INTERNATIONAL INVESTMENT LAW AND

ARBITRATION AMIDST GLOBAL CHANGE

DISCUSSION LEADER

W. MICHAEL REISMAN

CHAIR

DANIEL MARKOVITS
 Law’s Borders: Yale Global Constitutionalism 2012

W. Michael Reisman
International Investment Law and Arbitration Amidst Global Change*
Consensual economic transactions, while not necessarily equally
enriching, leave each participant net better off for them; where a common culture
obtains, the participants, for all their grumbling, usually appreciate, at some level
of consciousness, that the transactions were worthwhile and bear repeating.
Transactions involving direct foreign investments should be no exception to this
generality, but thanks, perhaps, to factors such as the cultural and linguistic
differences of the participants and the turnover of representatives during the
longer duration of the investment, direct foreign investments, compared to one-off
transactions, seem more prone to conflicts. In the current global era, direct foreign
investment outstrips international trade and it is probable that it will continue to
be an important wealth-producing factor as the international system evolves into
an increasingly science-based and technological global civilization. It is equally
probable that direct foreign investment will continue to be conflictive in old and
new ways.

From the rise of European imperialism, in particular, direct foreign

investment acquired the image (not entirely undeserved) of an exploitative
instrument of mercantilism and foreign domination. Later, the staggered
introduction of the industrial revolution enabled European transportation and
communications companies to carry their technologies to comparatively less
developed countries: key parts of direct foreign investment were henceforth
dedicated to and often controlled infrastructural development and its management
in national economies that had yet to experience industrialization. To many
citizens of those states, it seemed that the great corporations and mighty banks
and financial institutions of a distant Metropolitan “owned” their electrical grids,
their water supply, their railroads, their countries.

Customary international law had established minimum standards for the

protection of aliens and their property but in the absence of institutional methods
for applying those standards, their mode of implementation was left to the
discretion of the states of the investors themselves: euphemistically called
“diplomatic protection of nationals,” those methods of protection were often as
coercive as the investor’s state chose to make them. The very method of
enforcement of the international law standards rendered international investment
law even more controversial.

*
Excerpted from W. Michael Reisman, International Investment Law and Arbitration Amidst
Global Change, Address at The Future of Investment Treaty Arbitration: Challenges and
Response, Seoul National University School of Law (May 25, 2012).

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The Russian Revolution, installing the command economy as a competing

model for accelerated and more equitable national development, reinforced the
perception of direct foreign investment as an instrument of exploitation. After the
Second World War, as the great European empires were dismantled, many of the
new states that emerged from them adopted the command economy model, and,
along with it, the image of foreign investment and its international modalities of
protection, as an equally sinister but more subtle instrument for neocolonialist
exploitation and domination. The most explicit normativization of this view of
foreign investment was to be found in the United Nations’ General Assembly’s
Declaration on the Establishment of a New International Economic Order (NIEO)
and its Charter of Economic Rights and Duties of States.

Ironically, this burst of economic nationalism in many of the newer states

coincided with a demand for national economic development. The political
imperative for elites in many of these states was to grow their national economies,
increase the national wealth, and, through some form of distribution, whether by
provision of opportunity, entitlement or some mix of both, to expand the
economic and other life opportunities of their citizens. Indeed, for non-democratic
elites, the promise and delivery of economic development became a substitute for
political legitimacy. No surprise then that in 1986, the General Assembly of the
United Nations, which had decreed a “new international order,” also resolved not
only that “the right of development is an inalienable human right” but that “states
have the duty to take steps individually and collectively to formulate international
development policies with a view to facilitating the full realization of the right to
development.”

Alas, development cannot simply be legislated. Efforts to achieve it solely

by reliance on indigenous resources, of which Chairman Mao’s “Great Leap
Forward” was the most extreme example, demonstrated conclusively that, in the
contemporary world, a satisfactory rate of development is virtually unachievable
without the participation of foreign capital, technology and enterprise. The
community of new states, which had advanced, at least terminologically, if not
factually from the rubric of “under-developed states” to “developing countries,”
looked to international organizations for assistance.

The International Bank for Reconstruction and Development (IBRD), the

original name of the World Bank, had been established, as a specialized agency of
the United Nations, with the task of assembling and then lending the public
international funds necessary for the reconstruction of a Europe that had been
devastated by the Second World War. The IBRD project succeeded brilliantly. By
the late 1950s, Europe’s economies had rebounded. But by then, more and more
of Europe’s former colonial territories, now independent, desperately needed to

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develop. They turned for assistance to the international organizations which had
midwived them. Because their demand for development capital exceeded the
supply of public international funds available to meet that demand, the only
available source that could realistically address the shortfall was private direct
foreign investment. But, as I noted earlier, foreign investment was being vilified
as a neo-imperial tool of exploitation rather than as a potential adjunct tool for
national development.

In this impasse, the real significance of the Washington Convention of

1965, by which developed and developing states established the World Bank’s
“International Centre for the Settlement of Investment Disputes (ICSID),” was its
consensus decision: because of the indispensability of private investment to
national economic development, an international seal of approval was accorded to
private direct foreign investment. A central plank of the consensus was a radically
innovative compact according to which the capital exporting states bound
themselves to abjure “diplomatic protection” while capital importing states bound
themselves to submit to arbitration of disputes with foreign investors—at the
instance of the foreign investors themselves. Thus, the powerful governments of
capital exporting states were, in theory, removed from the process of forcefully
implementing customary international law’s standards of protection of aliens and
the responsibility for it was assigned to international arbitral tribunals.

It quickly became clear, however, that foreign capital alone was not a
magic bullet. The mere introduction of capital would not necessarily produce
multipliers with economic benefits for the local economy. An appropriate
normative infrastructure, the “rule of law,” was also required. In short order, a
network of bilateral international agreements and their dispute resolution
mechanisms assumed a role in, first, confirming the minimum standards for the
governance of foreign investment by host states and, second and equally
important, in designating the modalities with the exclusive competence for
supervising and implementing them.

There are now close to 3000 investment treaties, including BITs,

multilateral treaties and Free Trade Agreements with investment chapters.
Although there are variations between them, each validates international
investment and seeks to establish an orderly framework for it by creating, in the
language of the draft trilateral investment treaty between Korea, China and Japan
which was signed last week, “stable, favorable and transparent conditions for
investment by investors of one Contracting Party in the territory of the other
Contracting Parties.”

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The trilateral investment treaty thus acknowledges, as do thousands of

BITs using similar language, that “stable, favorable and transparent conditions”
are comprised of more than natural phenomena, such as climate, ecology,
geography and natural and human resources. Critically, “favorable conditions”
encompass appropriate internal legal, administrative and regulatory arrangements,
conducted through procedures designed to ensure that the arrangements are
applied as they are supposed to be applied. This, in turn, requires an effective
system of implementation, composed of impartial courts, an efficient and legally
restrained bureaucracy and transparency in decision-making. This international
minimum standard of governance is now recognized as a necessary control
mechanism over governments, whether dealing with their own nationals or aliens.
Without these “favorable conditions,” the investor may be able to reap short-term
profits, but the potential for robust multiplier effects for the host state is limited.

Thus, contemporary international investment law and its instruments and

institutions began to play a more particularized and increasingly assertive role in
supervising internal arrangements within states parties. BITs, in the aggregate,
were raising international law’s bar for the way states conducted their internal
affairs. Matters went from the Neer v. Mexico (Reports of International Arbitral
Awards, 1926) standard (a case actually unrelated to foreign investment) of “an
outrage . . . bad faith . . . to willful neglect of duty . . . an insufficiency of
governmental action” to a more nuanced standard involving a searching inquiry
into the administrative actions of the respondent government in a specific case.
Waste Management II (ISCID, Award of Apr. 30, 2004), which undertook to
summarize and synthesize the case law until that time, spoke generally of conduct
that was “arbitrary, grossly unfair, unjust or idiosyncratic. . . .”

At this stage in the development of investment law, by a happy confluence

of events, the rule of law arrangements, which were both a condition precedent
for more direct foreign investment and, to an extent, a consequence of the
application of international investment law, were being increasingly demanded by
the social and economic strata in many of the investment-recipient states which
had benefited from the development which foreign capital, technology and
enterprise had helped to stimulate. But ironically, elements in these same, now
politically effective strata often mobilize against direct foreign investment. The
dynamic which accounts for this is complex and seems to be a function of more
robust domestic politics as well as a function of the conditions that preceded the
introduction of the foreign investment. I am not speaking of indignation at
dishonest investments, for the international system has proved quite effective at
exposing and sanctioning them, but of indignation at honest investments which
become entangled in conflict. Let me explain by sketching two generic stories.

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The first story might be entitled “Sellers’ Remorse.” Before the existence
of suspected natural resources in country X was confirmed and made exploitable
by the creation of the necessary infrastructure, there was considerable domestic
support for attracting a direct foreign investor to enter the market and find and
develop them, precisely because domestic investors with the requisite capital and
skills did not exist. But as soon as the foreign investor, who had been courted and
invited in, succeeded in finding and exploiting the resource, an opposition formed
to decry the sale of the national patrimony for “a mess of pottage” and to insist on
a renegotiation to secure a “fair” allocation of the benefits of the resource. But
that “reallocation,” whether achieved by expropriation or escalated tax and
royalty rates, undermines the financial planning on which the foreign investor’s
investment was based. The result was a foreign investment dispute, in which each
side believed passionately in the iniquity of the other.

The second story might be called “Post-privatization trauma.”

Governmental control of the urban water supply (you may substitute electrical
supply, rail and air transportation and so on) in State Y was subject to electoral
politics. The degree of influence of those politics increased in direct proportion to
Y’s democratization: politicians trying to get into office or to stay there were
under pressure to maintain low prices in response to popular demands and then to
make up the inevitable shortfall by provision of state subsidies. In the meanwhile,
more and more positions in the national water system were created as political
favors and rewards. But subsidies must be paid for by taxes and the very populist
imperative that maintained the cost of water at artificially low prices resisted
increased tax rates. As the prices cum subsidies proved insufficient to allow for
the maintenance and reinvestment in the water system (especially one with a
bloated work force), its plant deteriorated and the water which it produced
became erratic and its quality less and less potable.

At this point, privatization was presented as a solution and it won popular

support. When tenders were issued, however, only foreign investors had the
technology and access to capital necessary to reestablish an efficient water supply
system. But the foreign investor was subject to the demand of the market rather
than populist politics and applied an economic calculus in which price per water
unit had to cover the actual cost of the investment, service of loans and still
produce a profit for its own investors, all this without the cushion of state
subsidies. The increased prices were viewed as price gouging and populist politics
quickly mobilized voters against the foreign investment. Successive governments
were under pressure to cap prices which undermined the economic viability of the
investment. The result, again, was a foreign investment dispute.

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The new ingredient in these and many other stories and scenarios is
investor-state dispute settlement arbitration (ISDS) . . . .

As all international lawyers can attest, international law is replete with

injunctions for high-minded standards. Most of them remain unfulfilled; indeed,
some may have been enacted with such an expectation. What has distinguished
these new developments in international investment law is that most
contemporary international investment agreements allow the qualifying investor
itself, acting without the intervention, permission or blessing of its state of
nationality, to invoke an international tribunal to review host state action, in terms
of, inter alia, whether it has constituted “fair and equitable” treatment. This is a
procedural change with far-reaching substantive implications which make
international investment law unique in international law.

In his “Early Law and Custom,” Sir Henry Maine observed that “so great
is the ascendancy of the Law of Actions in the infancy of Courts of Justice, that
substantive law has at first the look of being gradually secreted in the interstices
of procedure.” The insight is particularly relevant to this stage of the evolution of
international investment law, for the procedural addition—the ascription of a
meaningful independent international standing to the investor—has transformed
what was heretofore soft, aspirational and only intermittently applied law into
predictably effective law which, moreover, restrains governmental action in
unprecedented ways. The initiation of the process of enforcement of investor
rights is transferred entirely to the investor, a party that is driven only by an
economic interest in the outcome. The investor’s state’s “national interest” (or
disinterest) or its quotidian political objectives cease to be factors in deciding to
press or abandon its national’s claim. With more effective invocations of third
party decision, there is more effective application of international investment law.

I would emphasize that the revolution here is not only in the right of the
private initiation of claims but in the scope of their content as well. Scope has
expanded dramatically. Compare the high thresholds set in Neer, which I
mentioned earlier, which was very indulgent to the state, with some widely cited
current formulations. In Metalclad v. Mexico (ISCID, Award of August 30, 2000),
the tribunal found that it is “[t]he totality of these circumstances [which]
demonstrates a lack of orderly process and timely disposition in relation to an
investor of a Party acting in the expectation that it would be treated fairly and
justly.” Tecmed v. Mexico (ISCID, Award of May 29, 2003), in a paragraph that
has been cited and recited by many other tribunals, set a higher, perhaps
unachievable standard:

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The foreign investor expects the host State to act in a consistent

manner, free from ambiguity and totally transparently in its
relations with the foreign investor, so that it may know beforehand
any and all rules and regulations that will govern its investments,
as well as the goals of the relevant policies and administrative
practices or directives, to be able to plan its investment and comply
with such regulations. Any and all State actions conforming to
such criteria should relate not only to the guidelines, directives or
requirements issued, or the resolutions approved thereunder, but
also the goals underlying such regulations.

Even more far-reaching is the statement in Occidental v. Ecuador (2004),

where the tribunal said

The relevant question for international law in this discussion is not

whether there is an obligation to refund VAT, which is the point on
which the parties have argued most intensely, but rather whether
the legal and business framework meets the requirements of
stability and predictability under international law.

Thus, some international investment tribunals seem to be molting into

what are essentially international courts of appeal over the administrative actions
of the respondent state, appraising not only (i) the adequacy of the entire
administrative framework in terms of international law standards but even (ii) the
specific applications of national law by the national administration in terms of its
legal accuracy under that law.

To be sure, this expanded scope of review of matters which, until now,

had been deemed quintessentially domestic, is all of a piece with other
developments in international law: for example, the international human rights
program. In a broader sense, it is part of the remarkable constriction of the sphere
of “domestic jurisdiction” in general international law, which, as the Permanent
Court of International Justice famously observed, is a function of the state of
international relations at that moment. But, of course, every social change
generates resistance, for each new constellation necessarily increases the power of
those formerly disenfranchised, while reducing the power of the former
incumbents. In the investment law context, these changes are now being resisted
by many governments as well as some indigenous interest groups thanks to three
coinciding factors.

The first of these factors is the administrative revolution that has taken
place within states seeking development. The early ideal of the Laissez-Faire

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State has yielded to the current model of the Regulatory State. It is now
universally appreciated that accommodating an efficient economy to the complex
political demands of democratic states, the protection of the most vulnerable strata
of the population and the preservation of the environment is a task beyond the
powers of the “Invisible Hand.” Rather, it requires continuing managerial
oversight and episodic adjustments by those governmental agencies in the
national regime which are charged with regulating economic activity. So just as
the developing state is learning, as did the states that went through this process in
the early twentieth century, to manage its political economy through a panoply of
regulatory agencies, the international investment law system seems to be
subjecting those efforts to greater and greater scrutiny by external decision-
makers who apply a set of international standards that was shaped by and reflects
the values of the Laissez-Faire State.

The second factor is the empowerment in many of the host states of a

multi-partite civil society. The force of this factor is amplified by the remarkable
extent to which electronic communications enable that new “E-state” to press its
own versions of the national interest. Many of those versions are not congruent
with the programs pursued by the national government. In some instances, this
private political activity works in favor of international investment law, such as
where some groups within civil society press their governments to adjust policies
and practices so as to more closely approximate its requirements. In other
instances, however, non-governmental entities agitate against compliance with
particular decisions and even against the regime of international investment law
itself.

The third factor is the blurring of the line between capital-importing and
capital-exporting states. Many developed states, which had essentially been
capital-exporters, are now hosts to significant amounts of foreign investments and
expect and wish to attract more; many of those investments are, moreover, of
increasing importance to their economic infrastructure. Earlier these states had
been champions of an international investment regime which provided protections
to their own investors abroad. In that role, they had insisted on international
supervision of domestic regulatory competences insofar as they impacted foreign
investors. Now, however, with ISDS available against them, many of these states
are behaving like traditional capital-importing states, jealous of trespasses on their
own regulatory competences. The result, reflected in new generations of Model
BITs as well as in negotiating positions, is a movement toward a constriction of
investor protections and a greater tolerance for governmental actions against
foreign investors. As a consequence of the operation of these three factors, the
ambitious transformative role of international investment law is now being

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resisted in different ways by a surprisingly heterogeneous coalition of states and

organized interest groups.

One response, until now only on the part of developing countries, is the
recrudescence of the Calvo Doctrine in new raiment. Its vehicle is not a formal
“Calvo Clause,” nor an insistence that choice-of-law and choice-of-forum clauses
in contracts with foreign investors should prevail over international treaty
commitments. Rather, it contends that the only decision institution for investment
disputes which is compatible with national sovereignty is a national court. The
implications for international investment law of this blanket rejection of ISDS in
general are more far-reaching than is generally appreciated.

At issue is more than a mere substitution of a national court for an

international tribunal as the agency for the implementation of treaty-based
investor protections. Investor-state dispute resolution regimes in BITs have
always included as one of the optional forums for application of the treaty, at the
election of the investor, national courts. In fact, they are not elected by investor
claimants for many of the same reasons that designers of international commercial
transactions select international commercial arbitration over adjudication in one
of the parties’ national courts. But in disputes involving the application of
substantive treaty-based protections, there is an additional and distinctive reason.
Unless the respondent state hews to an absolute and predictably effective
Monism, in the sense of always super-ordinating international treaties over all
national law (including the national constitution), its courts, even if they are
absolutely independent and impartial, will apply national law over international
law. Insofar as the injury to the investor arises from later prescribed national
legislation, that legislation will prevail over the protections afforded by the BIT.
And this, I suspect, is precisely what the latter day proponents of the Calvo Clause
seek. So the revival of the Calvo Clause is not simply a mechanical change of one
efficient forum for another: it is really a defeat of the guarantees of treaty-based
international investment law.

A state that is both an importer and exporter of direct foreign investment

may try to game the system by renouncing ISDS, thus requiring foreign investors
whom it hosts to resort to local courts while at the same time expecting its own
foreign investors to select BIT-friendly nationalities for their investment vehicles
in order to have the benefit of their BIT protections. This nationality shopping by
states that do not reciprocate has already generated a backlash, in instruments
such as the Energy Charter Treaty. Article 22(2) of the new trilateral investment
treaty between China, Japan and Korea effectively blocks such shopping.

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But even if the Calvo proponents prevail, their victory will prove to be
pyrrhic, as will the short-term victories of states that renounce all ISDS. The
protections which will no longer be enforceable through treaty-based modalities
will persist at customary international law—the only difference will be that the
modality of their enforcement will revert to “diplomatic protection of nationals.”
Governments, which had beneficially been removed from the protection of their
national investors, will be drawn back into it, reviving the politicization of the
protection of international investment.

In a period in which the down-swings of economic cycles are coinciding

with radical structural adjustments, other challenges to international investment
law are presenting themselves. In terms of who may qualify as an investor, the
shift of significant quantities of investment funds from the traditional private-
sectors of capital exporting states to state owned enterprises (SOEs) and to
Sovereign Wealth Funds (SWFs) now presents the question of whether these
entities qualify as “investors” under investment treaties. Insofar as the function, if
not raison d’être of international investment law, is to facilitate the movement of
long-term investment across borders as a means of increasing economic
productivity, the capital of SOEs and SWFs is an important resource, especially as
it is often capable of being more “patient” than that of private venture capitalists.
Given the language in many BITs and other investment instruments, this may
require the production of a new jurisprudence constante pending a new
generation of BITs. The question of the definition of “investment” is also being
raised in acute fashion by defaults on sovereign bonds. The first question is
whether they qualify as investments for the purposes of treaty protection. This is
usually resolved in the affirmative by the definitions provision in a BIT, although
the requisite “investment in . . . ” has been debated by scholars and tribunals. The
compensation issue may also prove to be acute. Where bonds have been
purchased by major financial houses or by vulture funds at deep discounts and,
more generally, where the market discounts price for risk, is compensation at face
value appropriate? Where bonds have been retailed to small investors, should a
different calculation of compensation operate? And should small investors be
permitted to act through mass arbitration in circumstances in which each would be
incapable of bringing a separate claim? These are questions which are sub judice
and will shape a new chapter in international investment law.

Some of the causes of tensions within international investment law are

part of the very fabric of this sector of law. Governments are different from other
actors. Even when they enter the market place, their responsibilities to internal
communities and constituencies continue; in all but the most brutally totalitarian
of them, governmental power is temporary and often shaky. Even strong
governments are beholden to internal constituencies which may have little

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appreciation of, or respect for, the international arrangements that their

governments have concluded but which later come to be popularly perceived as
affecting their own lives and aspirations. Compensation metrics in international
investment law have always been somewhat mysterious and they come under
intense pressure in circumstances in which awards, which are easily justified in
terms of ordinary commercial standards, are not politically feasible and the
specter of Versailles is raised. Yet, here, as everywhere else, there is, in Milton
Friedman’s words, “no free lunch.” Redressing compensation quanta in favor of
respondent governments which claim “non possumus” simply passes the losses
through to the ultimate investors, the pension funds of vast numbers of individuals
in the developed world or, even, ironically, to SWFs of developing countries. The
mere prospect of such a reassignment of losses could well chill the appetite for
foreign investment by the very international market which ICSID had sought to
mobilize.

The fact that there are stresses within the legal arrangements now
collectively referred to as international investment law should occasion no
surprise. All law is dialectical in nature and every arrangement, which provides
comparative benefits to some and less to others, immediately generates pressure
to be adjusted or terminated and replaced with a different value configuration.
Some of the adjustments that result from this dialectical process operate within
the established constitutive structure of international investment law. Others are
truly revolutionary, rejecting the constitutive structure, as a whole, or particular
arrangements within it. One cannot, as a result, assume a straight-line projection
from the past or an organic extension of the current situation into the future.
Without according excessive importance to the economic vicissitudes which the
world economy is now experiencing, one can identify five alternative futures.
Each constructive future is based on latent tendencies in current trends. Any one
could emerge from the current system of international investment law. . . .

One possible future would involve the reinforcement of the trends toward
globalization, with English functioning as the lingua franca, within a context of a
planetary-wide civilization of science and technology. In such a future, more and
more direct foreign investment would be made world-wide, on the basis of
economic rather than political considerations. The law-making and law-applying
functions of international investment law and the national decision processes
influencing them, would continue to fall within the jurisdiction of international
arbitral tribunals, whether under the aegis of ICSID, the Permanent Court of
Arbitration, or ad hoc tribunals operating under UNCITRAL Rules administered
by private transnational arbitral associations. This future would witness new
generations of BITs, with common provisions affording identical enhanced
protections to investors. It would also include the pluralization or

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multilateralization of investment treaties, in place of much of the current network

of bilateral instruments and an explicit investment role for the World Trade
Organization (WTO). It would likely include the installation of an appeal
mechanism, perhaps on the model of the WTO’s Appellate Body, which would
make arbitral applications more uniform.

A future of global integration would include more decisions by

international investment tribunals with respect to the quality of governance within
states which hosted foreign investment with a view to moving steadily toward a
homogenization of national practice in accordance with increasingly robust
international standards.

A second possible future would be marked by regional and sub-regional

integration rather than the high level of global integration as the central feature of
the preceding future. Regional blocks in Europe, North and Central America, in
the southern cone of South America, Africa, and Asia would trade and principally
invest among themselves. In place of a single lingua franca, dominant regional
languages would operate. Extra-regional investment might continue but it would
be relatively reduced, as compared to the more intense regional and sub-regional
investment. New generations of BITs and Free Trade Agreements, instead of
running North and South or East and West, as in the recent past, would tend to be
between members of the same regional bloc. Instead of international standards,
regional standards would emerge, on the model of “regional customary
international law.” As for the tribunals charged with deciding disputes, they
would be increasingly composed of members of a single region, on the model of
the Chamber-system of the International Court of Justice.

A third possible future would be characterized by increased protectionism

and mercantilism, driven by economic uncertainty and perceived resource
scarcities. Protectionism would manifest itself in limitations on outward foreign
investment as well as increased restrictions on inward foreign investment. Both
limitations would be justified as measures necessary for the protection of national
security and other vital national interests.

A recrudescence of mercantilism could be exacerbated by a perception of

a critical shortage of key natural resources in a world whose population has grown
and the demands of whose members for a better material lifestyle have
universalized. Such a future is likely to see a new generation of BITs, marked by
enhanced competences assigned to host states, including rights of counterclaim by
the host state against foreign investors. In such a future, the amount of general
foreign investment would be expected to decline significantly, to be replaced by
“diaspora networks.”

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A fourth possible future would see the return of an effective coalition of

developing countries and developed mineral-exporting countries, trying to use
their numerical superiority within international organizations to enact
international instruments comparable to the Charter of Economic Rights and
Duties of States of the New International Economic Order. In this future, states
would insist on the right of expropriation for a broad range of self-judging reasons
with “appropriate” compensation to be determined exclusively by institutions of
the host state. This future would see significant withdrawals from ICSID and its
consequent decline as the central institution in international investment dispute
resolution (without regard to decline due to endogamous factors such as loss of
confidence in its control mechanism). Many BITs would also be denounced.
Insofar as mineral extraction industries would still be obliged to pursue natural
resources wherever they might be found, the system of international investment
law based on the provision of protections for investors and their implementation
by international arbitration tribunals would decline, to be replaced by alternative
risk-management or risk-abatement methods. Thus political risk insurance might
be more widely used with the consequent additional costs of investment passed
through to consumers. At the international organizational level, in this future
construct, the Multilateral Investment Guarantee Agency (MIGA) and its private
counterparts would supersede ICSID in importance.

A final possible future would involve a continuation of the present mixed

and contradictory system in which international law continues to commit itself to
the encouragement and protection of international investment through the
maintenance of international standards and some soft supervision of the practices
of host states in terms of those standards. In this future, many of the antinomies
that are characteristic of contemporary international investment law would
continue.

One engages in the intellectual task of the creation of alternative images of

futures in order to refine strategies that will increase the likelihood of achieving
desirable or utopic futures and decreasing the likelihood of the eventuation of
dystopic ones. I consider Future One the most desirable, for its promise of
enhanced production and the efficient use of the resources of our planet, a future
in which everyone is net better off and in which, moreover, there are procedures
for adjustment of arrangements and internationally supervised modes of dispute
resolution. The resulting interdependence, one hopes, will also act as a restraint
on the use of violence. By contrast, the third and fourth futures are, in my view,
undesirable.

In theory, international arbitration tribunals are well-positioned to make ad

hoc adjustments in disputes precipitated by changed circumstances but factors

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 International Investment Law and Arbitration Amidst Global Change

such as the limits on arbitral authority and the ever-present peril of annulment for
excès de pouvoir constrain their ability to redesign long-term economic
arrangements so that an appropriate balance of the benefits and burdens of the
transactions can be reestablished. Hence, in navigating through the present toward
any of the imagined futures, the emergent future of the international investment
system and its role in the growth and maintenance of the global economy will
depend more on the statesmanship and wisdom of national leaders.

Traitez de Paix, Bernard Picart, 1726. Frontispiece.

Jean Dumont, Corps universel diplomatique du droit des gens.
Image provided courtesy of the Rare Book Collection, Lillian Goldman Law Library,
Yale Law School.

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 Law’s Borders: Yale Global Constitutionalism 2012

Logo of the Permanent Court of Arbitration (PCA) before October 18, 2007.
All rights held by the PCA. Image reproduced with its permission.

Logo of the Permanent Court of Arbitration (PCA) after October 18, 2007.
All rights held by the PCA. Image reproduced with its permission.

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 International Investment Law and Arbitration Amidst Global Change

The Small Hall of Justice in the Peace Palace used

by the Permanent Court of Arbitration.

A 1987 meeting of the Iran-United States Claims

Tribunal in that Hall.
Photographs reproduced courtesy of the Carnegie Foundation and the Iran-United States Claims
Tribunal.

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