Recapturing public power: is investment arbitration's engagement of the public interest contributing to the democratic deficit?

• Author: Choudhury, Barnali

ABSTRACT

Globalization has changed the way sovereign states regulate their societies. The effect of globalization has been the creation of several international agreements that transfer decision-making from the national to the international level. An important subset of these agreements is international investment treaties; an estimated 2,500 of these treaties have been entered into worldwide by a number of states, especially in the last ten to twelve years. As these agreements almost always contain arbitration clauses, the number and scope of arbitrations handling disputes under these investment agreements have grown exponentially. Arbitrators governing these disputes are now regularly reviewing domestic public interest issues due to their expanded role. In fact, in some cases arbitrators are effectively striking down national regulations. The breadth of the regulatory powers of arbitrators in their review of national state decisions, regulations, and legislation has even caused some scholars to characterize investment arbitration as part of the evolving concept of global administrative law. Concerns also arise with investment arbitration's curtailment of democratic expression through its ability to counter a state's sovereign decision-making authority.

This Article seeks to address these issues, initially by positing that the efficacy of investment arbitration decisions on public interest issues is limited by the lack of public participation. The Article identifies in greater detail the features of investment arbitration, the elements of democracy and the democratic deficit, and the process and outcomes of investment arbitration that have implicated public interest issues. It then explores suggested solutions to increase public participation in and accountability for the investment arbitration process, and to infuse non-investment related concerns into the outcomes of the traditionally private domain of investment arbitration[degrees]

TABLE OF CONTENTS I. INTRODUCTION A. Investment Treaties: From Shield to Sword B. Investment Arbitration as an Instigator of the Democratic Deficit 1. Democracy and the Democratic Deficit 2. The Impact of Investment Arbitration on the Democratic Deficit a. The Investment Arbitration Process b. The Outcomes of Investment Arbitration i. Public Interest Issues (1) Regulatory Expropriations through the Lens of Environmental Issues (2) Non-Expropriatory Regulatory Interferences with Investments (3) Public Services (a) Water Services (b) Health Care and Other Subsidized Public Services (4) Idiosyncratic Public Interest Issues ii. Investment Arbitration, the Public Interest, and Democracy II. SOLUTIONS FOR BALANCING PUBLIC INTEREST WITH INVESTMENT ARBITRATION . A. Process Changes 1. Transparency a. Public Access b. Amici Curiae 2. Accountability of Arbitrators B. Outcome Changes 1. The Margin of Appreciation and Article 1 of the ECHR 2. Ascertaining Intent III. CONCLUSION I. INTRODUCTION

The sovereignty of a state signifies its independence. (1) Independence in regard to a portion of the globe, in turn, signifies the right to exercise therein the functions of a state, to the exclusion of any other state. (2) Thus, a state's sovereignty dictates that it may legislate and regulate at will issues of concern to its constituents, including issues of public interest. (3) States should therefore be free to set national regulations concerning environmental safety, human rights, affirmative action, or state emergencies in exercising their independence. (4)

Globalization, however, challenges the idea of the state as the sovereign guardian of the public interest. (5) The effect of globalization has been the creation of several international agreements that transfer decision making from the national to the international level. (6) The increased use of these agreements has raised concerns regarding the transfer of a state's public power to an international institution. (7) Constraints on the ability of a state to exercise its public power are particularly apparent in the area of investment arbitration. (8) Since 1959, states have entered into international treaties that permit foreign investors to initiate direct actions against a host state for disputes arising from the state's treatment of the foreign investment. (9) Until the early 1990s, international investment treaties were used primarily by European nations and to a lesser extent by the United States. (10) However, in the last ten to twelve years, the use of international investment treaties has exploded, and it is now estimated that almost 2,500 of these treaties have been entered into worldwide by a number of states. (11) As a result, arbitrations arising from disputes governed by these international investment treaties have expanded exponentially. (12)

The growth in investment arbitration has also extended the powers of the international bodies governing these disputes. (13) In particular, the arbitrators governing these disputes are now regularly reviewing domestic public interest issues due to their expanded role. (14) In fact, in some cases arbitrators are effectively striking down national regulations. (15) The breadth of the regulatory powers of arbitrators in their review of national state decisions, regulations, and legislation has even caused some scholars to characterize investment arbitration as part of the evolving concept of global administrative law. (16)

Concerns also arise with investment arbitration's curtailment of democratic expression through its ability to counter a state's sovereign decision-making authority. (17) State parties to investment agreements can no longer legislate at will in the public interest without concern that an arbitral panel will determine that the legislation constitutes interference with an investment. (18) Thus, investment arbitration may result in an overall loss of state independence and sovereignty, which has implications for democratic governance. (19)

Nevertheless, it could be argued that, as a system of private international governance, investment arbitrators are not "guardians of the public interest" and therefore should not decide investment disputes that implicate broader political and economic issues. (20) At the same time, the question arises whether state exercises of public authority should be adjudicated by foreigners, largely on the basis of commercial principles, when the adjudicators are unconcerned with the wider effects of their decisions. (21)

The democratic implications of public interest issues further complicate this dichotomy of investment arbitration. If democratically elected governments enact public interest regulations in response to public concerns or to address democratic ideals, how can investment arbitrators make decisions affecting such regulations without public input? Moreover, by allowing investment arbitrators to rule on public interest regulations without input from the affected populace, does investment arbitration contribute to the ever-growing democratic deficit that has plagued many international bodies?

This Article seeks to address these issues, initially through the thesis that the efficacy of investment arbitration decisions on public interest issues is limited by the lack of public participation. The Article begins in Part I by identifying in greater detail the features of investment arbitration, the elements of democracy and the democratic deficit, and the process and outcomes of investment arbitration that have implicated public interest issues. In Part II, the Article explores suggested solutions to increase public participation in and accountability for the investment arbitration process, and to infuse non-investment related concerns into the outcomes of the traditionally private domain of investment arbitration.

1. Investment Treaties: From Shield to Sword

   Foreign investment constitutes the single largest source of external finance for developing countries. (22) Accordingly, developing countries have sought ways to encourage this form of financing from foreign investors. (23) At the same time, foreign investors have identified developing countries as a source of beneficial financial returns and as a means of establishing themselves in future key markets. (24) This circumstance has incited considerable interest in foreign investment. (25)

   However, foreign investors have continually expressed concern over investing in states where they are subject to the state's lawmaking authority but are unable to participate in the state's political or public policy processes. (26) As a result, disputes stemming from foreign investments have warranted a unique process. (27) Traditionally, foreign investment disputes were settled by force. (28) Colonial powers would resolve an investment dispute by imposing implied or actual force on their subjected colonies in a process termed "gunboat diplomacy." (29)

   Around the nineteenth century, however, states moved from gunboat diplomacy to actual diplomacy, in the form of treaties of Friendship, Commerce and Navigation (FCN treaties). (30) Originally intended only to facilitate trade and shipping, FCN treaties increasingly began to include provisions protecting foreign investments. (31) The treaties emphasized the protection needed for individual investors engaged in trade and included provisions for most-favored nation treatment (32) and the guarantee of prompt, adequate, and effective compensation for an expropriation. (33) Nevertheless, FCN treaties did not provide for direct dispute resolution, and international law generally barred foreign investors from initiating a direct cause of action against a state. (34) Rather, aggrieved investors were forced to rely on politicking, in hopes that their home state's government would take up the claim on their behalf. (35) Alternatively, investors were forced to litigate against the host government in its own national courts. (36) However, neither option...