Pursuing and Reimagining the International Rule of Law Through International Investment Law

Abstract

In challenging times for international law, the international rule of law as a connecting thread of the global legal order is a particularly salient topic. By providing a working understanding of the content and contexts of the international rule of law, and by taking the regime of international investment law as a case study, I argue that assessing ‘rise’ or ‘decline’ motions in this sphere warrants a nuanced approach that should recognize parallel positive and negative developments. Whilst prominent procedural and substantive aspects of international investment law strongly align with the international rule of law requirements, numerous challenges threaten the future existence of the regime and the appeal of international rule of law more broadly. At the same time, opportunities exist to adapt the substantive decision-making processes in investor-state disputes so to pursue parallel goals of enhancing the rule of law at both international and national levels. Through recognizing the specificities of interaction between the international and national spheres, arbitrators can reinvigorate the legitimacy of the international rule of law through international investment law—benefitting thus the future of both.

1 Introduction

Defining the ‘international rule of law’ and discussing its contemporary challenges is a complex task. The international rule of law is often invoked and commands a broad appeal. Much like the rule of law in general, it is largely a ‘charmed concept, essentially without critics or doubters’.¹ Prominently, the strong declaratory commitment of states towards upholding the rule of law has been expressed in a number of oft-mentioned UN documents.² The states, to sum up the general narrative, reaffirm ‘solemn commitment […] to an international order based on the rule of law’³ and profess that ‘respect for and promotion of the rule of law and justice should guide all [state, UN and international organization] activities and accord predictability and legitimacy to their actions’.⁴

Yet, the international rule of law requirements and specific contexts in which they arise remain disputed both within the UN framework⁵ and more generally.⁶ Seeking clarity about these issues goes beyond an academic endeavour. The perceived international rule of law crisis calls for clear(er) categories so to ascertain trends and developments, examine the intensity and proportions of the crisis, and determine what can be done about it.⁷

In light of this, it makes sense to distinguish what specific international rule of law requirements might be under pressure, and in which contexts this is the case. Contexts would be the relationships that are (or should be) subject to the international rule of law, thus providing the concept’s full scope of coverage. Combining the specific requirements with different contexts better reflects the multifaceted nature of the international rule of law. It can also suggest that positive developments and problems might occur in parallel, even within the same subject-matter areas.

This article focuses on international investment law as an excellent illustration of the above-mentioned theses. Three main arguments are put forward. Firstly, international investment law is a prominent example of the structural complexity of the international rule of law as it reaches beyond the state–state level into both the internal regulatory sphere of states and the relationship between the individual and the international legal order. Secondly, the investment law regime arguably manifests at least two positive features concerning the commitment of states towards the rule of law. One is a powerful dispute settlement and enforcement mechanism, something often highlighted as problematic for the international rule of law elsewhere. The second feature is that this mechanism is (most) often used to impose and enforce universally recognized formal rule of law requirements, particularly through the ubiquitous standard of ‘fair and equitable treatment’ (FET). The third and final argument is that the same enforcement mechanism and the intermeshing of internationally imposed rule of law requirements with the national legal frameworks also creates numerous challenges. These challenges can, if left unaddressed, potentially delegitimize or even deconstruct the international investment protection system.

In terms of structure, Sect. 2 delineates the common core of the international rule of law content and differentiates three different contexts of its operation—state–state, state–individual and individual–international law. Section 3 outlines the investment law regime as a part of the international rule of law structure which spans along all these contexts, while noting also the common self-legitimising narrative that presents the regime as a tool for securing that eligible foreign investors will be treated in accordance with the international rule of law. Section 4 illustrates the two features that can be seen as distinctly positive developments in rule of law terms, which have been briefly addressed above. Joined together, these features can make more effective the states’ proclamations of adherence to the rule of law at ‘both the international and national levels’.⁸

Section 5 argues, however, that there is little room in international investment law for complacency or self-congratulatory narratives. Specifically, and focusing here on the FET standard decision-making, arbitrators should carefully adapt the interpretation and application of the international rule of law principles to the state–individual context, or otherwise risk both further backlash and missed opportunities to enhance the national rule of law beyond the confines of a specific case. Section 6 concludes.

2 Defining the ‘International Rule of Law’

What features should the international legal order possess to be in accordance with the rule of law and how should international legal subjects behave to be rule of law-compliant? A straightforward answer is difficult, no less so because of the readiness to invoke the rule of law in many different contexts.⁹ Briefly, the concept is here understood as primarily setting out formal requirements or meta-values that should characterize the whole legal framework of public international law, as well as the behaviour of those subject to it.¹⁰

For one, the international rule of law can be understood as a far more political and/or theoretical concept than most of its national counterparts, which have a much clearer legal force.¹¹ National rule of law requirements, having a long history, operate at the level of domestic legal orders and essentially aim to constrain the arbitrary exercise of governmental power.¹² The lack of a hierarchically dominant sovereign and a correspondingly central constitution for the world order almost necessarily make the international rule of law a different phenomenon.¹³ Duly taking into account the sometimes proclaimed superior, ‘constitutional’ status of the UN Charter,¹⁴ the fact remains that UN is a as opposed to the player in the global legal arena,¹⁵ with its judicial organ (the ICJ) commanding authority that remains deeply limited by its non-compulsory general jurisdiction,¹⁶ and with ample possibilities for different regimes of international law to proliferate without necessarily forming a coherent and/or hierarchical system.¹⁷ Global constitutionalism remains a fertile and growing academic field, but not the one in which breaths are being held for a speedy adoption of an universal, explicit and legally binding global constitution.¹⁸

Among other implications, this also means that the requirements of the international rule of law need to be, to the extent possible, theoretically put together from different sources. The legal—as opposed to political and/or aspirational—significance of these requirements will be hard to ascertain outside the specific contexts in which they are invoked or applied. But this somewhat inductive task is arguably worthwhile because the aspirational ideal of the international rule of law is so widely and ardently shared.¹⁹ States worldwide consistently and vocally profess to want the rule of law at the global level,²⁰ and that sentiment is shared by international organizations,²¹ courts,²² NGOs,²³ and academia.²⁴

The next sub-section will thus first ascertain a common core of international rule of law requirements that can be distilled from various international sources and the doctrine, before proceeding on to different relationships in which these requirements arise.

2.1 The International Rule of Law Requirements: A Common Core

For the present purposes, it suffices to note a considerable level of consensus that the core international rule of law requirements are primarily formal in nature, with substantive rule of law obligations—primarily those reflected in the broader corpus of human rights—remaining a more disputed element that is on firmer ground only in certain contexts.

Generally, the rule of law definitions are almost always positioned between the formal (thin) and substantive (thick) poles.²⁵ The formal conceptions put forward the compliance of legal rules with certain system-internal requirements, without passing judgment on the substance of those rules. Formal understandings thus focus more on the ‘mechanical’ aspects of the law. In the well-known formal accounts of Joseph Raz and Lon Fuller, this requires prospective, general, clear, public and relatively stable law—coupled with the independent judiciary that can conduct judicial review.²⁶ Substantive conceptions use these requirements as a starting point, but go beyond by linking the existence of the ‘proper’ rule of law with the protection of specific values and/or the existence of specific guaranteed rights. This essentially requires ‘good’ as opposed to just ‘general, prospective and consistent’ laws.²⁷ Apart from those substantive definitions that focus on a singular aspect,²⁸ more holistic visions usually revolve around the respect for the broader or narrower corpus of human rights.²⁹

A survey of ICJ practice, international instruments, other documents (such as NGO positions) and relevant doctrine shows a considerable level of agreement that the international rule of law requires:

• 1. supremacy of international law and respect for obligations under it³⁰;

• 2. non-arbitrary behaviour³¹;

• 3. clarity, consistency and predictability in the promulgation and application of law³²;

• 4. equality of subjects before international law³³;

• 5. peaceful settlement of disputes, including through impartial adjudicative processes³⁴;

• 6. respect for due process of law and procedural fairness.³⁵

This implies that the less controversial requirements are essentially formal in nature. Formality has an arguable advantage of certain normative ‘neutrality’ that allows wide(r) support,³⁶ and in that sense ‘thinness’ of the definition might be a ‘worthy price to pay’.³⁷ A predominantly formal understanding also generally accords with the comparative national understandings of the rule of law requirements,³⁸ although not completely. A comparative overview of the rule of law definitions also shows inclusion of at least some human rights into the ‘core’ rule of law requirements,³⁹ sometimes also at the international level.⁴⁰ However, as inclusion of human rights can blur the still often-emphasized distinction between them and the rule of law,⁴¹ as well as bearing in mind the controversy that this inclusion still generates,⁴² the remainder of this article focuses on the largely formal requirements identified above. These represent the most extensive level of states’ consensus currently possible.⁴³ Moving forward, the next section suggests the different contexts in which the international rule of law operates, providing an insight into how investment regime fits into the increasingly complex picture of the international rule of law.

2.2 The Contexts/Relationships in Which the International Rule of Law Operates

The domestic rule of law, with some important caveats, exists to constrain the power of the state towards the individuals and entities under its jurisdiction.⁴⁴ The above-mentioned requirements of the international rule of law arise in more diverse contexts. As is noted in doctrine, there are at least three sets of relevant relationships: (1) state–state relationships; (2) the relationship of the state and individuals/non-state entities under its jurisdiction; and (3) directly between the level of international institutions/international law and the individual.⁴⁵

The state–state context dominated the discourse for a long time, especially in areas such as the external actions of states and the use of force.⁴⁶ Many scholarly efforts aim to identify the basic requirements of the rule of law between sovereign states,⁴⁷ and prominent proclamations of the concept primarily focus on the rule of law requirements as a way of securing a peaceful framework of their cooperation.⁴⁸ Yet, the post-Cold War developments increasingly made the state–state relations just one of the relevant international rule of law contexts.⁴⁹ The state–individual relationship—sometimes referred to as the ‘internationalized’ rule of law⁵⁰—spans and connects international and national levels. The international rule of law came into full-on interaction with the exercise of states’ internal regulatory power.⁵¹ International human rights regime(s), some being in place for almost six decades now, might offer the best example,⁵² but international investment law is seen in that light as well.⁵³

Finally, the relationship between the individual and the international legal order has been a ground-breaking development in international law. Although the individual as the subject of international law is sometimes contested,⁵⁴ in a number of contexts the individual is indeed for all intents and purposes a bearer of both rights and obligations under international law, and able to appear before international courts and tribunals in different roles.⁵⁵ As noted, international criminal law is a particularly prominent example.⁵⁶

A holistic understanding of the structural complexity of the international rule of law helps elucidate the ways in which particular phenomena support or endanger it. With this more complex but also more nuanced picture in mind, it is possible to ascertain the place and role of the investment law regime.

3 International Investment Law as a Tool to Enforce the International Rule of Law

The international investment regime exhibits close connections to all three of the above-mentioned contexts. The regime is a vast network of mostly bilateral international agreements containing open-textured and appealingly formulated standards of how to treat eligible foreign investors. These standards are coupled with a very potent enforcement regime manifested in investor-state dispute settlement (hereinafter ISDS) mechanisms which allow the affected investors to directly sue the host states under international law and to efficiently enforce the potentially resulting (and sometimes financially staggering) awards.⁵⁷

States thus mutually establish binding international law obligations (state–state aspect) that constrain their behaviour towards entities that would otherwise for the most part fall under their regular jurisdiction (state–individual aspect)⁵⁸ and provide those same entities with directly enforceable international legal rights and a procedural standing (individual–international law aspect). At the same time, the constrains imposed through investment agreements have been analogized to the rule of law requirements, providing a strong legitimising narrative of the regime.

There is an often-mentioned proposition that international investment protection aims to secure the rule of law for foreign investors.⁵⁹ The role of international (investment) law is on occasion asserted not just to reinforce but to actually institute the rule of law domestically - absence of arbitrary conduct, judicial independence and non-retrospectivity are all ‘standards’ of the rule of law present in investment agreements so to potentially discipline a host state.⁶⁰ As summarized by David Rivkin, himself an investment arbitrator and counsel, ‘[investment] [a]rbitrators have developed a supranational rule of law that has helped to create uniform standards for acceptable sovereign behavior’.⁶¹

One of the critical features of this ‘supranational’ rule of law is the avoidance of interaction with the domestic rule of law mechanisms,⁶² helping thus to preserve the apparent neutrality of the employed precepts.⁶³ The pre-existing domestic legal framework is often perceived as insufficient—thus securing the rule of law is a primary function of an investment treaty.⁶⁴ As is often argued, the desire to remove the investor-state relationship from the possible vagaries of both diplomatic protection and the domestic rule of law primarily inspired the creation and eventual burgeoning of the investment regime.⁶⁵ More generally, states are required to ‘conform their behaviour to rule of law standards’⁶⁶ and should not be allowed to ‘misregulate’.⁶⁷ The ADC v. Hungary tribunal noted that ‘while a sovereign state possesses the inherent right to regulate its domestic affairs, the exercise of such right is not unlimited and must have its boundaries. […] the rule of law, which includes [investment protection] obligations, provides such boundaries’.⁶⁸

The link between the investment regime and the international rule of law as understood in this article should be clear. However, the claims about the pivotal role of this regime in enforcing the international rule of law should certainly not be taken at face value, as both positive aspects and considerable challenges can be identified in parallel.

4 The Positive International Rule of Law Aspects

There are two crucial aspects through which the investment regime furthers the international rule of law, sometimes to an extent hardly equalled elsewhere. Firstly, through ISDS and the framework for enforcement of investment awards, the investment regime potently secures the respect for the assumed international obligations through a mechanism that is sometimes described as causing ‘envy’ in other branches of international law.⁶⁹ Secondly, these assumed obligations, and in particular those stemming from the ‘core’ standard of FET, largely mirror the formal rule of law requirements enumerated above by demanding non-arbitrariness, predictability, non-discrimination and due process in host state behaviour. Whilst the focus of the investment protection remains on providing these international rule of law benefits to a select eligible class of foreign investors, the ever-increasing globalization of the world economy, the turbulent history of investment protection that international investment law aims to supersede, and the potential spill-over effects into domestic rule of law enhancement indicate that this is not an isolated, easily ignored ‘neck of the woods’.⁷⁰ Importance of the investment regime for the international rule of law is tangible, and must not be overlooked in broad assessments of its current state. The focus will first be on the enforcement aspect, before turning to the substantive obligations.

4.1 Enforcement of International Obligations

Acceptance of binding dispute settlement mechanisms and the power to enforce international legal obligations have often been put forward as important rule of law problems. The lack of a central sovereign and the often-rued limited reach of binding dispute settlement mechanisms indicate that the respect for the international rule of law was (too) often just a matter of states’ good will.⁷¹ The refusals of states to comply with the decisions of international adjudicative bodies, although not overly frequent, do contribute to these sceptical accounts.⁷² Calls for more opt-ins to binding dispute settlement mechanisms remain a constant feature in the UN context.⁷³

In addition, the problematic history of foreign investment protection adds importance to the currently existing regime. Protection of foreign investments and alien property deeply involved the home states of investors/aliens, and often resulted in diplomatic struggles, political interference, sanctions and, most severely, military interventions—sometimes referred to as ‘gunboat diplomacy’.⁷⁴ The rule-based settlement of investment disputes through third party adjudicators thus bears some clear advantages. While there might exist a tendency to overemphasize the extent to which the disputes are truly ‘de-politicized’,⁷⁵ there would seem to be little interest in returning this sphere into the domain of power politics.⁷⁶

To note, the investment regime certainly does not single-handedly prevent the excesses of gunboat diplomacy, nor is it a unique phenomenon in the growing ‘judicialisation’ of international relations. However, while the use of force today faces much more powerful constraints,⁷⁷ and the sheer amount of international adjudicative bodies rose sharply in the previous three decades, the extent of acceptance of ISDS and its ability to exert compliance with investment awards is in many ways unprecedented.⁷⁸ Due to these features, the investment regime has sometimes been hailed as one of the ‘most progressive developments […] in the last 50 years’.⁷⁹

International investment law sphere exhibits a massive acceptance of international arbitral jurisdiction by states (with claims, as noted, lodged by non-state entities directly) and a high rate of compliance with the awards.⁸⁰ The most pertinent features are the provisions on recognition and enforcement of awards rendered under the International Centre for Settlement of Investment Disputes (ICSID) and the rather limited possibilities of recourse against the awards within that framework.⁸¹ Notably, ICSID Convention Article 54 (1) dispenses with the possibility for the national courts to review ICSID awards. The informal option of rejecting to comply always remains, but by virtue of ICSID Convention Article 27(1) such rejection allows for the re-launch of diplomatic protection by the investor’s home state.⁸² As the experience of Argentina shows, non-compliance can prove both costly and ultimately unsuccessful.⁸³

A strong enforcement regime exists outside the ICSID framework as well.⁸⁴ Almost universally, the recognition, enforcement, and recourse against non-ICSID investment awards are governed by the New York Convention⁸⁵ and the almost identically worded nationally adopted versions of the UNCITRAL Model Law 1985/2006.⁸⁶ Despite broader grounds for recourse than in the ICSID Convention Article 52 (1), the merits generally remain beyond review.⁸⁷ In practice, the oversight conducted by the national courts is largely non-intrusive. As Van Harten and Loughlin note, the ‘piggybacking of investment treaties on the enforcement structure of international commercial arbitration both fragments and restricts judicial supervision of investment arbitration’.⁸⁸ The closer look at enforcement of awards under the New York Convention shows that it is indeed a largely automatic process in most situations.⁸⁹ Whether under ICSID or otherwise, the recognition and enforcement has been described as practically compulsory.⁹⁰

The investment regime thus exhibits both a high level of state commitment to binding international dispute settlement and the remarkable power to enforce the results of such settlement. Taking the respect for international obligations and the existence of a third party adjudicative mechanisms as relevant benchmarks, international investment law is one of the bigger success stories of international law. However, this in itself might not necessarily be positive without caveats, as the obligations thus enforced might theoretically conflict with other international rule of law benchmarks. However, leaving aside for the moment some issues with the rule of law aspects of ISDS (addressed in Sect. 5 below), the relevant obligations, and in particular the ubiquitous FET standard, are themselves in line with the remaining international rule of law requirements.

4.2 Imposing the Rule of Law Requirements: The FET Standard

While there are other important provisions, most notably the prohibition of uncompensated expropriation,⁹¹ the FET standard offers perhaps the best example for the interlinkage of investment protection and the rule of law. It has become the preeminent standard invoked by foreign investors,⁹² and the one bringing most success to them.⁹³ The FET standard and its sub-principles are very likely to be found in almost all existing (and prospective) ISDS disputes.⁹⁴ It has emerged as a core investment law concept with a potential to reach deeper into the regulatory sphere of states than any other standard.⁹⁵

The FET standard, mainly through ISDS jurisprudential developments, is now widely considered to embody certain key rule of law requirements.⁹⁶ In an oft-cited summary, Stephan Schill identifies seven sub-clusters of rule of law requirements that emerged in FET jurisprudence, all of which ‘also figure prominently as sub-elements or expressions of the broader concept of the rule of law in domestic legal systems’:

(1) the requirement of stability, predictability, and consistency of the legal framework; (2) the principle of legality; (3) the protection of legitimate expectations; (4) procedural due process and denial of justice; (5) substantive due process and protection against discrimination and arbitrariness; (6) transparency; and (7) the principle of reasonableness and proportionality.⁹⁷

A number of authors argue along similar lines.⁹⁸ Investment awards, to give some examples, emphasize requirements for the host states to provide stability and consistency,⁹⁹ respect domestic legality,¹⁰⁰ provide procedural due process¹⁰¹ and behave transparently.¹⁰² These developments have also been codified (with some clarifications and limitations) in recent ‘new generation’ investment agreements, such as the Canada-EU Comprehensive Economic and Trade Agreement (CETA).¹⁰³

Leaving aside for the moment the process of further interpretation and application of these rule of law requirements, and the sometimes criticized way in which these became embedded in jurisprudence,¹⁰⁴ such general-level concretisations of the FET standard effectively translate the declaratory rule of law commitments of states into palpable requirements whose breach can entail costly consequences. Both the FET standard and investment law more generally are thus on the frontlines of realizing the proclaimed aspirations towards a ‘transparent, stable and predictable investment climate with […] respect for […] the rule of law’.¹⁰⁵ This could, in turn, help ‘[give] the rule of law legal significance beyond its appeal as an aspirational principle’.¹⁰⁶

4.3 The Positive Aspects: Some Concluding Remarks

In sum, a powerful international enforcement mechanism has been put into the service of securing respect for some of the basic rule of law requirements. This synergy gives credibility to the above-mentioned descriptions of international investment law as a rule of law enhancer, and can provide a key foundation for its legitimacy. Remembering Thomas Franck’s influential account, a ‘demonstrable lineage’ of a rule/institution can extensively contribute to its ‘symbolic validity’, enhancing its legitimacy and the resulting compliance pull.¹⁰⁷ Anchoring its mission within the lineage of (international) rule of law can secure the enduring appeal of the investment regime and ISDS in face of the potentially significant detriments to financial or reputational self-interest of states.¹⁰⁸ At the same time, this can provide legitimacy-enhancing benefits for the very concept of international rule of law itself. Every manifestation of its requirements being more than ‘dead letters’¹⁰⁹ and actually maintaining a coherent link between rules and reality,¹¹⁰ ultimately also speaks against the narratives of decline in international rule of law or at the very least requires their careful nuancing.

The invocation of and reliance on the international rule of law as a legitimacy-conferring tool does not, however, somehow bestow a free pass on investment arbitrators in terms of their decision-making. On the contrary, it comes with a price tag of seemingly increasing expectations—themselves based on the rule of law—concerning the functioning of ISDS and the quality of justice that investment arbitrators are dispensing. To the extent that these expectations remain insufficiently fulfilled, there are challenges to both the prolonged existence of the investment regime in this form and to the image and appeal of the international rule of law. The next section looks at some of these challenges.

5 The Challenges (and Opportunities)

Investment law and ISDS face scrutiny and criticism due to the perceived rule of law deficiencies that question their foundation, current operation and future tenability. Limiting and inevitably simplifying the issues to the two main features discussed above, both the ISDS as a mechanism and its rule of law-promoting output are subject to far-reaching criticism. This section will address (some of) these challenges. A special emphasis is on the somewhat less discussed substantive decision-making issues, such as the interaction of international and national rule of law in the state–individual context.

5.1 Criticism and Reform of ISDS: Structural and Procedural Issues

There has been an increasing amount of examination and criticism of the structural and procedural features of ISDS ever since the sharp increase of investment cases brought the regime into the spotlight. Put briefly, the crux of criticisms revolves around the alleged inability of ISDS to conform to a number of rule of law ideals.¹¹¹ Whether concerning the procedural rule of law, transparency of the proceedings, arbitrators’ impartiality, or structural deficiencies that hamper harmonious jurisprudence, the debate and ‘backlash’ have increasingly led to reform proposals.¹¹² The proposed structural reforms to the regime, primarily in terms of introducing an appellate level of review,¹¹³ or substituting the existing arbitral mechanisms with an Investment Court System as advocated by the EU,¹¹⁴ have certainly gained in prominence recently. Important initiatives are underway under the auspices of UNCITRAL, International Law Association (ILA), and Institut de Droit international (IDI). The process before Working Group III (Investor-State Dispute Settlement Reform) of UNICTRAL perhaps gained most public prominence, and is potentially also farthest reaching. Bringing together numerous states and other stakeholders as participants and observers, the Working Group is tasked with identifying concerns and discussing potentially sweeping systemic, structural and procedural reforms of the regime.¹¹⁵ Importantly, the Working Group has concluded that concerns regarding inconsistent interpretations of treaty provisions, multiple uncoordinated proceedings, inconsistency and incorrectness of awards, independence and impartiality of arbitrators, disclosure and challenge mechanisms, diversity of decision-makers, mechanisms for constituting tribunals, and costs and duration of proceedings,¹¹⁶ are all sufficiently strong to warrant developing further reforms.¹¹⁷ The broad range of concerns illustrates well that the above-mentioned international rule of law advantages of ISDS cannot serve to overshadow numerous practical issues. In terms of reforms themselves, the future work of the Working Group will certainly be under close attention. Developments such as introducing a widely accepted standing investment court would certainly fundamentally change the structure and perception of ISDS as it exists now.

Similar concerns have also inspired work by ILA and IDI. ILA Committee on the Rule of Law and International Investment Law, in addition to substantive issues (discussed briefly in the following section) also has a mandate to examine the procedural issues of ISDS such as the independence and impartiality of arbitrators, procedural fairness, equality of arms and access to justice, and the adequacy of annulment and set-aside procedures.¹¹⁸ Following ILA Sydney Conference in 2018, the Committee has issued a report that contains an extensive theoretical and comparative study of rule of law benchmarks, providing thus the foundation for further work in this area.¹¹⁹ Another important initiative is the work of the 18th Committee of the IDI on Equality of Parties before International Investment Tribunals.¹²⁰ A recent Report of the Committee on this topic, authored by Campbell McLachlan,¹²¹ contains an in-depth look at the function, implications, procedural issues and desirable measures to secure and promote the equality of parties in investment arbitration,¹²² and with an overarching goal of ‘assist[ing] in the progressive development of fair procedures for the resolution of international investment disputes, whether by arbitration or within a standing international tribunal’.¹²³ The Report contains a wide range of recommendations that should, in line with IDI practice, also soon be formulated in a form of a resolution.¹²⁴ Equally relevant in these reform efforts should be the awareness of these parallel tracks and potential synergies. As noted by UNCITRAL Working Group III regarding its future work, special care is warranted to ensure coordination with other organizations and with multiple tracks of ongoing reform.¹²⁵

To be sure, it is almost impossible to overestimate the importance of these topics. Various reforms proposals have sparked voluminous academic literature, and the trend is certainly not abating. If, as is sometimes suggested, investor-state dispute settlement is ‘the’ very factor that matters for investment protection,¹²⁶ its maintenance in a manner that is acceptable to all key stakeholders should remain a priority. The focus of the rest of this article, however, is not on these issues. This is partially because of the well-tread nature of the discussions. Another reason, however, is that regardless of the likelihood of success of the structural and procedural reform proposals, the question of how substantive decision-making should look like remains open.

5.2 Criticism and Reform of ISDS: Substantive Issues

Interpreting the investment protection standards, and in particular the FET standard, as embodying rule of law requirements also opens new questions. The concept of the rule of law remains contested,¹²⁷ and the requirements embodied in the FET are claimed to provide insufficiently specific guidance for resolving disputes.¹²⁸ At the same time, numerous potential factual and legal scenarios that can arise in ISDS call for preserving the discretion of arbitrators and case-specific flexibility.

However, an overly free hand of investment arbitrators in interpretation and application of relevant provisions can also tarnish the appeal of the international rule of law. If decision-making is perceived by states and investors as inconsistent, overly broad or insufficiently reasoned, the recourse to lofty concepts such as the (international) rule of law can eventually lose meaningful impact on legitimacy.

Such concerns can propel both ‘system-external’ and ‘system-internal’ reform efforts.¹²⁹

One of the important academic initiatives to take stock of the substantive investment obligations and their relationship with the rule of law is the above-mentioned work of the ILA Committee on the Rule of Law and International Investment Law. With its mandate to examine both the substantive content of the treaty standards, and the impact of those standards on the rule of law in the host states,¹³⁰ the work of the Committee could in future lead to proposing improvement to treaty language in order to clarify obligations and better capture the balance of interests at stake, as well as to better take into account specificities of specific host states when interpreting the provisions.¹³¹

Reforms in practice are also underway. Whilst jurisprudential coherence and perceived correctness of awards could also be fostered through future structural reforms, improvements are already sought by the re-negotiation (or ‘re-calibration’) of investment treaties. With the aim of further specifying the meaning and content of employed concepts, some of these efforts are highly visible and can be impact future treaties more broadly.¹³² The extent of the realized reforms should perhaps not be overestimated. The clarification of the open-textured standards such as FET¹³³ has still so far produced relatively limited results, arguably leaving the door open for further suggestions on rethinking the reasoning process and the interrelationship with other sources of rules.¹³⁴ This, of course, if the ‘new generation’ investment agreements drafts become binding at all. Notably, a very strong majority of ISDS claims continues to be lodged under the ‘old generation’ investment agreements of the 1990s and before.¹³⁵

In that light, the possibilities remain open for further ‘internal’ refinement of substantive decision-making, particularly in the sphere of applying international rule of law precepts in conjunction or opposition with pre-existing national rule of law notions. Within this ‘internationalized’ (state–individual) rule of law context, there are both serious challenges and considerable opportunities to reimagine the role that the international rule of law can and should play through investment awards.

5.3 Substantive Decision-Making Between International and National Rule of Law

The state–individual relationship is one of the focal points of the investment regime, with an own set of distinct issues. The international rule of law precepts are not applied here to some sort of terra nullius where the rule of law played little to no role before, or is in a nascent state. Investment arbitrators make determinations in scenarios which are also deeply embedded within the national legal frameworks and could be amenable to at least nominally pre-existing domestic rule of law commitments.

While the eligible investors are, for the purposes of investment law, given a partial international law subjectivity,¹³⁶ their investments are for nearly all other intents and purposes largely indistinguishable from the purely domestic ones. As such, the foreign-owned business entities and their assets also face national law in its entirety.¹³⁷ On a practical level, host state decision-makers are primarily guided in their everyday behaviour towards foreign investors by the domestic (administrative, constitutional, criminal) law, and not necessarily by the provisions of investment agreements.¹³⁸

Put simply, the rule of law requirements that investment law imposes are certainly no novelty to host states, and it would be a considerable normative faux pas for the arbitrators to ignore this. The FET provisions, to continue with this example, are certainly not the only or even the most developed set of commitments that oblige the host states to respect the rule of law.¹³⁹ Combined obligations existing beyond the investment agreements are usually more specific and developed in terms of rule of law requirements imposed upon the host state decision-makers.¹⁴⁰ Investment provisions, and FET in particular, essentially and substantially overlap with these obligations.¹⁴¹ For example, they ‘overlap substantially with the rights protected in human rights treaties’,¹⁴² have cognates in other international commitments of the state,¹⁴³ as well as in constitutional obligations.¹⁴⁴

It is unlikely that a host state did not already have a domestically or internationally sourced obligation to treat the investor and its investment non-arbitrarily, non-discriminatorily, predictably and transparently. The extent to which individual states attempt and/or manage to comply with their pre-existing obligations can indeed, to put it charitably, be problematic. Sometimes the national rule of law obligations do resemble the ‘lofty eloquence of the constitutions of banana republics of yore’.¹⁴⁵ But the fact remains that the ‘internationalized’ rule of law aspect of the investment regime clashes with an area where there is often ample domestic and other international law at play. Both the investor and the host state could have expected these other sources of law to be at least equally, if not primary, relevant for the life of an individual investment. Whilst the empirical research is still somewhat scarce, existing research of investors’ attitudes seems to point to a similar conclusion.¹⁴⁶

The critical friction point is when a dispute does arise and the international rule of law principles as embodied in the FET standard formally become primarily or even exclusively relevant. Even if up to that point both the investor and the host state were focused on the domestic legal order and its mechanisms, this will not necessarily be given decisive or even considerable weight by investment tribunals. As the cause of action is the international standard embodied in the treaty, the applicable law considerations imply that international law (and in the first place the text of the treaty itself) is the basis upon which the decision is to be rendered.¹⁴⁷

Unlike concerning some important jurisdictional questions,¹⁴⁸ in decision-making on the merits municipal law is in no way guaranteed to be relevant as either law or, as is more likely, a fact—and often is not. As noted by Jarrod Hepburn in his recent extensive survey of existing decisions, the approaches of investment tribunals vary considerably.¹⁴⁹ Some tribunals explicitly denied the relevance of domestic law (as a fact) for assessing an FET standard breach, others failed to deal with it without explicit explanation, whilst a number of them recognized the contributory role of domestic law in assessing the breaches of the ‘often nebulous’ FET standard.¹⁵⁰

To be clear, it is largely beyond doubt that investment arbitrators have no explicit legal obligation to formally engage with domestic law or non-investment obligation arising from other international commitments of the host state. At the end of the day, they are there to enforce international (rule of) law and prevent the regulatory autonomy of states from becoming an excuse for unhindered fiat towards investors. The FET remains an autonomous, international standard, that is not to be formally equated or tied to the host state’s or any other domestic understanding of the rule of law requirements.¹⁵¹ As per VCLT Article 27,¹⁵² national law cannot justify a breach of an international obligation by the host state,¹⁵³ and a breach of national law cannot per se entail a breach of the FET standard.¹⁵⁴ Likewise, the taking into account of other international obligations of the host state, at least at the level of interpretation of investment treaty provisions, is a possibility envisioned in the commonly-discussed VCLT Article 31(3)(c) but, as ISDS jurisprudence itself shows, is by no means a mandatory path for the tribunals.¹⁵⁵

An argument can also be made that, from the viewpoint of democratic legitimacy, this is exactly as it should be. Investment tribunals have their own set mandates within the confines of the relevant treaties, and their attempt to engage too deeply with domestic, presumably democratically enacted law might fuel further backlash. The recent language of the CETA investment protection provisions would indicate a similar homage to a strict dualism between the international investment law and national law worlds.¹⁵⁶

Yet, there are at least two reasons why there might be a need for investment arbitrators to systematically engage with national law and non-investment international obligations in their substantive reasoning, even if these sources are treated as facts.

The first one is that applying the discretion-laden international rule of law requirements without taking due and systematic account of the already existing provisions which relate to the legal situation that is under scrutiny negatively affects both the persuasiveness of reasoning¹⁵⁷ and the perception of due respect for the regulatory autonomy of the host state.¹⁵⁸ In an effort to avoid seeing the FET standard as ‘a malleable tool of ex post facto control of host states’ measures based on the arbitrators’ personal conviction and understanding about what is fair and equitable’,¹⁵⁹ there should exist a cogent effort to investigate and explain if and why the host state legal framework and/or compliance with it were (in)sufficient to meet the international rule of law criteria. Persuasiveness of determining if, for example, the host state acted in accordance with due process can only benefit from an examination how its own enacted (and presumably internalized) provisions relating to due process were followed through in the case at hand.¹⁶⁰ Likewise, it can only further help to explain why even if these domestic obligations were fully obeyed with, the relevant host state legal framework is not up to the par with what international rule of law would require.

The ultimate determination of the existence of a breach of an investment protection obligation might not depend on considerations of compliance with domestic law. But structuring the reasoning of arbitrators in this way can have a powerful disciplining effect. Investment cases can cut deeply into the critical national policy issues or cause budget-straining financial detriment. Every effort should thus be made to secure that the open-textured international rule of law requirements were not applied without extensive engagement with national law—or without in-depth reasoning more generally—just because there was no clear legal obligation to do so.¹⁶¹

But there is a further reason for this engagement with other sources, as it can lead towards the improvement of the domestic rule of law. Investment arbitrators are generally detached from the domestic institutional constraints and/or political pressure, and have a powerful enforcement mechanism at their disposal. No less importantly, investment awards often have a high public profile and can serve as focal points of public debate. Investment tribunals may thus be uniquely positioned to elucidate the potential deficiencies in the national (rule of) law mechanisms or practice. This, in turn, can provide guidance for the host states so to rectify the identified problems, avoid future disputes, and enhance the level of the national rule of law for the benefit of both foreign and domestic stakeholders. There are indications that the overall narrative in investment protection has been moving towards justifying its existence as being beneficial to the national rule of law and good governance more generally.¹⁶² If this is to become a reality, the reasoning and argumentative process of investment tribunals should be properly adapted.

Proposals made above are certainly not beyond the capabilities of investment arbitrators, nor are illustrative examples lacking in practice. Investment tribunals have on numerous occasions proven themselves capable of thoroughly and persuasively examining the (breaches of) domestic and international legal obligations of the host state, as well as national practice and secondary sources such as domestic court jurisprudence and academic commentary.¹⁶³ In some situations, the identified breaches of obligations existing beyond investment treaties have proven decisive in finding a breach of the relevant investment provisions.¹⁶⁴ Conversely, compliance and enforcement of the state of its domestic law and international obligations has also sometimes proven decisive in rejecting investors’ claims.¹⁶⁵ In all the cases cited, the thoughtful and extensive reasoning of the awards offers numerous potential insights for the host state as to what can be done to (if necessary) further improve the national rule of law.

To briefly conclude on this part, the international investment law regime faces deep-reaching challenges based on the rule of law issues in its structural, procedural and substantive decision-making aspects. The future of reform efforts is uncertain, and recent developments indicate that in some contexts ‘better’ ISDS might be replaced with no ISDS at all.¹⁶⁶ But in every challenge lies an opportunity. To focus on one, by properly adapting the application of the international rule of law requirements to the domestic context through deeper engagement with the national (rule of) law, opportunity exists to both more persuasively ground the ultimate determinations and to offer possibilities for the national rule of law enhancement.

6 Conclusion

Currently, international law and order seem to be facing new challenges with every passing week. The reactions of international lawyers point towards a deep reassessment of what (if anything?) the international rule of law still has to offer, the broad declarative support for it notwithstanding. This article has aimed to contribute to these debates from the perspective of the relationship between the international rule of law and international investment law, and to suggest that assessments of both phenomena need to remain nuanced. There are indeed both strengths and challenges, as well as opportunities in this sphere.

Duly taking account of the unsettled contours, the international rule of law can least controversially be seen as requiring a set of formal precepts—supremacy of the law; non-arbitrariness; consistency, clarity and predictability; equality before the law; peaceful settlement of disputes; and due process. The international rule of law can further be seen as operating at the state–state; state–individual; and the individual–international law level.

If these lenses are then directed towards international investment law, three broad arguments can be put forward. Firstly, investment regime is intertwined with all three contexts of the international rule of law and is, furthermore, often explicitly legitimized by those within the regime as a tool to enforce the international rule of law precepts. Secondly, taking the identified rule of law requirements as benchmarks, international investment law exhibits at least two positive features. The dispute settlement and enforcement mechanism, which is an element whose strength is often criticized in the context of international law more broadly, is here both powerful and widespread. And that same mechanism is often used, mostly through the standard of fair and equitable treatment, to enforce upon the host states some of the basic requirements which correspond to the ones identified as required by the international rule of law.

Thirdly, however, the recourse to the international rule of law as both a source of substantive principles and a legitimising factor has a boomerang effect in that international investment law itself needs to bear a rule of law scrutiny. The numerous criticisms, debates and reform proposals attest to the need to improve the structural and procedural aspects of the regime so to maintain its existence and legitimacy—and with it, at least partially, the legitimacy and continuous existence of the international rule of law. Likewise, an argument has been made that juxtaposing open-textured international rule of law requirements with domestic legal systems can, depending on the adaptability of investment arbitrators, either fuel further backlash against the regime or provide new opportunities for enhancing both the legitimacy of the international rule of law and the quality of its domestic counterpart. The decision-making process should systematically and thoroughly engage with the existing national legal framework, even though the ultimate decision on the existence of a breach of a relevant investment protection standard may not formally depend on it. Such an approach can help enhance the national rule of law beyond the confines of an individual case and beyond the piecemeal protection of an individual investor.

Looking towards the future, there is certainly a need for a careful assessment of what are the benchmarks, relationships and pressure points that should guide the assessment of the international rule of law. Perhaps even more pressingly, there is a need to identify the opportunities to reinvigorate the international rule of law and its legitimacy in the operation of different international law regimes. In the current global climate, it is questionable if either the international rule of law or the investment regime can afford to miss such opportunities.