Investor-State Regulatory Disputes (Part 2)

In my previous post, I described the sovereignty concerns raised by investor-state regulatory disputes, the viewpoint that currently predominates in the literature known as the public law approach, and my criticisms of that proposed framework.  In this post, I explain why investment tribunals should instead adapt concepts or tools from contract law and theory and describe in further depth one such proposal.

The basic argument for a contractual approach is that tribunals could do more to approximate how the contracting states themselves would want to resolve these disputes.  No one would disagree that, if states actually addressed the issue in their bilateral investment treaties (BITs), their express intent would govern.  The problem is that the BITs do not define “fair and equitable treatment” or otherwise provide guidance on how that standard should be applied to regulatory disputes.  In contract law, when an agreement has a gap or otherwise contains an ambiguity, courts do not simply abandon the inquiry into the parties’ intent but instead apply other tools to form the best possible estimate.  I believe a few of these tools could be usefully adapted for the present context to fill this gap in the BITs.

I do not suggest that recourse to contract principles is mandated by the BITs themselves, but neither of course is the public law approach.  Like proponents of the public law approach, I recognize that tribunals have been delegated some authority to develop the law in this area, but I believe a contractual approach is functionally superior to the public law alternative.  I noted in my prior post that a public law approach suffers from concerns relating to expertise and legitimacy.  A contractual approach would constitute an improvement in both of these respects.

With regard to expertise, a contractual approach would not require tribunals to make the inevitable policy judgments inherent in the public law approach’s balancing test.  Instead, tribunals would engage in more traditional modes of legal analysis and thus be in position to develop a more principled jurisprudence.  With regard to legitimacy, in addition to the benefits that come with more principled reasoning, a contractual approach would reduce concerns about interference with state sovereignty.  That is because tribunals could avoid passing judgment on the substance of state policy and instead intervene only as part of an attempt to effectuate the intent of the contracting states themselves.

For the sake of brevity, I will focus here on one particular contract law principle; the paper from which this post is derived explores two others.  The question of when a state should be permitted to revise its regulatory framework without implicating its fair and equitable treatment obligation could be understood as a problem of changed circumstances.  In contract law, changed circumstances will sometimes permit a promisor to excuse nonperformance, either because having to perform would be so burdensome as to be impracticable or because the purpose of the contract has been so completely frustrated.  One factor for analyzing when excuse is permitted is foreseeability:  If the supervening event was sufficiently foreseeable, then nonperformance will not be excused.  The rationale is that parties should be expected to have priced the risks of foreseeable supervening events into their agreement, but would want courts to find an implied condition on performance for risks that were outside their contemplation.

A foreseeability test could similarly be used to distinguish between regulatory changes that violate fair and equitable treatment and those that do not.  The question would be whether the supervening event was sufficiently foreseeable that the host state should have priced in that risk at the time it ratified the investment treaty at issue.  If so, then the state should be liable for losses suffered by investors relating to the regulatory changes at issue.  If not, then the investor should have to bear its own losses.  Here, as in the contract law context, foreseeability strikes a middle ground that reflects an intuitively plausible balance of the parties’ competing concerns: preserving the regulatory flexibility states need to respond to new developments on the one hand, and ensuring that legitimate investor expectations will not be too readily disrupted on the other.

Like any standard, foreseeability will not always yield definite answers.  But in contrast to a proportionality test, a foreseeability approach falls more squarely within the core competence of tribunals and allows them to focus on the contracting states’ intent rather than more policy-oriented questions that they lack the legitimacy to decide.

Note: The draft paper from which this post and my prior one are adapted is not quite ready for SSRN, but I would be happy to share it upon request with anyone who is interested.  And of course I welcome comments here as well.  Thanks!