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International Law and Justice

Working Papers

IILJ Working Paper 2009/6

Global Administrative Law Series






New York University School of Law


International Arbitration Law Clerk to the Hon. Charles N. Brower, London; Rechtsanwalt; Attorney-at-Law, New York

Global Administrative Law Project Directors:

Faculty Director: Robert Howse Co-Directors: Philip Alston and J.H.H. Weiler Benedict Kingsbury and Richard Stewart Program Director: Angelina Fisher Institute for International Law and Justice Faculty Advisory Committee: New York University School of Law Philip Alston, Kevin Davis, David Golove, Robert Howse, 40 Washington Square South, VH 314 Benedict Kingsbury, Martti Koskenniemi, Mattias Kumm, New York, NY 10012 Linda Silberman, Richard Stewart, J.H.H. Weiler, Website: www.iilj.org Katrina Wyman All rights reserved.

No part of this paper may be reproduced in any form without permission of the author.

ISSN: 1552-6275


Working Papers are issued at the responsibility of their authors, and do not reflect views of NYU, the IILJ, or associated personnel.

New York University School of Law New York, NY 10012 U.S.A.

Cite as:

IILJ Working Paper 2009/6 (Global Administrative Law Series) Finalized 08/19/2009 (www.iilj.org)

Investor-State Arbitration as Governance:

Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law Benedict Kingsbury * and Stephan Schill** Abstract Investor-State arbitration is not only a mechanism to settle disputes between an investor and a State arising out of an investment, it is also a form of global governance that involves the exercise of power by arbitral tribunals in the global administrative space. In setting standards for State conduct vis-à-vis foreign investors, for example in defining what is improper administration or a violation of due process under fair and equitable treatment, tribunals set standards which may influence future conduct by the respondent State and other States, and will very likely influence the decision-making of tribunals in other cases. In settling disputes between investors and States, the tribunals also act as pre-agreed review agencies of a State’s specific actions, in some cases applying proportionality analysis or other tools of public law review when confronted with difficult balances between investor protection and the State’s environmental or economic policy choices in the wider public interest. In these respects, investor-State arbitration forms part of a governance structure, and helps constitute and shape the emerging body of global administrative law. At the same time, this regulatory activity of arbitral tribunals attracts significant criticism, not only of specific decisions but with regard to the legitimacy of the decision-making powers of these tribunals as such. This paper argues that these concerns can be addressed, at least in part, by application of principles of the emerging global administrative law to, and by, these tribunals.

*. Murry and Ida Becker Professor of Law, Director of the Institute for International Law and Justice and CoDirector of the Global Administrative Law Project, New York University School of Law. Benedict Kingsbury has written expert opinions in several cases, under ICSID and UNCITRAL Rules, at the request of the Government of Argentina.

**.International Arbitration Law Clerk to the Hon. Charles N. Brower, 20 Essex Street Chambers, London;

Rechtsanwalt (admitted to the bar in Germany); Attorney-at-Law, New York; Dr. iur., Johann Wolfgang GoetheUniversität Frankfurt am Main, 2008; LLM International Legal Studies, New York University, 2006; LLM Europäisches und Internationales Wirtschaftsrecht, Universität Augsburg, 2002. We would like to thank José Alvarez, Robert Howse, Jürgen Kurtz and ICCA Dublin conference commentators and participants for helpful comments on earlier drafts of this Paper.

Investor-State Arbitration as Governance:

Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law

–  –  –

I. Introduction: Investor-State Arbitration and the Emerging Administrative Law of Global Governance……………………

II. Investment Arbitration as Regulation of State Action: “Fair and Equitable Treatment” Jurisprudence……………………………………………………..08 III. Proportionality in International Investment Treaty Arbitrations: Arbitral Tribunals as Review Agencies of the Host State’s Exercise of Regulatory Powers………………………………………………………………………….21 IV. Addressing Demands for Legitimacy in the Investor-State Arbitration System: Roles of Global Administrative Law…………………

V. Conclusion: Problems in Operationalizing the Normative Justifications of the Public-Regarding and Governance-Regarding Dimensions of the InvestorState Arbitration System…………………………………………………….....50

Investor-State Arbitration as Governance:

Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law



Investor-State arbitration, and in particular arbitration based on international investment treaties, is not simply dispute resolution. 1 It is also a structure of global governance. Through publicly available and widely studied awards, investor-State arbitral tribunals are helping to define specific principles of global administrative law and set standards for States in their internal administrative processes. 2 Similarly, investor-State arbitration functions as a review mechanism to assess the balance a government has struck in a particular situation between investor protection and other important public purposes, for example by using proportionality analysis. In addition, decisions made ex post by tribunals with regard to such balances may influence what later tribunals will do, and may influence ex ante the behavior of States and investors.

Most arbitrators understandably write their awards and their other public remarks within the framework of the primary and immediate function of these arbitrations as being to settle specific

1.This Paper is concerned primarily with treaty-based investor-State arbitration, arising under one or other of more than 2,500 bilateral, regional and sectoral investment treaties, including the North American Free Trade Agreement (NAFTA) and the Energy Charter Treaty (ECT). For general accounts of investment treaties and related instruments of investment protection see, for example, Rudolf DOLZER and Margrete STEVENS, Bilateral Investment Treaties (1995); Giorgio SACERDOTI, Bilateral Treaties and Multilateral Instruments on Investment Protection, 269 Recueil des Cours (1997) 251; M. SORNARAJAH, The International Law of Foreign Investment, 2nd edn. (2004) pp. 204-314; Campbell MCLACHLAN, Laurence SHORE and Matthew WEINIGER, International Investment Arbitration – Substantive Principles (2007); Andreas LOWENFELD, International Economic Law, 2nd edn., (2008) pp. 467-591; Rudolf DOLZER and Christoph SCHREUER, Principles of International Investment Law (2008);

Peter MUCHLINSKI, Federico ORTINO and Christoph SCHREUER, eds., The Oxford Handbook of International Investment Law (2008). This type of arbitration differs from purely contract-based arbitration, in which the governing law, the host State’s consent to arbitration, and the rules of the arbitration are dependent on an investorState contract, not on an international treaty. Although the focus in this Paper is on investment treaty arbitration, many of the observations made may apply, subject to modifications, to contract-based investor-State arbitration that is entirely independent of the application of an international treaty. Whether and how the observations made also apply to purely investor-State contract arbitration is not dealt with in this Paper. However, the existence of an applicable investor-State contract may have a modifying effect on the treaty analysis and institutional analysis in the Paper. Thus, questions of how investor-State tribunals should deal with the public law implications of investment treaty arbitration, such as proportionality analysis or implications of fair and equitable treatment, may potentially be considered differently to the extent that a contractual relationship between host State and investor is involved. For example, investor-State contracts often contain more precise and elaborate rules on the parties’ mutual rights and obligations, and applicable contracts may have implications for the specific application of treaty rules and of customary international law. No comment is made on these matters in this Paper.

2.New York University School of Law Institute for International Law and Justice’s (IILJ) research project on global administrative law includes a website with a substantial series of working papers and extensive bibliographies as well as links to papers from other scholars around the world www.iilj.org/GAL. Among the first sets of papers from this project were three journal symposia: Benedict KINGSBURY, Nico KRISCH, Richard STEWART and Jonathan WIENER, eds., The Emergence of Global Administrative Law, 68 Law and Contemporary Problems (Summer-Autumn 2005, nos. 3-4), pp. 1-385; Nico KRISCH and Benedict KINGSBURY, eds., Global Governance and Global Administrative Law in the International Legal Order, 17 Eur. J. Int’l L. (2006) pp. 1-278; and the Global Administrative Law symposium in 37 NYU Journal of International Law and Politics (2005, no. 4). Subsequent publications include sets of papers from conferences convened by the IILJ with partner institutions: San Andres University in Buenos Aires, Res Public Argentina (2007-3), 7-141; University of Cape Town, Acta Juridica (2009);

the Centre for Policy Research in New Delhi (forthcoming); Tsinghua Law School in Beijing (forthcoming); and the University of Geneva, International Organizations Law Review (forthcoming).

individual disputes between investors and States arising out of foreign investment activities. But investor-State arbitral awards have important effects going beyond those who appear before them in individual disputes. Investor-State arbitral tribunals implement broadly phrased international standards set out in very similar terms in many investment treaties, and concretize and expand or restrict their meaning and reach through interpretation, so that they increasingly define for the majority of States of the world standards of good governance and of the rule of law that are enforceable against them by foreign investors. 3 And they review State action in ways that can have implications for much wider public interests and public policies, and for the legitimacy and methodological justifiability of the tribunals themselves.

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