Exit, Voice, and Loyalty in Investment Treaty Arbitration

• Publication year: 2021
• Citation: Vol. 93

93 Nebraska L. Rev. 313. Exit, Voice, and Loyalty in Investment Treaty Arbitration

Exit, Voice, and Loyalty in Investment Treaty Arbitration

Anna T. Katselas(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 314

II. The Investment Treaty Arbitration Organization ...... 322
A. What Organization? ............................... 322
B. A Look Inside the Club ............................ 326

III. Exit, Voice, and Loyalty ............................... 335
A. Exit: A Long, Difficult, and Open Road to the Door. 335
1. The Three Types of Exit and the Unavailabilityof Selective Exit ............................... 335
2. The Long Road to Formal Exit ................. 338
3. The Operation of Exit .......................... 346
B. Voice: From Protest to Prescription ................ 348
1. Protest ........................................ 348
2. Interpretation ................................. 351
3. Prescription ................................... 353
4. The Operation of Voice ........................ 358
C. The Interplay of Exit and Voice, and the Question of Loyalty ........................................... 360
1. The Interplay and Relative Effectiveness of Exitand Voice ...................................... 360
2. The Question and Role of Member Loyalty ..... 361

IV. Conclusion ............................................ 369

1

I. INTRODUCTION

Nearly twenty years ago, Jan Paulsson, a leading authority on international arbitration, wondered what might become of investor-state arbitration.(fn1) "Arbitration without privity," as he termed it, was radically different from that which had come before and could either remain a "marginal feature" of international arbitration or "presage an epochal extension of compulsory arbitral jurisdiction over States"-only time would tell.(fn2) When he wrote those words in 1995, there were close to 900 bilateral investment treaties (BITs)-not an insignificant number-but investors had initiated fewer than thirty-five investor-state arbitrations in the International Centre for Settlement of Investment Disputes (ICSID).(fn3) Now, as investors have more widely come to realize the power they hold, Paulsson's second possibility has evidently come to fruition. There are now nearly 3,000 BITs in force, and investors have initiated close to 500 ICSID arbitrations.(fn4) The year 2012 was a record one both in terms of the number of new investor-state disputes filed, fifty-eight, and the size of a single award, U.S. $1.77 billion (U.S. $2.3 billion with interest), against the Republic of Ecuador.(fn5)

2

The precipitous development of the investment treaty arbitration machine is not unlike a freight train barreling down a steep and treacherous hill. The BIT phenomenon gained momentum rapidly in the 1990s, fueled by globalization and a loss of alternatives to foreign investment as a source of capital.(fn6) In the absence of a multilateral agreement on investment, states hurriedly jumped on the BIT train- a club of sorts-to protect investments made by their own nationals in foreign states, to attract inward foreign investment, or both.(fn7) Like the barreling freight train, the speed with which states moved involves a tradeoff; they jumped on board and covered an impressive amount of ground in a remarkably short period of time, but not in the most controlled fashion and with considerable uncertainty as to what lay ahead. Paulsson mused in 1995 that many states did not appreciate the full implications of the obligations they had assumed.(fn8) Now that states' journey on the BIT train has taken a troubling turn, the remarkable truth of that statement is indubitable. States are increasingly trying to regain control of the train through various steering mechanisms, including amending their BITs and issuing interpretive statements. Some states have denounced the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), and a number have terminated one or more of their BITs and appear to want to jump from the train alto-gether.(fn9) In contrast to the steady uptick in investors' utilization of

3

investor-state arbitration, states appear to be concluding BITs at a declining rate. Although some level of saturation and an increased interest in regional trade and investment agreements (as opposed to bilateral, investment-specific treaties) are likely factors in the comparatively low rate at which new BITs are being concluded, it is notable that states concluded fewer new BITs in 2012 than they had in any of the preceding twenty-five years.(fn10)

The broadest goal of modern international investment law is one that is very familiar to international lawyers-it is to dethrone power and crown law as the ruler of the game. The regime seeks to prevent states from relying, as the powerful ones occasionally did in the past, on "gunboat diplomacy" to settle international investment disputes.(fn11) It does this principally through the aforementioned BITs and other international investment agreements (IIAs), in which states agree to afford various substantive standards of treatment to investments made by each other's nationals-such as fair and equitable treat-ment-as well as to arbitrate treaty disputes brought by those nation-

4

als (hence the lack of privity).(fn12) The idea is to provide a neutral alternative to host state courts, which might be biased against foreign investors, and a law-based alternative to diplomatic espousal, which requires the injured national's state to assume the investor's claim and pursue it through diplomatic channels.(fn13) The goal is often described as the "depoliticization" of international investment disputes, but it could just as accurately be described as the "legalization" of the disputes-law is to supplant politics, of course.(fn14)

Despite its international character, investment law is similar to many systems of domestic administrative law in that it requires governmental actors to adhere to certain standards of conduct in their dealings with private parties, and creates a private right of action as a means of enforcement. The private right of action is a significant protection for the private parties, but it also gives rise to a material concern. As a practical matter, both systems enable private parties to challenge governmental action that may lie at the heart of a state's sovereignty, such as domestic health, safety, and environmental measures. Given the similarities between the systems and the more developed status of the latter, recent comparative work has explored how principles from the latter might be usefully adapted to the former.(fn15) This Article builds upon that work in light of a fundamental difference between domestic administrative judicial review and investment treaty arbitration. Specifically, and as discussed in more detail below, whereas national courts serve as a check on national agents in American administrative law, investment arbitration tribunals are the agents in international investment law. Further, they are not subject

5

to any check comparable to national judicial review. Because international investment tribunals do not operate within a tripartite power structure, that familiar mechanism is unavailable as a means of controlling them.(fn16)

Accordingly, while I and others have sought to illustrate that investment arbitration tribunals could beneficially adapt and apply various limiting principles drawn from domestic administrative judicial review, it is worthwhile to also consider the control problem from a different vantage point.(fn17) Specifically, it is useful to go beyond analysis of what the tribunals can do to guard against exceeding the bounds of their delegated authority to perpend states' abilities and responsibilities in this regard. In this vein, Jason Yackee has usefully analogized investment arbitration tribunals to domestic administrative tribunals, one component of a broader investment law agency created by states.(fn18) This Article similarly focuses on states as principals, but views the delegation of authority through a different lens. Rather than an expert administrative agency analogue, the investment arbitration machine is viewed here as an intergovernmental organization or club. The lenses are not altogether dissimilar; however, the membership organization lens highlights the international delegation, as well as the diversity of the organization's members and the fractured nature of the organization itself. It also brings to light an important fact: regardless of any benefits a club may impart to third parties, it must first and foremost provide benefits to its members that the members deem to be worth the costs of membership.

Through the organizational lens, this Article considers the principal-agent control problem utilizing Albert O. Hirschman's Exit, Voice, and Loyalty rubric. In his exalted book, Hirschman illustrated the dynamic relationship of consumer exit, an economic concept, and consumer voice, a political one, in the marketplace and beyond.(fn19) Foundationally, the members of an organization have two possible responses to unsatisfactory organization performance: they may abandon the organization or voice their dissatisfaction in an effort to rectify the problems.(fn20) Hirschman's great insight was that the two forces have a dynamic relationship that can be...