The Future of Investment Treaties: Metamorphosis or Deconstruction?

Traditionally, the sole subjects of public international law are sovereign states. Therefore, in

the Westphalian system, only statal political entities are able to assume obligations and

benefit from certain rights at an international level. As a consequence, under this classical

approach, only such actors can initiate and can take part in this type of disputes, even though

the prejudiced part might not be the entire state, but an administrative division, a group of

citizens or a company incorporated in that state.

However, in the aftermath of World War II, public international law suffered structural

metamorphosis, allowing both natural persons (due to the human rights theory and its

accompanying charters) and legal entities (due to the various bilateral or multilateral

investment agreements) to challenge the abusive conduct of a state, without needing the

diplomatic intervention of their state of origin. Therefore, in the post-Westphalian

international law system, the sovereign entities are no longer needed as „procedural proxies‟

for aggrieved investors, being able themselves to directly involve in international litigation

and be compensated for their losses.

The central element of this new legal configuration is constituted by the depoliticization of

disputes and the demise of strictly diplomatic negotiations, which tended to favour states in

reaching a strategic compromise even though it might have further prejudiced the aggrieved

investor. Thus, when signing the 1965 Washington Convention (i.e. Convention on the

Settlement of Investment Disputes between States and Nationals of Other States, or – simply

put – the ICSID Convention), it was genuinely believed that such a legal instrument would

solve both the logistical problem of an arbitration centre and the procedural issue of unitary

rules and award enforcement.

More precisely, the Convention established that the member states undertake to recognize

any such award as final and binding on their territory, not necessitating a prior recognition

procedure, as in the case of other arbitral awards ruled by the 1958 New York Convention.

Thus, it was assumed that not only the litigation itself would be more predictable, but also its

end-result: voluntary abiding to the award or swift enforcement.

Analysing this system from a historical perspective, it can be argued that it already became

fully functional in the last decades, as presently there are several thousand Bilateral

Investment Treaties in force and around 400 (known) finalized investment arbitrations.

Usually, states (mostly from the „developing states‟ group) have been challenged by

numerous investors (mostly originating from the „developed states‟ group), being forced to

pay compensation of several hundred million dollars or even billions for their abusive

treatment toward the investors.

However, with all the system‟s implicit efficiency, the last decade presented itself with a

contestation of the established arbitration regime. More precisely, some scholars – dissenting,

albeit not marginal – raised suspicions that the functioning of the system subversively favours

capital-exporting states against capital-importing states. This argument was not a novelty in

international law, as it continuously accompanied the evolution of UN Resolutions all along

the Cold War. However, in the strict sector of investment arbitration, such a stance appeared

– for some analysts – more convincing in the circumstances of numerous controversial

awards rendered by tribunals, which appeared to neglect the need for equilibrium between

investor rights and the public interest of host states.

Thus, following the (in)famous defeat of several Central- and South-American states in front

of arbitral tribunals, both sovereign entities and various NGOs or legal academics emphasised

that the functioning of the present system could lead to statal incapacity to issue public

interest norms. More precisely, developing states argued that they were ordered to pay

damages for the revocation of licenses for companies that acted in a detrimental manner

toward public health and the environment (see, for example, the renown Tecmed v. Mexico

case), perceiving such award as an unpredictable extension of the obligations undertaken in

the Treaties.

In this context, a series of countries – of which Argentina is the most prominent example –

explicitly refused to voluntarily compensate the investors, practically denying the effects of

the arbitral awards. Other countries – such as Australia – decided to include only inter-state

arbitration clauses in their future investment treaties, readopting the classical international

adjudication system. Even strong capital-exporting states such as Germany issued the opinion

that the direct dispute resolution system should be discarded in the new TTIP agreement

between the EU and the US. Thus, without affecting the stability of the Investment Treaty

network, these states promote only a reform concerning the methodology of litigation, aiming

to avoid an autonomous decision of private parties to begin arbitral proceedings against

another state without the close supervision of their state of origin.

Another stance towards this legal domain – of a more radical nature – was exposed by

Indonesia (and also by South Africa) which aims at terminating its existing Bilateral

Investment Treaties and – thus – totally exiting the self-referential treaty network. The first

step in this direction was announced by the Dutch embassy in Jakarta which notified the

general public that the Indonesia government decided to terminate the existing Bilateral

Investment Treaty between the two states from 1st July 2015. In the same context, it was

shown that “the Indonesian Government has mentioned it intends to terminate all of its 67

bilateral investment treaties”. The origin of such an attitude can be followed to the last

challenge toward Indonesia‟s conduct in relation to a British-Australian investor – i.e.

Churchill Mining –, arbitration that already passed over the jurisdictional phase and is

approaching the merits phase, with claims to compensation for over 1 billion dollars.

Therefore, Indonesia takes the already existing „rebellious‟ attitude against the present system

a step further, challenging not only the legitimacy of investment arbitration (as a dispute

resolution method), but also the entire global network of Investment Treaties. In a symbolic

manner, the first terminated international agreement is that signed with its former colonial

metropolis – the Netherlands. Following this hermeneutical perspective, the first Investment

Treaty signed is also the first one terminated, revealing the ideological position (often met in

certain academic circles) that the present system represents only a legal continuation of the

former political dominance.

In this context, it remains to be seen whether the Indonesian attitude will be marginalised by

the international community and – even more important for the long-term survival of

investment law – if the absence of such treaties will lead to a diminishment of foreign direct

investment in the archipelago. If this is not the case, there is the risk of reverberating such a

position in more developing states and, consequently, a re-politicisation of investment

disputes.

The order of Westphalia seems ready for a forceful return.