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International Investment Arbitration in Critical Focus


David Schneiderman (@d_schneiderman) is Professor of Law and Political Science (courtesy) at the University of Toronto.

How might we come to better understand the complex, multilevel, and interdependent world in which we live? This is a particular challenge for international and global legal scholars whose methods of analysis typically are confined to empirically observable legal phenomena in the form of international conventions, treaties, custom, and the like. In this post, I propose bringing international legal studies into conversation with a particular branch of international political economy (IPE), one that brings both an interdisciplinary and a critical edge to the global study of law.

The field of IPE in the English-speaking world has been described as being divided between two competing schools. A U.S. version emphasizes the testing of scientific models via empirical methods, focusing on state behavior as its unit of analysis. Modeled on ‘hard science,’ the U.S. version adopts a state-centric view. A more ambitious British version aims to be more qualitative and normative, emphasizing society, power, and history. It is this latter version that merits attention from legal scholars. It is a mode of analysis that is more interpretive than narrowly empirical, asking what values are promoted and who benefits from particular institutional arrangements. Susan Strange, one of the founders of the British school, has defined the study of IPE as concerning: ‘the social, political and economic arrangements affecting the global systems of production, exchange and distribution and the mix of values reflected therein. Those arrangements are not divinely ordained, nor are they the fortuitous outcome of blind chance. Rather they are the result of human decisions taken in the context of man-made institutions and sets of self-set rules and customs.’

This is a mode of analysis that will be familiar to critical scholars working in many disciplines, but an IPE approach has the advantage of thinking about contemporary global problems on multiple scales. Critical IPE is ontologically inclined, in other words, to theorize law as interacting with actors operating at various levels. It looks to the ‘complex whole,’ Robert Cox writes, rather than to the separate parts.’ Cox, in his own work, helpfully distinguishes between ‘problem solving’ theory and critical theory. The first has as its object the smooth operational working of international institutions. Such approaches serve ‘particular national, sectional or class interests.’ Problem solving is about managing the world, not changing it. Critical theory within IPE, by contrast, does not take institutions or relations of power for granted. It attends instead to how they arise and change. This is a style of understanding the world that is both multidisciplinary and normative.  It is, as Benjamin Cohen puts it, about ‘making the world a better place.’

Though its scholarship may be eclectic – the focus might be on institutions, structures or ideas – there are a number of methodological lessons drawn from a critical IPE account that may prove fruitful for legal scholars.  First, it asks that we be reflexive about the interests served by the rules and institutions of global law. We should be attentive, for instance, to the ways in which lawyers and legal scholars are invited to participate in law’s production while others are deliberately excluded. Second, we should be mindful of the historical and national contexts out of which global legal rules and institutions emerge. Particular national experiences are paraded as representing ‘universal standards’ or best practices of global governance; but this is as likely to be evidence of parochialism boosted by power. Third, we should not presume that it is our job to defend the vested interests of powerful economic actors nor be preoccupied exclusively with advancing ‘northern theory.’ This requires that we be open to voices issuing out of the periphery rather than listening only to those operating in North Atlantic metropolises. Fourth, we should insist upon interdisciplinarity as the most appropriate means for understanding the complex phenomena we associate with law and economic globalization.

How might legal scholars put this methodology into practice? I have been studying the growth and reach of international investment law with occasional assistance from critical IPE. International investment law concerns over 3,000 investment treaties and regional agreements (such as NAFTA) that are intended to shield foreign investors from adverse political risk. This post-1989 regime was constructed on the premise, however, that it would also direct new foreign investment into previously neglected locales. States in the Global South signed onto these treaties in the hope of attracting desperately needed investment and improving the economic well being of their citizens.

As with trickle down economics, catering to the rich has not turned out to benefit everyone else. The relationship between signing treaties and attracting new investment from abroad is ambiguous, at best. This is because the regime focuses almost exclusively on investor protection and not development. It is resolutely preoccupied with improving the situation of the already economically advantaged. Firms with annual revenues in the range of $1 billion plus and immensely wealthy individuals have been awarded almost 95 per cent of monetary damages to date in disputes with national governments.

Investor protections are intended to mirror protections found in the constitutional law of capital exporting states. According to USTR, investment treaty obligations provide ‘no new substantive rights’ but, instead, correspond to those found in the US Constitution. Yet their reach goes substantially further. Investment treaties typically mandate that states act in a non-discriminatory fashion (national treatment), disable them from requiring foreign investors to retain local services or hire local labor (performance requirements), commit them to refrain from ‘taking’ investments without immediate, fully transferable compensation at fair market value (expropriation and nationalization), and mandate that investors receive the minimum standard of treatment under international law, including fair and equitable treatment. Encompassed by the latter opaque standard is the protection of investors’ legitimate expectations, which can practically amount to freezing of national regulatory space. All variety of economic interests receive protection, well beyond those interests typically associated with constitutional property rights.

These obligations are enforceable before arbitration tribunals having the authority to issue damage awards against misbehaving states. This is the system of investor state dispute settlement (ISDS) that is generating resistance from governments and movements around the world. While there is much uncertainty about outcomes – investors do not, of course, win all of the time – it is clear that the regime’s purpose is to both punish states and citizens for violating treaty commitments and to have those disciplines internalized via legal reform. In the meanwhile, the threat of adverse judgment discourages policy proposals that threaten to give rise to investment disputes.

Because states, on occasion, misbehave, they have lost some disputes. Yet, investors also have won in circumstances that are difficult to defend. Damage awards against the state of Argentina for taking emergency measures in response to the economic meltdown of 2001 are hard to justify other than on grounds that states and citizens should be penalized for having followed the edicts of the ‘Washington Consensus’ by privatizing everything in sight. The Clayton group of companies, with headquarters in Delaware, succeeded against Canada for refusing to authorize the construction of a rock quarry together with a ferry terminal on sensitive Nova Scotia shoreline. The government was disciplined for having followed the advice of an independent environmental review panel, which concluded that construction would harm marine, land, and human environments. The investment tribunal accepted the investor’s highly debatable claim that the environmental review was conducted in an arbitrary manner, having strayed from statutory standards, thereby violating the minimum standard of treatment. The tribunal also accepted that discrimination occurred on the grounds of nationality because the proposal was scrutinized too rigorously, applying a standard of review not applied to other investors, including foreign investors, who were in like circumstances. This was nothing less than a gross intrusion into Canadian environmental law processes, sending a signal to host states that they should not dig too deep into environmental effects lest they offend the sensibilities of investment arbitrators.

With few exceptions, much of the investment law literature looks very much like Cox’s problem solving theory. It is preoccupied with improving the system so that it can attain the requisite legitimacy that it appears to lack at present. Regrettably, many of those pursuing this line of scholarship also hope to join its ranks, serving as consultants or arbitrators, attracting lucrative fees. By contrast, a critical IPE approach offers a more independent lens, exposing the particular interests advanced by this legal regime – those of powerful capital exporting states and home-state firms together with their legal representatives. By decentering the preferences of powerful actors in the Global North, we can also observe how alternatives, such as those presently advanced by Brazil and South Africa, who have checked out of the system of ISDS, can result in more normatively just outcomes. That is, if our objective is to improve the economic situation of the poor of the Global South, a critical IPE approach offers us an opportunity to engage with these questions in a more deliberate and transparent way.