda. They militate for ensuring policy space for states, transparent procedures for dispute settlement, and the protection of human rights; but they also demand a system of investment protection that ensures the accountability of host states under the concept of the rule of law.

Principles of UN Constitutional Law

The second set of principles that can inform investment law reform stems from UN constitutional law. One norm of UN constitutional law in particular should be placed at the center of the current reform debates. This norm is Art. 55 of the UN Charter, which states:

Article 55

With a view to the creation of conditions of stability and well-being which are necessary for peaceful and friendly relations among nations based on respect for the principle of equal rights and self-determination of peoples, the United Nations shall promote:

1.  higher standards of living, full employment, and conditions of economic and social progress and development;

2.  solutions of international economic, social, health, and related problems; and international cultural and educational cooperation; and

3.  universal respect for, and observance of, human rights and fundamental freedoms for all without distinction as to race, sex, language, or religion.

Although this provision is addressed to the UN, it can be read, together with Art. 56 of the UN Charter, as setting out broader global constitutional principles, which can provide a frame for investment law reform. In fact, Art. 55 of the UN Charter contains a number of constitutional principles that are central for investment law reform: 1) ensuring international peace and security and the peaceful settlement of disputes; 2) the protection of self-determination; 3) the principle of sovereign equality; 4) the protection of human rights; and 5) development and social progress.

Read in light of these principles, investment law needs to be conceptualized as a tool for states to achieve “peaceful and friendly relations” that “respect … the principle of equal rights and self-determination” in order to work towards “higher standards of living …, economic and social progress and development”, while “respect[ing] … human rights and fundamental freedoms.” This perspective would stress: 1) the objective of investment law to govern international investment relations peacefully, by providing mechanisms for peaceful settlement of disputes; 2) the need for investment law to give sufficient policy space to states to pursue their development strategies autonomously; 3) the application of investment rules to both capital-importing and capital-exporting countries; 4) the vision to regulate not only state behavior vis-à-vis foreign investors, but also that of investors vis-à-vis states and other affected communities; and 5) the importance of human rights in informing international investment relations and investment law reform.

Investment Law and (Sustainable) Development

But above all, the principle of (sustainable) development, understood by the Brundtland Commission as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs,” has particular importance among the constitutional principles of UN law to guide investment law reform. The principle requires an important reconceptualization: from understanding investment law as an obstacle to development towards understanding it as a tool for host states to achieve their development objectives. That this is possible in practice is not least shown by UNCTAD’s Investment Policy Framework for Sustainable Development that translates the principle of sustainable development into concrete formulations of investment treaty provisions.

This reconceptualization is also necessary considering the importance the UN and its members attribute to increasing investment for achieving the UN Millennium Development Goals and countries’ development agenda more generally as expressed, inter alia, in the Agenda 21 (para. 2.23), the Monterrey Consensus (para. 22), and the Rio+20 Conference. In this context, the role of investment law must consist in fostering the political stability needed for domestic and foreign investors to engage in growth-oriented economic activity without hampering the pursuance of competing public concerns. At the same time, the principle of sustainable development also demands that (foreign) investment is subject to effective regulation at both the domestic and the international level in order to avoid environmental and social harm.

In sum, all of the above shows that constitutional analysis (at a domestic, comparative and international level) can serve as the normative basis for reforming investment law in a way that results in a comprehensive, balanced, predictable, and broadly consented global regime.