ABSTRACT
Introduction What do we mean by “the market” from a legal perspective? Economic relationships that are enforceable by law and that undergird markets vary from state to state. Property rights are subject to various forms of regulation (Cohen 1933: 41-9). Contracts may not be enforceable when they are found to contradict community values or frustrate core aims of the state. Cultural norms shape and restrain economic choices of firms and other actors (Hall and Soskice 2001: 9-14). Coercive power, when it emerges in markets, may be wielded by state or non-state actors, or both (Collins 1997: 72). Within government, authority may be allocated differently in different states based on their arrangements for federalism or the separation of powers. Underlying all market economies, then, are diverse sets of norms and institutions that affect the form of the market and the manner in which the goals of efficiency and productivity are positioned in relation to other objectives such as national security, political stability, social justice, or environmental sustainability (Ruggie 2003; Okun 1975: Ch 1; Hirsch 2005). Since the 1990s, a host of rules and processes have been established at the international level to restrict the regulatory activities of states and to shape the balance struck between competing priorities in the market. These rules are typically subject to interpretation, application, and enforcement by institutions very different from conventional courts. In the case of investment treaties,1 a set of rules and adjudicative processes have been established to advance and protect the economic demands of foreign investors by constraining the policy choices of states (Swedberg 2003: 196-7). There are now well over 2,000 bilateral investment treaties (BITs), of which roughly two-thirds are in force, as well as numerous regional economic agreements that contain an investment chapter (UNCTAD 2006: 26). These treaties establish a general constraining framework premised on broadly framed standards that protect investors from state regulation, backed by the use of compulsory arbitration to resolve investor claims against states.2 The aim of this chapter is to provide a legal analysis of investment treaty law and arbitration as a constraining framework that applies (primarily, at least in its effect) to governments of developing or transition states. The analysis seeks to complement an overarching new developmentalist3 perspective, as advanced in
this volume, although that wider perspective is more forward-looking than the present reactive analysis. Nevertheless, it is important to understand how investment treaty arbitration impacts regulatory decision-making in order to formulate effective state responses. There are three components to this analysis. It first involves questions of scope. To what institutions does the framework apply? Does it apply to state entities, non-state entities, or certain states only? To what activities of these entities does the framework apply? Does it apply to a limited class of activities or economic sectors? Or, if the framework applies generally, is its application limited by exceptions? Second, the analysis addresses the substantive standards that govern conduct under investment treaties. What primary rules constrain and influence the behavior of regulated entities? What sort of language is used to define the rules? Does it have a specific and identifiable meaning or is it ambiguous and open to varied interpretation by those authorized to resolve disputes? Third, the framework’s mechanism for dispute settlement and enforcement is examined. Who is authorized to interpret and apply the rules? What are the consequences of a finding of noncompliance? Is the framework a self-regulatory mechanism or is it subject to binding adjudication? What conditions must be exhausted before the resort to adjudication? And what consequences follow from the adjudicator’s finding of unlawful conduct? An examination of these questions allows one to dissect the constraining framework and, in turn, to characterize it as an instrument that generates market rules and so shapes underlying economic relationships. The core argument is that investment treaties provide an extraordinarily robust, though far from immutable or impregnable, framework to constrain state policy making. This is also in relation to policies that are well established in advanced industrialized economies as means to advance the economic position of the state and to balance competing priorities in business regulation. This is especially true for investment-related policies of the state that support domestic capital or employees in targeted sectors, that put conditions on foreign investors to encourage export production or linkages with the domestic economy, that revise the terms of investment contracts to account for changing market conditions, or that apply quality-or access-related standards to privatized service providers and utilities. Moreover, the constraints under investment treaties apply broadly to virtually any state measure that may substantially reduce the value of foreign-owned assets. The scope of the framework is broad; it relies on vague and open-ended standards to regulate states; and it allows for compulsory arbitration in a manner that appears to be structurally biased in favor of investors and against host governments. There are options within this constraining framework for states to pursue industrial policies that involve a pragmatic weighing of costs and benefits, as well as regulation, of foreign investment. However, this may require a state to reject the legitimacy of investment treaty arbitration, take steps to protect its assets from seizure abroad, and resist pressure from other states and international financial institutions to pay awards regardless of how dubiously the treaties have been interpreted by arbitrators.
