Should the United States continue to enter into free trade agreements containing sovereign commitments to resolve regulatory disputes with qualifying multinational corporations before international arbitral tribunals? This question has gained public prominence due to the vocal opposition of Senator Elizabeth Warren and President Donald Trump to the TransPacific Partnership (TPP), denouncing it as disastrous and corrupt. (1) Public outcry has focused in particular on the investor-state dispute settlement (ISDS) mechanism included in the treaty. Public criticism submits that ISDS suffers from a fatal systemic asymmetry--it favors the profit interests of multinationals over the public policy concerns of the host states in which these multinationals invest.
As this Article demonstrates, existing academic literature on ISDS tends to confirm this asymmetry. The prevalent ISDS literature is descriptively incorrect in this regard. This oversight is caused by a significant blind spot in the ISDS research perspective: the literature focuses exclusively on the expectation interests of multinationals arising out of investment transactions. This Article demonstrates that this focus is descriptively untenable.
This Article proposes an alternative to the expectation interest model prevalent in the current literature: ISDS does not focus upon investor expectancy, as currently theorized, but protects the reciprocal reliance interests of states as well as multinational investors. An ISDS process focused on the reliance interests of states and non-state actors imposes meaningful obligations on all parties to investment transactions. These obligations are part of a legal process mediating between state-to-state international law and commercial transnational law norms. By protecting the reciprocal reliance interests of states and multinationals, ISDS emerges as a constitutive component of the success of global public-private cooperation. This change in perspective demonstrates how ISDS can assist both states and multinationals in harnessing market mechanisms to achieve development policy goals.
TABLE OF CONTENTS I. INTRODUCTION II. APPRAISING THE DOMINANT APPROACHES A. The Dominant Approaches 1. The Transnational Legal Order Perspective 2. The Public Law Perspective 3. The Treaty Law Perspective B. Blind Spots of the Dominant Approaches 1. The Core Asymmetry of Current Approaches 2. Deconstructing the Dominant Approaches a. Transnational Law b. Public Law c. Treaty Law III. THE SUPERNATIONAL LAW HYPOTHESIS IV. THE UNILATERAL ACT ELEMENT OF SUPERNATIONAL LAW A. The Constitutive Function of Dispute Resolution B. Unilateral Acts and Non-State Actors C. Contextual Construction of Unilateral Acts D. Deference to Governmental Action V. THE TRANSNATIONAL GOOD FAITH ELEMENT OF SUPERNATIONAL LAW A. The Constitutive Function of Dispute Resolution, Redux B. Applicable Law C. The Reference Point of Transnational Law VI. COMBINING THE ELEMENTS OF SUPERNATIONAL LAW VII. CONCLUSION: THE VALUE OF SUPERNATIONAL LAW A. Depolitization B. Repolitization C. The Allocation Function of Commercial Risks and Responsibilities I. INTRODUCTION
Oh and while the king was looking down The jester stole his thorny crown The courtroom was adjourned No verdict was returned.
--Don McLean, American Pie. (2)
Is it prudent and sustainable to privatize the global governance of international investment flows? Today's legal infrastructure relies significantly on investor-state dispute settlement (ISDS)--a network of international arbitral tribunals sitting ad hoc--to fulfill just this task. (3) Currently, the amount in controversy involved in pending ISDS claims between states and multinationals exceeds half a trillion dollars ($595.5 billion). (4) These ISDS tribunals are empowered either under privately negotiated investment contracts between multinationals and the host states to their investment or by consent of the host state to the investment in vaguely worded international investment treaties or domestic investment laws. (5) In either case, ISDS tribunals are not subject to broad governmental or international oversight. (6) Given the ubiquity of contract, treaty, and legislative consents to ISDS, transactions subject to ultimate ISDS review are worth trillions of dollars. (7)
The question of whether such a large role for ISDS makes for good policy has acute political significance. The United States entered into an international treaty with eleven Pacific Rim nations, known as the Trans-Pacific Partnership (TPP), on October 5, 2015. (8) The treaty has been decried as "insanity" and "rigged" by President Donald Trump and Democratic Senator Elizabeth Warren, respectively. (9) The issue drawing the most pitched opposition--the one clause "everyone should oppose"--is the ISDS provision of the treaty. (10)
Part of the current academic response to public criticism of ISDS mechanisms is quantitative. (11) This quantitative response submits that the outcomes of ISDS proceedings do not support the claim that ISDS is "rigged" because states incur liability in only a reasonable number of disputes and, in those instances, recovery is typically significantly less than originally requested by the investor. (12) This analysis proves, in a sophisticated manner, that there is no overt bias against states when international tribunals determine governmental liability. (13) It concludes definitively that, while there is room for ISDS reform, there is no need categorically to question its fairness. (14)
But the quantitative responses given so far allow for a potential rejoinder: the scholarship focuses upon ISDS state loss rates. It does not address the possibility for states' recovery of damages from multinational investors in ISDS for investor misconduct. (15) This focus is consistent with the conventional wisdom in qualitative ISDS scholarship: states bargain away legal protection to investors in exchange for the expectation of increased future foreign investment flows. (16) States do not bargain with investors to gain legal protection through ISDS themselves. (17) This conventional wisdom sets up the problem identified by ISDS critics--that ISDS, in fact, appears to be completely one-sided, favoring investor rights to the exclusion of state rights. (18)
Part II will explain that this rejoinder fails because the ISDS literature is descriptively incomplete. The ISDS literature so far does not account for the habitual and significant counterclaims raised by states and state entities in both treaty and contract arbitrations. (19) The recent landmark decision in Perenco v. Ecuador, permitting counterclaims in a treaty arbitration to proceed for a failure by the investment vehicle to act "as a responsible environmental steward" in the host state, is only the most recent--and most visible--example of this facet of ISDS. (20) The literature so far thus fails to fully explain the scope and nature of ISDS.
Part II submits that much of the qualitative ISDS literature is self-defeating because it looks to answer the wrong question. (21) The literature accepts that states bargain away ISDS protections in exchange for the prospect of investment, (22) and then seeks to define the scope of protection by reference to investor expectancy--what benefit of the bargain must states provide to investors to attract investment? Such expectancy measures whether the "breach of the [state's] promise causes [the investor] to feel that [the investor] has been 'deprived' of something which was [the investor's own]." (23) The dominant approaches simply diverge on the narrower question of whether expectancy should be defined by reference to the commercial law perspective of the investor, (24) the administrative law perspective of the domestic regulator, (25) or the treaty law perspective of the host state. (26) As Part II concludes, each of these approaches logically becomes self-defeating because commercial expectancy is an inapposite measure for the legitimacy of regulatory (i.e., non-commercial) state conduct and vice versa.
Part III submits that the descriptive problems in the current literature can be overcome by more careful empirical analysis of the ISDS process. (27) How do ISDS tribunals arrive at decisions? Part III proposes that the ISDS process does not concern investor expectancy but rather concerns the protection of reciprocal reliance interests of the state and the foreign investor. In the context of long-term transactions, these reliance interests are necessarily reciprocal--each party constantly changes its position because of, and in response to, the conduct of the other (e.g., the investor commits money in response to regulatory approvals of a new turbine for a power plant, the state adjusts its plans for electricity generation because the investor promises to operate the turbine by a certain date, and so on).
Part III proposes that, by switching to a reliance perspective, ISDS can balance otherwise incommensurable interests of state, regulatory, and private actors. (28) Part III explains that, if this hypothesis is correct, ISDS would form part of a new, supernational law between classic international law, transnational law, and global administrative law. (29) This super-national law would do more than traditionally theorized supra-national law--a term that refers to "legal rules and procedures that are authoritatively interpreted by institutions existing outside of the legal and political structures of the sovereign states that establish those institutions." (30) Rather than refer to a set of rules and procedures for their interpretation beyond the realm of the sovereign to which these rules are applied, supernational law theorizes the common logic or process of their application. This supernational law incorporates transnational commercial, global administrative, and/or public international law norms as reference points to assess the reasonableness of reliance...