Exhaustion Requirements and Dispute Resolution Reform in Bilateral Investment Treaties

• Publication year: 2021

Exhaustion Requirements and Dispute Resolution Reform in Bilateral Investment Treaties

William Crowder Gastrins, Jr.^*

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Table of Contents

I. Introduction................................................................. 373

A. Contemporary Issues in International Investment Law: The ISDS Regime......................................................................374
B. The Rule of Local Remedies..............................................378

II. BITs Status Quo............................................................ 380

A. Geopolitical and Geo-Economic Forces Guiding BITs from 1994 to 2015......................................................................380
B. Policy Interests at Stake....................................................382

i. Economic Protectionism.............................................382
ii. Legitimacy Crisis........................................................382
iii. Fair and Equitable Treatment—Reliance Interests and Legitimate Expectations..............................................384

III. Examination of BITs.....................................................387

A. Extreme Exhaustion Requirements .................................... 388
B. Traditional Fork-in-the-Road............................................389
C. Fork-in-the-Road with Limitations....................................390
D. No Exhaustion: Always Have the International Option .... 392
E. Treaty-Established Tribunal.............................................. 392
F. Diplomatic Process............................................................393

IV. Limitations of This Treaty Framework........................... 395

A. Futility Doctrine................................................................395
B. Emergency Measures and Other Crises............................396
C. MFN Provisions.................................................................397
D. "X-Factors "—Non-Traditional or Non-Legal Frustrations of BITs................................................................................400

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V. Conclusion................................................................. 403

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I. Introduction

International trade tensions—trade wars, tariffs, trade deficits, and more—dominated global news in the late-2010s, stoking the imagination of not only politicians and economists but also the average citizen. This phenomenon was part of the public reaction to the changing policies on a global level surrounding international trade and investment relationships. Beginning in the latter-half of the twentieth century and accelerating after the end of the Cold War, the world's states broke down barriers to international trade and investment through multilateral treaty systems such as the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).¹ These multilateral systems did not regulate, though, Foreign Direct Investment (FDI), the transfer of capital across international borders.² Instead, the various states individually regulated FDI through a collection of treaties between usually two states that provided protection for the investments of a citizen of one state in the other.³ These treaties are known as Bilateral Investment Treaties (BITs).⁴

Most BITs offered protection to investors through the abrogation of the Rule of Local Remedies (the RLR), a doctrine of customary international law that requires international claims be resolved in the host state's local courts.⁵ Under these BITs, investors could file claims against the host state directly before an international tribunal in an arbitral proceeding known as "Investor-State Dispute Settlement" (ISDS).⁶ Since the global financial crisis in 2008, though, political leaders questioned the viability of such liberalized trade policies.⁷ Beginning around 2015, international political leaders renegotiated BITs to be more

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protectionist, including reviving the RLR and limiting the availability of ISDS.⁸ This Note will examine these reforms offered in BITs negotiated in the late-2010s to determine whether they accomplish the goals of reformers and whether other legal doctrines in the international investment regime will frustrate these reforms.

Part I of this Note discusses the political and legal underpinnings that led to the reform of BITs in the late-2010s. Part II discusses the policy interests that motivated reformers when drafting 2010s BITs. Part III examines the choice of fora and exhaustion clauses in individual BITs to determine whether they fulfil the policy interests that reformers sought. Part IV offers a cursory exploration of pitfalls that the reformed dispute resolution systems face when brought before international tribunals. Part V offers concluding thoughts on how these BITs and their dispute resolution clauses may affect the international investment regime and the law of ISDS tribunals.

A. Contemporary Issues in International Investment Law: The ISDS Regime⁹

Many of the reform efforts taken in the late-2010s stem from the failure of the Doha Round of multilateral trade negotiations in the mid- to late-2000s.¹⁰ After the 1999 WTO Ministerial Meeting in Seattle failed to start a new round of trade negotiations, the Doha Round of the WTO also stalled as middle-income countries such as Brazil, Russia, India, China, and South Africa sought concessions to bolster their geopolitical and geo-economic positions and interests.¹¹ In the Doha Round, the WTO had expected to conclude an international FDI treaty, but this effort failed when the Doha Round collapsed in the mid-2000s.¹² Among the

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reasons proffered to explain the failure of the Doha Round, scholars point to: divergence in the objectives of developing states, the fear of Chinese economic growth, lack of political will, the expansion of government regulation of climate change, and the lack of strong support from business stakeholders.¹³ With regard to the lack of support from business stakeholders, the business stakeholders wanted reforms in services, investment, and e-commerce, while the WTO and other political stakeholders focused on tariff and non-tariff barrier reduction.¹⁴

From the ashes of WTO-led negotiations, bilateral (e.g., BITs)¹⁵ and plurilateral (e.g., NAFTA, USMCA) preferential trade agreements on more limited issues emerged, backed by global business interests.¹⁶ While these agreements more immediately addressed the needs of the business community, they created a complex patchwork of inconsistent protections, obligations, and other regulations.¹⁷ While some commentators and academics retained hope in the early-2010s that there would be a multilateral solution to the problem of FDI regulation,¹⁸ mid-decade shifts in political mores made this increasingly unlikely.

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While the collapse of the Doha Round created the legal backdrop for FDI and BIT reform, the political will for this reform stems from policies associated with the candidacy and election of Donald Trump to the U.S. Presidency. During the 2016 U.S. presidential campaign, Donald Trump and his advisors made largely protectionist economic promises.¹⁹ In May 2016, then-Trump supporter and later-Secretary of Commerce Wilbur Ross expressed concerns about the rising economic power of China and its state-controlled debt and currency markets.²⁰ As the election progressed, investors began to fear major drops in Asian stocks following a Trump victory, citing as an important factor "'unpredictable' foreign policy" that may produce beneficial individual outcomes through negotiation but would aggregate into substantial losses or underperformance across Asia.²¹ Campaign bluster quickly turned into action after inauguration, with Trump taking executive action to withdraw the United States from the Trans-Pacific Partnership and reorienting U.S. international trade and investment policy.²²

World leaders prepared for a vacuum in global political leadership as soon as President Trump was elected.²³ Under the Trump Administration, U.S. strategy shifted towards using bilateral pacts with individual states and unilateral tariffs to effect Trump's trade, investment, and foreign policy objectives, harnessing the United States' strategic and economic heft to prevent concessions granted during earlier plurilateral and multilateral negotiations.²⁴ By mid-2017, these tactics

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launched a "trade war" between the United States and China that forms the backdrop to the topic of this Note.²⁵

Political disruption from this shift spurred a cascade of new BIT negotiations, giving states and political actors an opportunity to revisit the legal underpinnings of the international investment system.²⁶ As states faced new political and diplomatic tensions caused by such adjustments, business stakeholders similarly faced new legal and economic challenges. Business interests globally faced populist pressure to consider a broader range of stakeholders when making business decisions, driving business leaders to pledge to take increased responsibility for the public good.²⁷ Additionally, governments considered new regulations on technology, energy, and other sectors of the economy, further disrupting traditional business activities.²⁸ This panoply of economic and political forces drove actors' interests in and commitment to the international trade and investment negotiations in the late-2010s, and the BITs' efficacy must be evaluated in light of those commitments.

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B. The Rule of Local Remedies

Unless abrogated by a BIT, the Rule of Local Remedies (the RLR) is the default customary rule of international law that controls whether a foreign investor can seek remedies from an international tribunal for claims arising out of FDI. The RLR requires claimants for international or treaty wrongs to vindicate their rights in domestic tribunals before seeking a remedy in an international tribunal.²⁹ The International Court of Justice recognized this customary...