The jurisprudence on the treaty/contract issue lies in disarray. The question is handled irregularly within and across all treaty issues, from forum selection to substantive obligations and damages. Such uncertainty is a real problem in private law. From the ex ante perspective, states and foreign investors cannot be confident about the meaning of any contract they ultimately adopt. Will the contract be augmented by the background norms set by an applicable investment treaty? If so, are such provisions mandatory, or are they subject to negotiation--can the parties opt out of treaty arrangements if they prefer to allocate risk in a different way? And, if the treaty rules are mere defaults, how sticky are they? Must parties do anything specific to contract around their parameters, to ensure that tribunals give force to their choices? The cases give wildly different answers to these questions, typically without much explanation. (182) Such uncertainty is problematic, to say the least, in the sensitive realm of high risk, high value foreign investment projects--where it can strongly affect the state's regulatory capacities and where disputes often turn into "bet-the-company" cases.
As a first step, it is essential to see how tribunals' implicit choices affect investment contracts, and what they mean for future contractual negotiations between states and foreign investors. It is crucial, in this regard, to get past the formalistic idea that treaty and contract claims are on purely separate tracks. Treaty and contract cannot be neatly separated. In Crawford's words, "treaties and contracts are different things. But they are not clean different things ... between them there is no great gulf fixed." (183) And as Arbitrator Abi-Saab puts it, to simply "assert ... that the treaty applies, without taking into consideration the terms of the contract, amounts to revising and rewriting the contract." (184) Taking the ex ante perspective of states and foreign investors--as contracting parties--helps to clarify how these messy interactions might be better harmonized.
Under most interpretations, where a treaty claim arises out of a contract dispute, the treaty adds (or can add) something to the contract--whether a heightened standard of treatment under FET, a new measure of damages, or access to international fora. Cases like SGS v. Paraguay and the Argentine Gas Cases insist that these additions arise purely out of the treaty and are completely separate from the contract. (185) But this reasoning is overly formalistic--focused too much on the general relationship between international and national sources of law, and not enough on the private law logic of those very contracts the treaty seeks to protect. (186)
From the ex ante perspective of the parties to an investment contract, the strict separation refrain only obscures the treaty's material, economic effect on the contract. Formalities aside, if the contracting parties are aware that an overarching treaty will add to or alter their bargain, they will have to consider such alterations materially part of the deal. From their point of view, the treaty creates a fairly comprehensive set of background rules supplementing their arrangements. Parties with any sophistication will have to price these norms into their contract, or weigh whether to contract around them.
From this vantage point, it becomes clear how much it matters how we think about these background norms--a point distinct from the content of the treaty provisions, and obscured by the neat separation of treaty claims from contract claims. If, as in the strict separation logic, an investor's treaty rights cannot be affected or disclaimed by the terms of the contract, then the treaty provisions act as mandatory investment protections and cramp the parties' ex ante ability to efficiently allocate risk. But if the treaty rules are defaults, as in the reading of Kardassopoulos, Crystallex, and SGS v. Philippines, the parties may then dicker over them in their negotiations as they would with any other price term. (187) On this reading, the treaty may well change the baseline for negotiations by supplanting potentially more lenient default structures in the national law of the contract, perhaps putting the state more on the back foot. But the parties will still be able to negotiate over the ultimate allocation of risk and reward.
It matters how investment treaties interact with contracts, and it is troubling that on this issue the cases have been irregular, inconsistent, and often markedly unclear. (188) There do seem to be trends. Tribunals apparently tend more toward making assumptions that render investment treaty provisions effectively mandatory, as in the Argentine Gas Cases and SGS u. Paraguay. (189) But a significant minority of tribunals have taken party choice in contract more seriously, viewing investment treaties as defaults of varying degrees of stickiness. As in Kardassopoulos and Crystallex, some tribunals have viewed treaty provisions as highly sticky defaults, which apply unless the contracting parties opt out with exceedingly clear and specific language. (190) And a handful of others buck the trend even further, as in SGS v. Philippines and Oxus, viewing treaty provisions as simple default rules, wholly subject to contracting party choice. (191) These variations are not limited to any particular treaty provision or issue, and they are occurring with increasing frequency.
The main goal of this Part has been to highlight and analyze the disorder in the case law on the interaction between treaty and contract. One normative point should, however, already be obvious. The current state of uncertainty is hugely problematic from the ex ante perspective of contracting parties--states and foreign investors--who cannot be confident about the material meaning of any contractual arrangements under the shadow of an investment treaty. This makes planning extremely difficult and expensive, as rational states and investors will have to build insurance into their arrangements. And it adds significant transaction costs to the contracting process. If sufficiently well understood, such uncertainty risks seriously chilling contractual relations between states and foreign investors--precisely the opposite of what investment treaties seek to achieve.
The next Part shifts more fully from the descriptive to the normative. I start from the position that certainty and consistency of any kind would already be a boon. (192) However, I argue that tribunals' apparent tendency to privilege treaty norms over negotiated contract provisions reflects the wrong approach from the perspective of contract theory--in most, though perhaps not all, instances.
EFFICIENCY, AUTONOMY, AND THE FUNCTION OF CHOICE
Thus far I have argued that the moment investment treaties are made to apply to contracts, they establish some kind of international law of contracts. Given that the treaties are invariably laconic on this issue, however, it is difficult to determine just what kind of law they create. Investment treaties clearly establish full panoplies of substantive and procedural rules that relate to all investments in some way. Their application to contracts might be fully extensive--supplying norms ranging from breach, defenses, and damages to forum selection. Investment treaties might also be read more narrowly, as applying to contracts more minimally than they would to assets like real property. Likewise, these treaty rules might be read as rigid provisions that apply over and above the parties' choices, or more flexibly as defaults to be contracted around. On all these questions the treaties remain silent--and the jurisprudence has oscillated among these possibilities, compounding the uncertainty facing states and investors contemplating contractual relations. An international law of contracts is gradually emerging, but its contours are yet to be defined.
This Part examines how the treaty/contract issue ought to be approached. Contrary to arbitral tendencies, I suggest that it should generally be presumed that explicit contractual provisions prevail over treaty provisions as the authentic expression of the contracting parties' division of risk. In the first place, as a matter of treaty interpretation under international law, a general presumption that treaties create mere defaults is essential to the object and purpose of these treaties--to protect and promote foreign direct investment. There are also strong policy reasons for understanding most treaty rules as mere defaults, grounded in both the logic of private law and in concern for public regulatory values. But this conclusion is not an absolute. Even on these rationales there may be reasons why, in certain limited cases, treaty rules ought to be understood as sticky defaults. By hypothesis, I explore the possibility that forum selection clauses and the general exceptions provisions might be justifiable candidates. It may even be that some treaty provisions ought to be understood as mandatory. Still, crucially, I argue that these choices must be justifiable in light of both the positive law of the treaty and the private and public values it seeks to promote.
Especially since the nature of the treaty/contract relationship is generally undecided in treaty text, the first touchstone for treaty interpretation must be the investment treaty's object and purpose. (193) This entails, in most cases, the twin overarching goals of protecting and promoting investments. Investment treaties are not solely about endowing foreign direct investment with protections as a matter of justice or fairness to the investors. Rather, states agree to afford such protections in order to encourage investment, which they view as essential drivers of development and a key component of diversified economic health. (194) If states did not want to induce investment, they would not sign modern investment treaties....
The logic of contract in the world of investment treaties.
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