Dispute Settlement and the Reform of International Investment Law: Legalization through Adjudication

I. INTRODUCTION

It is no exaggeration to say that international investment law is at a point of inflection. Sustained backlash targeted at virtually all aspects of the system has led to numerous calls for reform, both substantive and procedural. On the substantive side, reform ultimately seeks to ensure that the guarantees of investment protection do not prejudice States’ right to regulate and their ability to tackle pressing global problems like climate change. On the procedural side, reform seeks to achieve a more sustainable and balanced regime of investor-State dispute settlement (ISDS). Interestingly, notwithstanding the close link between them, substantive and procedural reform do not proceed in unison. Despite being long advocated by international bodies,² substantive reform still proceeds in a fragmented and piecemeal fashion, being practised in the course of treaty negotiations by some States more than others. By contrast, since 2017, ISDS procedural reform has been a multilateral effort spearheaded by UNCITRAL’s Working Group III.³

Against this backdrop, Chen Yu’s thoughtful (and thought-provoking) book Dispute Settlement and the Reform of International Investment Law: Legalization through Adjudication is a timely contribution to the field. The book stresses the challenges but also points to possible ways in working towards sustainable procedural and substantive reform in international investment law. The book’s principal methodological contribution comes by bringing an interdisciplinary, in particular constructivist, perspective to its inquiry.

II. THE BOOK’S THESIS AND CHAPTER STRUCTURE

The book’s thesis is that the current paradigm of legalizing international investment law primarily through dispute settlement has reached its limits. According to the author, there are two main reasons for this: over-institutionalization and the practical limitations of adjudication as a mode of social ordering. First, the problem that the author calls over-institutionalization occurs because legalizing principally through adjudication transfers to arbitrators a significant amount of power to create and enforce a common understanding of international investment law across all actors involved in the system. Thus, to the extent that arbitral decisions do not conform with the views that (at least some) of the actors in the system may hold, legalization through adjudication tends to act as a source of continuous backlash, causing non-compliance, legitimacy challenges and even regime exit. Second, and relatedly, this should not be surprising, given that adjudication itself has inherent limits as a mode of social ordering. As the author argues, adjudication faces particular challenges as a mechanism to resolve complex social and legal issues where implicit distributive choices are involved, of the sort one is often faced with in international investment law.

The thesis is developed in detail in the course of five chapters. Chapter 1, which also serves as the book’s introduction, sets the stage for the inquiry. It recounts international investment law’s historical development and the social needs it sought to address at its inception. It also recalls the criticisms that have been levelled against the system over the years and the principal drivers for ISDS reform. In so doing, the author suggests that purely legal fixes to ISDS are insufficient if any reform is to be sustainable, since purely legal fixes do not necessarily account for the reasons why actors in the system may be detractors.⁴ It is in response to this that the author proposes analysing the reform of international investment law through the lens of constructivism.

Chapter 2 then draws on constructivist theory to introduce one of the book’s core concepts—legalization. As understood by the author, legalization describes the state of an institution where legitimated relations of obligation (rule-bindedness), precision (the ratio of determinacy to interpretative discretion contained in the rules) and delegation of authority (third-party dispute settlement) exist.⁵ These relations must be legitimated in the sense that the actors of the institution in question actually perceive the institution itself as being fair or just.⁶ Given this definition, the author concludes that, despite instances of legalization clearly being present in international investment law (eg binding substantive obligations and dispute settlement), the imprecise nature of core standards of investment protection, coupled with openly expressed divergent views on the system’s legitimacy, mean that the legalization of international investment law is in a state of flux.

Chapter 3 delves into another core concept of the book—shared understandings. The term describes ‘collectively held background knowledge, norms or practices’ that serve as components of social construction for the identities and interests held by an institution’s actors.⁷ The author clarifies that having a ‘shared understanding’ does not necessitate absolute agreement on everything. Shared understandings, rather, are evolving and interactive: they are generated, maintained or modified through the social interactions of an institution’s actors. The level and degree of shared understandings that may exist at any given time can therefore vary: shared understandings can pertain, eg to norms, practices, values, purposes or processes, and these may be expressed at any level of abstraction or generality.⁸ According to the author, the quantity and quality of shared understandings are associated with the actual and perceived legitimacy of an institution by its actors and, by extension, with the degree of the institution’s legalization.⁹ Applying these insights to international investment law, the author sees the fragmentation of international investment law into thousands of treaties and the clash of paradigms discourse as signs of a lack of fundamental shared understandings on key investment protection obligations and, crucially, even on the economic rationale behind having investment treaties.¹⁰ This, in turn, has implications for how one should approach legalization. That is, even though ISDS can in principle contribute to the evolution and development of shared understandings over time, by serving as a platform for actors to interact,¹¹ this capacity is hindered in practice by the current low level of shared understandings causing backlash instead.¹²

Chapter 4 picks up from that conclusion. It examines the inherent constraints that adjudication exhibits as a mode of social ordering, especially when it comes to mediating between different social and distributive imperatives entailed in, as the author calls them, ‘polycentric’ problems.¹³ Three such constraints are identified in the ISDS context: (i) the limited opportunity afforded to all impacted stakeholders, beyond investors and States, to participate in the arbitral process;¹⁴ (ii) that ISDS is premised on the consideration of rights-based arguments of the disputing parties (principally of the investor), and not on the consideration of policy arguments of the community at large;¹⁵ (iii) the long case-processing times.¹⁶ The author thus concludes that ISDS tribunals are not well placed to address the kinds of polycentric problems raised by the settlement of investment disputes and, by extension, are not well placed to align actors’ divergent perspectives into common shared understandings.

Chapter 5 consolidates the various strands of analysis developed in the course of the book in an effort to explore possible strategies towards legalizing international investment law going forward. A number of strategies are examined in detail that could be implemented at the domestic, bilateral and multilateral levels. Taking all into account, the author ultimately concludes that reform proposals which aim to radically institutionalize the regime, such as the EU-led Multilateral Investment Court, should be treated with caution as they may aggravate the problem of over-institutionalization and thus further hinder the goal of improving the currently unsatisfactory state of shared understandings.¹⁷ Instead, in an effort to ensure the widest possible participation and the ‘buy-in’ of all stakeholders, the author advocates squarely in favour of more flexibility and plurality as the guiding principles for reforming international investment law.

III. FINAL THOUGHTS

Reforming international investment law is clearly not amenable to quick-and-easy solutions. It is not a matter of mere coordination of State action but a complex, multifactorial problem where cooperation may come with associated benefits and costs for the stakeholders involved that cut across the substantive–procedural divide. Disagreements thus exist, not only with respect to substantive reform (long a point of controversy, as the author also points out in recounting the history of failed attempts to negotiate a multilateral framework on investment protection),¹⁸ but, as we now see, also with respect to the more ‘technical’ question of reforming ISDS. Indeed, the deep rift among States with respect to their preferred modalities of ISDS reform has persisted, it seems unabated, since the beginning of the UNCITRAL Working Group III process.

One may therefore have reason to be sceptical about Working Group III’s capacity to improve what the book identifies as low levels of shared understandings. On the contrary, in fact, concern can be expressed that the current, flexibly modular approach to ISDS reform pursued by the Working Group¹⁹ may further prejudice the development of shared understandings. In this connection, while the author, perhaps sensibly, suggests mechanisms that States could employ to help them live with their disagreements for the foreseeable future, this should not be the end of the matter as the need remains for a detailed and concrete roadmap towards the gradual alignment of the divergent views currently expressed.

Overall, Dispute Settlement and the Reform of International Investment Law: Legalization through Adjudication is an important and welcome contribution to the field. The book is well researched and offers in the constructivist approach a new lens through which to examine ISDS backlash and prospects for reform. In introducing the concepts of over-institutionalization, legalization, shared understandings and polycentric problems, the author brings a number of useful insights on imperatives of system design. The writing style is systematic yet accessible. Frequent examples and case studies aid in the comprehension of complex issues and helpfully contextualize the more theoretical statements of the constructivist method used. The book will appeal to readers in search of a comprehensive overview of the debates surrounding the reform of international investment law as well as to readers who are looking for a new perspective in thinking through these same issues.

Footnotes

Author notes