The Depoliticization of Investment Disputes – How Deep Does the “Rabbit Hole” Go?

Abstract

One of the founding narratives of international investment law and arbitration is the depoliticization of the contemporary investor-state dispute settlement system (ISDS).[1] Essentially, investors who are aggrieved by host state measures (or the lack of such measures in certain cases) would benefit from a third-party dispute settlement mechanism, normally via arbitration (pinning that investor, as a claimant, against the host state, as a respondent).[2]

From a theoretical standpoint, this arbitration mechanism supposedly removes the influence of politics from the disputes between the foreign investor and the host state of the investment.[3] From a historical perspective, the transition to a “(quasi-)judicialized” form of settlement of disputes between foreign investors and host states was almost revolutionary (although explainable in the context of multilateral reforms in the 20th century, especially since the end of the Cold War).[4] This is why commentators argue that the mechanism is a depoliticized one,[5] seeing how initially investor-state disputes would be settled politically in most cases.

Traditionally, the foreign investor would be under the protection of its home state.[6] If the host state adopted measures that aggrieved that investor, there was a risk that the home state of the foreign investor would intervene.[7] In fact, intervention by the home state would normally be the only way in which an aggrieved investor could safeguard its interests, once a conflict with the host state of the investment occurred. This intervention would sometimes be diplomatic,[8] and sometimes even forceful or threatening the use of force.[9] It was one of the most common examples of one state exercising its political might and influence over another – in order for the former to allegedly protect the interests of its nationals.[10]

This would come to be known as gunboat diplomacy,[11] something which clearly made it very difficult for smaller (or weaker), capital-importing (or which held resources desirable to foreign powers), states to exercise their sovereignty when this exercise of sovereignty conflicted with the economic interests of foreign investors, and/or those of their home state. Perhaps one of the most relevant examples refers to the Opium Wars occurring in the 19th century, where Great Britain used force against China in order to, among others, engage in opium-based trade activities from Chinese territory (and while investment and trade are distinct, great power politics such as this dominated international relations in that period, irrespective of whether commercial activities involved investment or trade).[12]

In present-day international economic affairs, outright force-based triggers to commerce might not constitute the norm anymore. However, what in the past stood for gunboat diplomacy got replaced by economic statecraft or “economic gunboat diplomacy”, especially with state-controlled enterprises investing in foreign territories.[13]

Seen in this light, politicization has over the time become synonymous with a host of negative aspects revolving around ISDS and foreign investor-state relations, in general. The negative aspects, inter alia, include the geopolitical influence exercised by the home state of the foreign investor, unpredictability of outcome for the investor (the investor would never know how its dispute would be settled in a specific context, owing to its lack of control over the politically-charged issues), decrease in investment that would further prevent development (it is well-known that political risk is one of the major obstacles to foreign investment).[14]

All these effects of politicization run counter to the major premises of, and promises that, ISDS set out to deliver. For starters, ISDS was conceived as a neutral, objective, and predictable dispute resolution system.[15] Furthermore, removing (great power) politics – to the extent possible, at least from an institutional point of view when it comes to settlement of disputes – from the ambit of ISDS meant that the investor, the actor around which the whole mechanism was built, takes centre stage.[16]

But this goes far beyond the pure interests of the investor. It actually enables economic globalisation – with private initiative percolating through the entire investor-state relation,[17] even at the eventual dispute settlement stage (further enabling private initiative by raising the individual to an almost independent actor in international relations,[18]eventually equipping him with a remedy to obtain redress to alleged wrongs of the host state).

Against this backdrop, this chapter sets out to explore the depoliticization narrative, while also demonstrating that ISDS has never completely removed politics from the system. As already mentioned, depoliticization has been seen as an enabler of ISDS and of its success so far. Basically, removing the political influence (either from the home state, or from the host state, mostly) enables judicialization of investment disputes.[19]

In other words, international investment arbitration can exist precisely because it is an alternative to the political settlement of disputes. The latter characterises great power politics and not an independent, neutral, and objective dispute settlement mechanism. While far from perfect, ISDS offers a solution to the immediate interests, and fears, of the investors. And even acts as a key in the multilateral, rules-based, economic order characterising the 20th century (and still – at least somewhat – characterising present times).[20]

However, we suggest a different understanding of this depoliticization narrative. The article proposes that we should conceive of depoliticization as existing, and manifesting itself, in two different realms. One realm characterizes the procedural and, to a certain extent, institutional aspect of ISDS (procedural rules and guarantees, such as those ensuring independence and impartiality of arbitrators, the dispute settlement mechanism etc.). Here, depoliticization should be understood as the decluttering of political interference of host, and home, state institutions within the governance of arbitral proceedings.

When it comes to the substantive sphere (which characterises the merits of the dispute, including the actual relationship between the investor and the host state), this chapter will go beyond and demonstrate that not only has depoliticization never completely occurred in this realm, but that a certain degree of politicization is, actually, beneficial to ISDS (or to international investment law, in general).

Other authors have expressly acknowledged the existence of politicisation existing in investor-state relations to a certain extent.[21] But this article goes further and brings forward a model to actually explain why depoliticisation should be conceived as having occurred to different degrees based on the realms in which it manifested itself – procedurally, or substantively. Moreover, we also apply John Rawls’ theory concerning procedural justice to explain how procedural depoliticization (establishing the right procedures), as a systemic good, is enough to address most concerns existing with regards to the fairness of the final outcome in what would otherwise be an unpredictable, politically-charged, environment in which the foreign investor would find itself.

As such, the analysis proceeds as follows. Part I explores the depoliticization narrative in ISDS and how it has become widely accepted that depoliticization is desirable. This part also introduces a distinction between procedural depoliticization and substantive depoliticization. Here, we argue that international investment arbitration, in its procedural (and institutional) dimension, indeed leads to depoliticization. But this is only a partial form of depoliticization, when looking at investor-state relations globally. Substantively, however, as already mentioned, investment disputes have never been completely depoliticized. 

Thus, we posit a paradigm shift that avoids evaluating investment disputes in terms of being politicized or not. We suggest, instead, a two-pronged approach that assumes (1) a (almost) complete procedural, and institutional, depoliticization and (2) a partial substantive depoliticization. That means that the questions and mechanisms used to assess those two dimensions will, of course, be different. More specifically, while procedurally one should expect depoliticization, substantively one should examine it in terms of degrees of (de)politicization, with a degree of political influence when it comes to the substance of investment disputes being acceptable – and also realistic.

Part II, then, explores in depth the parameters of procedural depoliticization, in order to highlight tools used for this purpose, and to clarify where ISDS has attained the strongest form of depoliticization. Finally, Part III explains how, substantively, there has never been a complete depoliticization – and why that is not even desirable and also not practicable.

About the author: Gautam Mohanty

Gautam Mohanty is a PhD student at Kozminski University, Warsaw, Poland. He is currently writing his doctoral dissertation tentatively titled “Legitimacy crisis of investor-state dispute settlement and third-party funding”. Prior to commencing his PhD studies, Gautam was a practitioner of law enrolled as an advocate in India and also an Assistant Professor at Jindal Global Law School India (JGLS), India. He is also a Fellow at the JGLS Centre for Alternative Dispute Resolution (CADR). His research interests include international investment arbitration, international commercial arbitration and international economic law.

About the author: Alexandros Bakos

Alexandros Bakos is a PhD candidate in international economic law at City, University of London. His thesis focuses on the protection of foreign investors under international law against (internationally illegal) economic sanctions. Alexandros is also a teaching assistant in EU law and public international law at City. Previously, he taught international investment law at Brunel University and was a researcher in international economic law at the British Institute of International and Comparative Law.

[1] On depoliticization, as one of the founding narratives of international investment law and arbitration, see, generally, Shihata (1986), pp.1-25, Kozawa and Bjorklund (2010), p. 211, Paparinskis (2012), p. 271, Titi (2015), p. 261, Kriebaum (2019), pp 23-40, Mehranavar and Johnson (2022), p. 264.

[2] Mehranavar and Johnson, supra n 4, pp. 265-6.

[3] Ibid.

[4] Cutler (2018), pp. 73-8; Alter et al. (2019), pp. 453, 458; Basedow (2022), p. 1374; Voeten (2022), p. 14.

[5] Supra n 4.

[6] Cutler, supra n 7, pp. 73-4.

[7] Kriebaum, supra n 4, pp. 24-5.

[8] Diplomatic protection meant that the home state could protect its nationals since their property were also part of the former’s. For more details, see Dolzer et al. (2022), p. 2. See also Mavrommatis Palestine Concessions (Greece v. U.K.), 1924 P.C.I.J. (ser. B) No. 3 (Aug. 30), p. 12.

[9] Dolzer et al. (2022), supra n 11, p. 2. See also, Bjorklund (2010), supra n 4, p. 239.

[10] Shihata (1986), supra n 4, p. 19.

[11] Dautaj (2021), pp. 288-93.

[12] Philips (2012), p. 20.

[13] See, generally, Duanmu (2014), p. 1044. See, also Boute (2019), p. 383, especially at pp. 398-415.

[14] See Kriebaum (2019) supra n 4, pp. 24-30.

[15] Vicuña (2010), p. 67. See, also Peters (2016), p. 291.

[16] Idem, pp. 63-4.

[17] Slobodian (2018), pp. 93, 129-31.

[18] Peters (2016), supra n 18, pp. 289-93. However, for the theory that any procedural rights accruing to an individual in international (investment) law are a by-product of rights that are originally those of the home state’s (also known as “delegated rights”), see Paparinskis (2013), pp. 625, 627.

[19] Supra n 7.

[20] Supra n 20.

[21] For instance, see generally, Titi (2015), supra n 4, p.261; Mehranavar and Johnson (2022), supra n 4, pp. 293, 296, 299.