Investment Protection in Extraordinary Times: A Response

The recent article by Burke-White and von Staden raises critical and timely issues about international economic law and treaty interpretation. The paper acknowledges challenges posed to the institutional legitimacy of investment treaty dispute resolution (which I have written about elsewhere) that are caused by different tribunals coming to different interpretations of the same or similar treaty provisions. It also considers the difficulties for international law when tribunals interpret treaty provisions in a manner that negates agreed areas of state responsibility and instead shifts to an analysis based on customary international law. In a day and age when rights-based adjudication depends on the interpretation of negotiated international agreements, these concerns are no small matter.

Using the Argentinean economic crisis of 2002 as a launching point, the article makes an important contribution to the doctrinal evolution and emerging jurisprudence related to international investment agreements. The paper offers a balanced analysis of Non-Precluded Measures (NPMs) provisions in investment treaties, which arguably permit states to use their police powers to regulate without imposing treaty-based liability, and contrasts this with the necessity defense customary international law. While acknowledging a similarity between the legal issues, Burke-White and von Staden explain the micro and macro implications of confounding the lex specialis analysis of the terms of an investment treaty with the interpretation of the necessity defense under customary international law. The article convincingly argues that tribunals, parties and policy makers ignore the distinction between these different concepts at their peril.

Rather than leaving readers without a paradigm for the future, the article provides a useful framework for analyzing NPM provisions. The analysis calls for a particularized consideration – on a treaty by treaty basis – of: (1) the nexus between the state action and a treaty’s particular scope [i.e. does the NPM clause require state action to be “necessary for” or “directed to” a particular end], and (2) the permissible objectives articulated by the treaty [i.e. “security” or “public health”]. Acknowledging state conduct may require independent evaluation by an arbitral tribunals, a more controversial aspect of the article argues that tribunals should use the European Court of Human Rights “margin of appreciation” to grant deference to a state’s internal determination of what circumstances fall within the scope of an NPM clause. As applied to Argentina’s financial crisis, this could mean that tribunals give a degree of deference to Argentina’s determination that the civil unrest related to its economic situation from 2001-2002 (that included a run on the banks, violent protests and the imposition of a state of emergency – see here) created a state of emergency covered by the NPM clause. The article also contains a useful flow chart [p86] that recommends how future tribunals should approach issues related to NPM clauses and necessity.

I often find that a quality, well-written and thought-provoking article leaves me with more questions than when I started. This article exemplified that experience. It left me wondering about the proper intersection of international economic and human rights law. It caused me to question the proper role of canons of construction in light of the Vienna Convention. I could go on. But for now, I will confine myself to three issues that intrigued me, perhaps because of my own scholarship and experience in practice with investment treaty dispute resolution.

First, the authors describe international investment agreements as risk allocation devices. While they may not intend to suggest this is the exclusive function of investment treaties, the analysis does not consider other potential purposes of investment treaties. Treaties also serve to signal a host state’s interest in foreign investment; and treaties can provide an incentive for domestic reforms that expand the “rule of law enclave” (see here) from an international investment agreement to the domestic setting. Framing investment treaties as a “risk allocation device” alone could improperly suggest that investment treaties are akin to a form of insurance. The merits decision in Maffezini emphatically disputed this point and explained it “must emphasize that Bilateral Investment Treaties are not insurance policies against bad business judgments.” [Para 64] If investors are really looking to manage their investment-related risk more effectively, perhaps the key is to procure more appropriate political risk insurance rather than relying on the potentially uncertain adjudicative outcome of arbitral tribunal (or other type of dispute resolution). Given the uncertainties of adjudication exemplified by the Argentine cases, one might reasonably expect that investors will take these risks into account and extract a financial premium for future foreign investment. As a result, one wonders whether the substance of the article’s analysis would change if other functions of investment agreements came to the fore.

The authors also construe NPM clauses as an “exception” to liability. [p80] One wonders whether this is the case in all treaties. If, for example, a treaty’s NPM provision were structured as an exclusion from liability (rather than an exception), perhaps the analysis of an NPM provision would be different. Although the results may be functionally equivalent (i.e. a tribunal renders an award that either obligates a state to pay or not), the distinction could be important. The general default under customary international law has been that, except in particular cases (state agreement to be bound, violations of the minimum standard of treatment, jus cogens and the like) states are not liable to individuals for their conduct. This means, prior to creating an affirmative liability on behalf of a state through a treaty and a forum for enforcement, the default is sovereign immunity. This means that investors should generally expect to carry the risk of investments and take precautionary measures – such as the purchase of political risk insurance or engaging in other risk diversification strategies. It also means that where states have excluded coverage of the substantive rights through an NPM clause, no affirmative cause of action accrues under the lex specialis of the investment treaty. This should mean that, unless an investor is alleging that a cause of action under customary international law, analysis of the affirmative defense of necessity under customary international law should be unnecessary. Irrespective of whether an NPM provision is an exclusion from or exception to liability, the authors usefully explain that: (1) a lex specialis exclusion should be analyzed separately from customary international law, and (2) a proper textual understanding of these matters is critical to the international economic legal order and sovereignty of states negotiating investment treaties.

Finally, as the article’s title suggests, the Argentinean situation does seem somewhat extraordinary. One wonders therefore how representative the Argentinean experience is of the investment treaty dispute resolution in general and the interpretation of NPM clauses in particular. The later is harder to ascertain, as there does not yet appear to have been extensive interpretation of these clauses in other cases. Nevertheless, the former is somewhat easier to assess. Preliminary analysis does suggest that Argentina’s experience may be akin to a statistical outlier (see here). If Argentina’s case is not representative, it may be that we are less concerned about the collateral effects of the current situation. Nevertheless, as hard cases can still make bad law, even statistical outliers offer information about institutional integrity that can be used to formulate structural improvements.

Ultimately, this article is a must-read for those who are interested in international investment agreements and the potential defenses that host states can raise in connection with investment disputes. Its framework for future analysis is worthy of attention by scholars, lawyers, arbitrators and policymakers who have an interest in ascertaining the scope of governmental authority and the balance of interests with the rights of private investors. I am grateful to have been selected as a commentator for this article, as it has provided me with an excuse to delve deeply into an excellent paper that involves an intellectually stimulating issue with implications for the real world.