I have recently been pondering a common complaint voiced against the EU and Canada’s proposal for a multilateral investment court, which is that it would be biased against investors because all of the judges would be selected by states (see, for example, the ABA’s Report here and Judge Schwebel’s speech here). In my view, this criticism is misguided because it confuses the role of states as disputing parties and as treaty parties. States have dual roles in the investment treaty system: they are treaty parties with a legitimate interest in the interpretation and application of their treaties and they are disputing parties with a desire to avoid liability in particular cases. When it comes to questions of institutional design, I think that we need to adopt a treaty party framework of analysis, not a disputing party one.
In a particular dispute, an investor can appoint one arbitrator and a state can appoint another. Once a case is filed, it is hardly surprising that both disputing parties would seek to appoint arbitrators who are broadly sympathetic to their positions. This tends to generate polarization within the field with arbitrators often being thought of (whether accurately or not) as having either a “pro-investor” or a “pro-state” bias. This division helps to explain why, when judged from the perspective of the dispute resolution framework, investors and members of the arbitral community have raised concerns that having tribunals selected by states only would lead to biased results. This is so even though neither the claimant investor nor the respondent state would appoint the particular tribunal members tasked with hearing the case.
When it comes to institutional design, however, we need to shift our focus from the disputing party framework to the treaty party framework. Although states have certain interests as disputing parties in particular cases, things look different when they are treaty parties in the negotiating room. The treaty parties are the ones that strike the original deal that affords certain protections to investors and provides certain safeguards to states. In doing so, they balance their interests as capital exporters and capital importers because either they have both interests individually and thus need to internalize them (which is true of the EU and Canada) or they have both interests collectively and thus need to negotiate a compromise between them (which is true of treaties between a clear capital importer and exporter, subject to the operation of power asymmetries).
When it comes to designing the right system for dispute resolution, what the treaty parties want is adjudicators who are going to be faithful to the bargain that they have struck. This isn’t a question of being biased in favor of investors or states – indeed, the notion of being biased in favor of the treaty parties makes little sense. Instead, it is a question of adhering to the bargain that the treaty parties collectively agreed upon which includes striking a balance between investor protections and state prerogatives. If states were only ever motivated to avoid liability, they wouldn’t have agreed to investment treaties that afford investors protections in the first place. Being pro the treaty parties isn’t about being pro-investor or pro-state – it is about being pro honoring the deal that was made.
I suspect that this is part of what the EU and Canada are trying to achieve with the investment court. By having judges appointed by the treaty parties rather than the disputing parties, and by requiring that these adjudicators are first and foremost experts in public international law, the EU and Canada are trying to redesign the system to ensure that the judges understand that their role is to faithfully interpret and apply the deal that was struck by the treaty parties, whether or not that means finding for a claimant investor or a respondent state in a particular case. The same is true of other judicial bodies, like the European Court of Human Rights and the Iran-US Claims Tribunal, where judges are appointed by the treaty parties but find in favor of both individual claimants and respondent states in particular cases, without allegations of systemic pro-state bias.
Adopting this sort of institutional framework also encourages states to appoint balanced adjudicators, rather than ones that lean too heavily in favor of investors or states. Joint capital importers and exporters, like the EU and Canada, will need to select adjudicators that they would be happy to live with on either side of the equation, i.e., that they would be content to have hear a case brought by either their investors suing foreign states or foreign investors suing them as host states. States that are primarily capital importers will face a different balancing act: they will want adjudicators who are able to hold them accountable to their obligations (thereby facilitating their ability to make credible commitments) without holding them accountable to standards that are above and beyond that to which they agreed.
Moving from a model where the disputing parties select the arbitrators ex post to one where the treaty parties select the adjudicators ex ante helps to encourage states to make these selections with their treaty party hats, rather than respondent hats, more firmly on. It also encourages states to take a longer term perspective. A state may have an interest in one case now because it is brought by its investors and another case later because it is brought against the state itself and it will need to internalize those interests. A state’s balance between being a capital importer and a capital exporter may also shift over time, as has clearly occurred with the United States and China, though going in opposite directions. All of these factors should nudge states towards (1) adopting treaties that strike a balance between the interests of capital importers and exporters and (2) selecting balanced adjudicators who will honor the deal struck.
Shifting our frame of reference from a dispute resolution framework to a treaty party framework isn’t easy, particularly when we are talking about dispute resolution mechanisms as this issue naturally makes one think about disputes. Much of our understanding of the field comes from the existence and resolution of specific investor-state disputes, which makes it natural to default to the dispute resolution framework. This is all the more so when one is talking to investment treaty practitioners who live and breathe these disputes and who often have far more interaction with states operating primarily in their respondent-mode rather than their treaty party-mode. When it comes to institutional design, however, this disputing party framework is unhelpful because it misses the more nuanced and balanced interests exhibited by the treaty parties, particularly when they are firmly wearing their treaty party hats.
The investment treaty system has entered a precarious period. If the system is going to endure, there needs to be reasonable concurrence between those who create the law (the treaty parties) and those who interpret and apply the law (investment tribunals). If there is systematic divergence between the two, the treaty parties will lose faith in the system and will defect in increasing numbers. The proposal by the EU and Canada is intended to prevent or forestall that occurrence. By requiring that the adjudicators be specialists in public international law who are appointed by the treaty parties rather than the disputing parties, states are seeking to narrow the distance between what they intend and what tribunals rule. Indeed, as one treaty negotiator explained to me: “I can’t forever keep dropping another footnote to deal with the latest case that decides something that the treaty parties never intended.”
Lots of questions about the EU and Canada’s proposal remain open, including whether other states will get on board with it and whether these sorts of reforms will be enough to overcome populist pushback against trade and investment treaties. There might be more cost effective or lighter touch alternatives that achieve a similar effect, which might be more attractive to non-European states or states that do not expect themselves or their investors to be heavy users of the system. And creating a court may also lead to other problems. For instance, it is often harder for states to reach interpretive agreements in a multilateral forum than a bilateral one, so an investment court might result in a greater shifting of interpretive power from the treaty parties to the adjudicators. All of these considerations are important and the implications of a multilateral court and other reform proposals need to be carefully thought through.
In assessing questions of institutional design, however, it is important to begin defaulting to a treaty party framework rather than a disputing party one. Taking this step helps to eschew simple claims about pro-state bias while focusing our attention on how to design a system that: (1) encourages states to internalize their interests as capital importers and exporters, which should push them toward making balanced, rather than biased, tribunal appointments; and (2) encourages adjudicators to faithfully apply the treaty parties’ deal, whether that means finding for claimant investors or respondent states in a given case. Ultimately, such an approach is also in the interests of investors because unless states remain confident (or regain confidence) in the system, they are likely to abandon investment treaties or withdraw their consent for investor-state dispute resolution. Although investors are likely to be tempted to pursue what suits them best in a particular dispute, in the end, investors – like states – would do well to play the long game.