Bankers at the beginning

In response to an earlier post on the 31-year gap between the first investment investment agreement (IIA) and the first investor-state dispute, an astute reader notes that the early deals (like the 1959 Germany-Pakistan agreement) didn’t include investor-state dispute settlement.

It wasn’t until a decade later that investors got that right, in Italy’s bilateral investment treaty with Chad. And it wasn’t until 1993 that a majority of developing countries had even one IIAs with strong investor-state procedural protections, and Germany didn’t begin transitioning its treaties to this model until 1988 (Yackee, 2007: 31-35). Meanwhile, the first award rendered under an IIA came only in 1990, in a challenge by a UK investor against Sri Lanka (Parra, 2012: 183).

That said, marrying the substantive and procedural rights of IIAs are not some latterly innovation. In 1958, a commission led by Deutsche Bank chairman

Abs meets Nehru.

Hermann Abs and former UK Attorney General Hartley Shawcross proposed a draft international convention that gave investors both.

A quick perusal of the text reveals the following article:

Article VII
1. Any dispute as to the interpretation or application of the present Convention may, with the consent of the interested Parties, be submitted to an Arbitral Tribunal set up in accordance with the provisions of the Annex to this Convention. Such consent may take the form of specific agreements or of unilateral declarations. In the absence of such consent or of agreement for settlement by other specific means, the dispute may be submitted by either Party to the International Court of Justice.
2. A national of one of the Parties claiming that he has been injured by measures in breach of this Convention may institute proceedings against the Party responsible for such measures before the Arbitral Tribunal referred to in paragraph 1 of this Article, provided that the Party against which the claim is made has declared that it accepts the jurisdiction of the said Arbitral Tribunal in respect of claims by nationals of one or more Parties, including the Party concerned.
The substantive rights in the treaty (fair and equitable treatment, bans on expropriation, etc.) are almost identical to what is contained in even the most recent IIAs.
How did the banker and the attorney general come up with such radical institutional innovations?
The answer, it seems, was to emphasize continuity rather than change.
In Abs and Shawcroft’s commentary on their draft,they wrote that “These principles have a broad basis in the practice of civilized states and the findings of international tribunals”. But they were obliged to comment that
“in some countries there has been a tendency to disregard them… However, international trade and commerce cannot thrive and prosper in an atmosphere of doubt and uncertainty. The need, therefore, arises of restating rules of mutual conduct of states in a convention which will assure to the nationals of the participating countries such measure of security and protection of their property, rights, and interests as is indispensable to encourage the flow of foreign investments.”
So, these rights were a state practice that not enough states practiced, so commerce demanded new rules so that they would be practiced.
This is an illustration of what critical legal scholar Marti Koskenniemi calls the contradiction between the ascending and descending assumptions of international law. International law can be legitimate because it stems from state consent and practice (ascending), or it can be legitimate because it is external to states and thus constrains them.  He writes:
“The result is a curiously incoherent doctrine which is ad hoc and survives only because it is such… To avoid utopianism, we must establish the law’s content so that it corresponds to concrete State practice, will and interest. But to avoid apologism, we must argue that it binds the State regardless of its behaviour, will or interest. Neither concreteness nor normativity can be consistently preferred… international law is singularly useless as a means for justifying or criticizing international behavior.  Because it is based on contradictory premises it remains both over- and underlegitimizing: it is overlegitimizing as it can be ultimately invoked to justify any behavior (apologism), it is underlegitimizing because  incapable of providing a convincing arument on the legitimacy of any practices (utopianism)…” (at 63-67)
Koskenniemi is reluctant to apply these insights to the power relations between North and South countries (p. 608). But his basic method can be fruitfully applied to the Abs-Shawcross proposal. State practice is clearly important, but “whose” state practice?
For the substantive rights in investment treaties, such as fair and equitable treatment, Abs and Shawcross emphasize the practice of the United States in its friendship and commerce treaties, and of inter-European court and arbitration decisions (such as between Poland and Germany in the 1920s). Expropriation norms would seem difficult to justify, given that the early 20th century was full of disputes between North and South countries as to whether land reform, oil nationalizations and other post-colonial initiatives required compensation.  This consumed much debate at the United Nations. However, Abs and Shawcross find support for compensation obligations in the 1950 UN General Assembly resolution on Eritrea. The authors do not see fit to mention that this resolution was made in the context of the UN forcing federation on an Italian-cum-UK colony.
While the substantive rights are mostly justified by the precedent of developed country actions (or impositions on developing countries), the authors cleverly ground the significant innovation – investor-state arbitration – in the practice of none other than developing countries. Abs and Shawcross write:
“It has, moreover, been felt to be important to make some provision enabling the private investor himself to pursue an international remedy. The notion that an individual may enjoy a right of access directly to an international tribunal is not new. Procedural capacity of this character was enjoyed by individuals in relation to the Central American Court of Justice and certain mixed arbitral tribunals, and is enjoyed by them today in relation to such diverse bodies as the Court of the European Community, the European Commission of Human Rights, and the administrative tribunals of the international organisations. It is, therefore, no real departure from legal tradition to suggest that similar rights be conferred on individuals in connection with investment matters.”
Nothing new to see here – keep walking, folks.
But on further inspection, these precedents are dubious. Europe was beginning a process of federation of relatively “like” countries – a different proposition than the rich-poor country treaties being proposed by the Deutsche Bank chairman.
And the Central American Court of Justice? In terms of legitimacy, it is ingenious to cite the practices of developing countries themselves as a precedent for imposing something novel on them. But as a history of that court shows, it only lasted for 10 years and had only 10 cases. Five of those were brought by individuals, all over human rights and freedom of movement concerns, and the court declined jurisdiction in all five cases (at p. 768). Hardly a rock of practice on which to ground a new institution.
It would have more honest, although perhaps not as legitimizing, to talk about the handful of precedents of investors suing countries under natural resource contracts. Shawcross and Abs might also have mentioned some of the other disputes on concession contracts, such as a 1931 case imposed on colonial Congo. Or, some of the 1950s disputes with Middle Eastern countries. As Anthony Anghie writes,
“The concession agreements between Arab states and Western MNCs that were the subject of the disputes contained arbitration clauses that provided, in the event of a dispute, for the resolution of the dispute by an arbitral tribunal that was to be established in the manner provided for in the clause. It was uncontested that in usual circumstances, the agreements would be governed by the laws of the host state. Thus, in the words of the arbitrator, Lord Asquith of Bishopstone, in the [1951] Ruler of Abu Dhabi Case: “What is the ‘Proper Law’ applicable in construing this contract? This is a contract made in Abu Dhabi and wholly to be performed in that country. If any municipal system of law were applicable, it would prima facie be that of Abu Dhabi.”
This position, which is no more than a restatement of the classic principles of international law, was, however, rejected by Lord Asquith,
who magisterially pronounced that the domestic law of Abu Dhabi was inapplicable because no such law can reasonably be said to exist: “The Sheikh administers a purely discretionary justice with the assistance of the Koran; and it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial contracts.” ” (at p. 226-227)
To conclude, Abs and Shawcross had to walk a tightrope. On the one hand, their only hope of getting country buy-in to their ideas (which did eventually take off) was to make an ascending argument that states had already been dancing the investor-state dance. But then, what would be the added value of their treaty? That is where the descending argument comes in: some states are not doing the dance, and we need to bring them in line. These states, however, have done the dance in the past (ascending), but we’re not going to mention the colonial roots of those past dances (descending/coercive).
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2 responses to “Bankers at the beginning

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