In Defence of the Impartiality of Barristers and Door Tenants in ISDS: A Call for Departure from Hrvatska Elektroprivreda d.d. v. Republic of Slovenia

Mar 29, 2024 | HILJ-HIALSA International Arbitration Collaboration, Online Scholarship

*Batuhan Betin

To venture so brazenly as to critique an order promulgated by the most distinguished of tribunals, comprised of Jan Paulsson, Charles N. Brower, and David A. R. Williams QC (as he was then), presiding, may be comparable to an act of sacrilege. Alas, heresy is precisely what the tribunal’s Order, dated May 6^th, 2008, in Hrvatska Elektroprivreda d.d. v. Republic of Slovenia provokes. In classrooms, misinformed articulations of the case garner polarizing responses from students. It prompts those educated in the institutions of the British Isles (and equally, the Commonwealth) to react viscerally, raising their hands in hopes of being called upon to clarify the particularities of the seemingly alien system of barristers’ chambers—much to the amusement of their contemporaries hailing from “enlightened” civil law jurisdictions who stubbornly refuse to distinguish barristers from the lawyers of their native lands.

Despite its notoriety, the case has attracted limited academic commentary.

At the crux of Hrvatska Elektroprivreda d.d. v. Republic of Slovenia was a list communicated on April 25^th, 2008, tabulating the members of the Respondent’s representatives who would be attending the  inaugural arbitral hearing scheduled a fortnight from then (¶ 3). Amongst the constituents of the list was Mr. David Mildon QC (as he was then) (¶ 3). Mr. Mildon KC (as he is now) was, and still is, a barrister operating out of Essex Court Chambers, in London (¶ 3). Mr. Williams KC (as he is now) was, at the time, a “door tenant” operating out of the very same set of chambers (¶ 3). The Claimant’s representatives declared that they had not been aware of Mr. Mildon KC’s retainer before the above-mentioned letter (¶¶ 4-5). They promptly requested disclosure of Mr. Mildon KC’s affiliations with the presiding arbitrator (¶ 5), and subsequently petitioned for Mr. Mildon KC to be removed on grounds that Mr. Williams KC could not ‘be relied upon to “judge fairly”’ (¶ 15).

The tribunal evaluated the interrelationship between Mr. Mildon KC and Mr. Williams KC and found that there was justifiable “apprehension of partiality” (¶ 31).  It ordered that “Mr. David Mildon QC may not participate further as counsel in this case” (¶ Ruling). The Tribunal’s decision to order the removal of Mr. Mildon KC was inspired by a medley of considerations. The seemingly most decisive and foundational consideration was the Tribunal’s finding that there was a justifiable “apprehension of partiality” because “the London Chambers system is wholly foreign to” the Claimant (¶ 31). Admittedly, this was bolstered by the tardy timing of the disclosure of Mr. Mildon KC’s retainer (only two weeks prior to the first hearing). Without reserving a firm position as to whether this case was wrongly decided, this article seeks to challenge the precedential value of this Order vis-à-vis future cases where members of the same chambers are appointed as arbitrators and counsel. Even the most authoritative of arbitral treatises, much (presumably) to their editors’ chagrin, cautiously cite this Order as a persuasive authority that the presence of both members serves as a basis for a serious risk of impropriety (Redfern and Hunter on International Arbitration (7th Edition), ¶ 4.138).

This article seeks to deconstruct two critical features of the Order. First, it shall seek to prove that, in hindsight, the Tribunal applied an erroneous subjective standard in discerning whether there was a risk of an appearance of partiality in contradiction to Article 14(1) of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Secondly, it advocates that the Tribunal could have more precisely characterized and investigated the interrelationship between Mr. Mildon KC and Mr. Williams KC. In particular, it seeks to demonstrate that the position of “door tenant” may be distinguished from that of a traditionally tenanted member of chambers. Consequently, the particularities of the former may mandate that in future disputes, tribunals should be cautious when applying principles generally applicable to “inter-barrister” relationships mutatis mutandis to “barrister-door tenant” relationships. To this extent, it seeks to discourage blanket recourse to the present Order.

The Tribunal applied erroneous standards in assessing the appearance of partiality. As previously mentioned, it articulated firstly, and seemingly decisively, that the Claimant had a justifiable “apprehension of partiality” because “the London Chambers system is wholly foreign to” them (¶ 31) (emphasis added). This assessment is problematic in that it endorses a subjective evaluation of the arbitrator’s partiality. It essentially adopts the position articulated by the Claimant’s representatives, that whereas the interrelationship “may not be cause for concern in London . . . [v]iewed from the Claimant’s cultural perspective, such concerns are justified” (¶ 10) (emphasis added). However, the prevailing view amongst ICSID tribunals today is that the independence of an arbitrator must be assessed, objectively, on the basis of “whether a reasonable third party, with knowledge of all the facts, would consider that there were reasonable grounds for doubting that an arbitrator possessed the requisite qualities of independence and impartiality” (Schreuer’s Commentary to the ICSID Convention p.1570 (emphasis added); see also Suez and Vivendi v Argentina ¶ 78; EDF v Argentina ¶¶ 109-111). A negative formulation of the test can also be articulated as follows: “a reasonable and informed third party would find it highly likely that the arbitrator’ lacked independence and impartiality” (p.1591; see also Caratube and Hourani v Kazakhstan ¶ 90). The Tribunal deviates from objectivity in that it assesses partiality exclusively from the subjective eyes of the particular Claimant to the dispute, as opposed to the objective lenses of the reasonable third party.

The Tribunal also failed to consider whether the Claimant could have become familiar with this purportedly ‘wholly foreign’ system through knowledge of all the relevant facts. Indeed, this is perplexing given that the Tribunal unequivocally acknowledged earlier in the Order that “[b]arristers are sole practitioners . . . [t]heir Chambers are not law firms” (¶ 17) (emphasis added). Whereas the Tribunal did caveat this statement by cautioning that “th[e] practice [of barristers] is not universally understood,” (¶ 18) it nonetheless tacitly acknowledged how readily accessible this information was. For instance, it pointed to the website of Essex Court Chambers in which unambiguous wording declared, “Chambers is not a firm, nor are members partners or employees. Rather, Chambers contains the separate, self-contained offices of individual barristers each self-employed and working separately” (¶ 17) (emphasis added).

Nowadays there is even greater transparency regarding this phenomenon. The Bar Council of England and Wales’ 2014 Information Note, and its recent 2022 Brochure, underscore that “barristers practicing from traditional sets of chambers are self-employed and are not [emphasis added] in partnership,” and “[b]arristers in the same chambers are fully independent of each other,” respectively. Similar disclaimers are customarily promulgated on the websites of Chambers. In the increasingly globalized world of arbitration, where the participation of barristers is ever-increasing, there is no sound reason precluding the representatives of opposing parties from explaining the realities of this system to their clients.

The tribunal also sought to caveat its earlier statement on the basis that the practice was not “universally agreed” (¶ 18). This proposition is hardly palatable. The independence of barristers is one of the Ten Core Duties promulgated by the Bar Standards Board (BSB) (the body responsible for the ethical regulation of the profession). It is imbued in various rules codified in the readily and publicly accessible BSB Code of Conduct, which, inter alia, underscores that “[m]embers of chambers are not in partnership but are independent of one another and are not responsible for the conduct of other members” (BSB Handbook v. 4.7, gC131). Even the failure to explain to “unsophisticated lay clients [emphasis added]” that “members of the chamber are, in fact, self-employed individuals who are not responsible for one another’s work,” is itself considered a breach of this Code of Conduct (gC56) (emphasis added). Consequently, any arbitrary attempt to doubt the legitimacy of this inviolable and fundamental principle must be readily rejected by future tribunals.

The Tribunal ought to have more precisely characterized the interrelationship between “door tenants” and barristers.

Even the most widely cited of treatises characterize the present matter as a conflict of interest between two barristers who are members of the same chambers. However, Mr. Williams KC was not a traditional member of Essex Court Chambers, nor did he practice as a litigator therein. In relation to Essex Court Chambers, his capacity was that of a “door tenant” (¶ 3). He appears to have retained his practicing certificate from the Bar of New Zealand where he was a traditional tenant of Bankside Chambers. In the absence of knowledge as to the extent and nature of his relationship with the English set, this article does not, per se, reserve a position as to whether the Tribunal erred in treating Mr. Williams KC akin to a traditional member of chambers. Indeed, as elaborated in detail below, there may be circumstances where such treatment may be justified.

The purpose of this Part is to acknowledge that, and identify why, the Tribunal conflated the roles/capacities of traditional members of chambers and that of their door tenants. It seeks then to dissuade other tribunals from blindly conflating the two, in future disputes, in prospective reliance of the current Order.

The Tribunal’s reluctance to distinguish between traditional members of chambers and door tenants should be attributed to the Background Information section of the 2004 IBA Guidelines on Conflicts of Interest in International Arbitration.  Therein, it is asserted (without much elaboration) that for all relevant intents and purposes, the term “members of chambers” shall, because it is “proper,” include door tenants (pp.456-457). However, the Background Information fails to provide any reason as to why the conflation is necessary or proper.

In practice, the relationship of a door tenant vis-à-vis a traditional member operating out of a set of chambers is not, per se, similar to the latter’s relationship with their contemporaries. One set of construction law barristers distinguishes the former as follows: “A number of individuals who are classed as ‘door tenants’ of Chambers also use the clerking and administrative services of ACL. Door tenants are not members, but the courtesy of displaying their name at the entrance to Chambers has been extended to them” (emphasis added).

Door tenants will likely have other permanent occupations. They may be career academics; they may be “affiliated to, and practice out of, another chamber”; they may even have vocations as lawyers employed full-time in traditional law firms operating out of “foreign” jurisdictions. The roles of a door tenant may also be vastly different vis-à-vis traditional members. Some may perform purely consultative functions. Whereas, admittedly, others will take on casework. One regional set of chambers describes the function of their door tenants as follows: “door tenants . . . are available . . . as advisers and consultants and they take on casework which is particular to their field of expertise.” Evidently, one must not blindly conflate the two. Assessment must be made on a case-by-case basis, having regard to the specific nature and extent of the door tenant’s affiliation. Otherwise, one risks arbitrarily mischaracterizing the probability of partiality.

In finding a justifiable appearance of partiality, the Tribunal placed great emphasis on the basis that the promotional materials disseminated by English chambers created a real sense of partnership and collective association amongst their traditional members (¶¶ 17-18). To this end, the Tribunal opined, it was appropriate to treat barristers, in respect of their perception by litigants, akin to solicitors employed in traditional law firms (¶ 19). However, surely, this litmus test can have a countervailing effect. The proactive efforts by chambers to distinguish between permanent members and door tenants (as exemplified for instance by the abovementioned quote from Atkin Chambers) creates a line of delimitation between the two types of tenants. It distances the latter from the former and conveys an unambiguous message that the character of the latter’s affiliation with chambers is likely to be fundamentally different from that of the former.

This is not to say that a “barrister-door tenant” relationship may never warrant disclosure. For instance, where a career academic (Professor A), who is also a door tenant, receives extensive appointments via chambers, their relationship vis-à-vis an ordinary tenanted member may be more akin to a traditional “barrister-barrister” relationship. There, mutatis mutandis application of principles governing the latter may be entirely warranted. However, it is submitted, that due regard must also be had to the secondary nature of a door tenant’s relationship to chambers. Traditionally, a barrister’s principal, if not exclusive, line of business is his self-employed vocation as a litigator, who operates out of the relevant set of chambers. On the contrary, a door tenant has a principal employer or vocation (which may be their primary source of material income). If the same hypothetical Professor A was instead a “hobby arbitrator,” instructed in less than half a handful of cases per annum, it would surely be less persuasive to treat them as if they were any other tenanted barrister.

The failure to distinguish door tenants from traditional barristers also results in certain perplexing outcomes under the 2014 IBA Guidelines on Conflict of Interests in International Arbitration. Professor A who is a door tenant at Chambers B, but a tenured member of the faculty at University C, would be expected to disclose their relationship with Counsel Y who is a junior tenant at Chambers B (¶ 3.3.2). Nonetheless, they would be exempt from disclosing their relationship with Counsel X who is also a tenured member of the faculty at University C (¶ 4.3.3). In light of Professor A’s financial independence from Counsel Y, it is unclear why the risk of bias in favor of Counsel Y is deemed inherently higher than that vis-à-vis Counsel X. Surely, in this hypothetical, the risk of bias should be greater vis-à-vis Counsel X, as a favorable award could bolster the reputation of the faculty, which may in turn indirectly benefit Professor A.

In the modern age, where information is publicly and readily accessible, no reasonable observer armed with the requisite information pertaining to the ethical regulation of barristers should have a good reason for believing that a door tenant is likely to be partial towards counsel hailing from a shared set of chambers by that connection alone. Hrvatska Elektroprivreda d.d. v. Republic of Slovenia must not be interpreted as promulgating a presumption applicable indiscriminately, and capable of producing dispositive outcomes without consideration of the specificities of each prospective conflict. This case also illustrates the desirability of expanding the 2014 IBA Guidelines on Conflict of Interests in International Arbitration such as to provide greater elucidation as to the susceptibility of door tenants (specifically) towards certain biases, with special attention being held to the secondary nature of their vocational relationship with the set. Future tribunals should and must not rely on the present Order as legitimizing the indiscriminate conflation of the two, potentially vastly different, roles.

Skepticism vis-à-vis the Order has started to emerge outside of the investment arbitration context. In 2012, the London Court of International Arbitration (“LCIA”) Court engaged in perhaps the most “sober” interpretation of the Order. In its Challenge Decision No. LCIA81116 the Court unequivocally found that the mere fact that counsel and arbitrator operate out of the same set of chambers cannot serve as “a [decisive] basis to impose upon him an obligation to disclose the activities of other barristers in his chambers; therefore, non-disclosure of such activities does not give rise to ‘justifiable doubts’” (¶48). It rejected any contention that the collective marketing or promotion of members of chambers could ever usurp this presumption (¶47).  Nonetheless, it cautioned, that the presumption of impartiality amongst barristers is neither inviolable nor irrefutable. On each occasion, it is paramount that one conducts a “fact-based enquiry” into whether that particular relationship, between those two members of the same set of chambers, meets the requisite threshold for an appearance of partiality (¶48). This is a most welcome development. Admittedly, this skepticism may stem from the reality that the LCIA is an inherently English institution. The LCIA Court is constituted predominately of English and common law qualified practitioners (or of those intimately familiar with the English legal system). Nonetheless, the author hopes to see the LCIA Court’s sobering approach proliferate and prevail amongst its more transnational investment arbitration contemporaries.

*Batuhan Betin holds an LL.M from Queen Mary University of London where he graduated first overall in his cohort. He extends his sincerest gratitude to his good friend Ms. María Rosario Tejada for bringing the HILJ-HIALSA Collaboration on International Arbitration to his attention.

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Navigating the International Investment Maze: Dissecting Imbalances, Ditching BITs, and Charting a Course Towards Sustainable Solutions

Mar 25, 2024 | HILJ-HIALSA International Arbitration Collaboration, Online Scholarship

Abdelhameed Dairy*

Introduction

The paper critically assesses the contemporary challenges facing the international investment regime, concluding that urgent reform is needed. It argues for abandoning Bilateral Investment Treaties (“BITs”) as the prevailing tools. The first part of this article characterizes the regime as an “imbalanced bargain” and highlights the regime’s inability to achieve objectives, leading to regulatory chill and hindering sustainable development goals. The second and third parts of the article propose a novel reform approach centered on the doctrine of acquired rights within a domestic legal framework, offering a comprehensive solution to existing challenges. The researcher advocates for terminating BITs, emphasizing the need for transformative legal adjustments to address the regime’s shortcomings. The methodological approach aligns with Sauvant’s emphasis on understanding the regime’s purpose as a foundation for meaningful reform discussions.

I. Background and Objectives

The global response to enhancing protection for foreign investors, framed as a “Grand Bargain,” has been subject to critical examination (Kaushal 2009; Salacuse and Sullivan 2005). Asha Kaushal revisits the history of the foreign investment regime to illuminate the present backlash against the regime, shedding light on its historical underpinnings. Kaushal’s findings underscore the tensions inherent in the BIT architecture, revealing a disconnect between the intended benefits of BITs and their actual impact on foreign investment flows (Kaushal 2009, p. 492-496).  While these treaties were originally envisioned as a means to attract investment by trading regulatory sovereignty, recent studies suggest that they may not significantly influence investment patterns. Moreover, Kaushal argues that the real bargain underlying BITs involves developing countries relinquishing sovereignty in exchange for enhanced protection of foreign property and contract rights (Kaushal 2009, p. 495).  This nuanced understanding of the BIT regime challenges traditional binary structures and highlights internal contradictions within the investment arbitration framework. Jeswald Salacuse and Nicholas Sullivan, in their evaluation of bilateral investment treaties, question the efficacy of the grand bargain inherent in these treaties (Salacuse and Sullivan 2005, p.77). The perceived imbalance in this arrangement stems from three key factors: states’ choice to enter into investment treaties in a “blind bargain” without full certainty as to their effects, provision of ‘more than just” protection for investments, and restrictions on the State’s right to regulate.

A. A Blind Bargain: A Historical Perspective

The historical evolution of international investment law, rooted in the assumption that BITs would spur economic development through increased foreign direct investments, is increasingly questionable (Kenneth Vandevelde 2009, p.21; Hallward-Driemeier 2003). The lack of empirical evidence supporting this assumption (Dolzer and Schreuer 2012, p. 23; Salacuse and Sullivan 2005, p.17) transforms entering the commitment to BITs into a speculative gamble. The early 1990s marked a shift toward neoliberal economic policies and the establishment of BITs, guided by the belief that they would foster economic development (UNCTAD 2006, p. 2, 6).

However, the paper contends that this anticipated correlation between BITs and economic development lacks empirical support. Hence, it characterizes the treaties as “blind bargains”. The paper also aligns with the view that while investment protection is an important objective, its direct translation to promotion and liberalization is not always guaranteed (UNCTAD 2003, p. 89).

B. More than Extra Protection

The surge in costly arbitration claims against host states, exceeding initial expectations, forms the second facet of the imbalanced bargain. This rise in claims, attributable to the expansive scope of BITs and their broad definitions of investments—such as in Joy Mining v Egypt (para. 45)—prompts a critical examination. Significantly, the origins of BITs are also implicated, with some arguing (Miles 2010) that the focus on investors’ interests may have led to the neglect of the host state’s interests. The unique privilege granted to foreign investors to initiate legal proceedings against host states is explored, emphasizing the need to redefine investments for better precision.

Upon revisiting the shared objectives of the regime and exploring its history, it is apparent that BITs were embraced with a specific goal: advancing the economic development of host states. This distinguishes BITs from human rights conventions. BITs focus on safeguarding investors’ property (Dolzer and Schreuer 2012, p. 60). The deliberate choice of developing countries to limit BITs to future investments highlights their core aim of promoting future Foreign Direct Investment (“FDI”), which contributes significantly to economic development Salacuse and Sullivan 2005, p. 80). Unfortunately, the lack of a precise objective definition in BITs’ preambles often leads to the inadvertent inclusion of potentially detrimental investments (UNCTAD 2011, pp. 1-13). This drafting oversight may stem from the novelty of this legal field, as acknowledged in the ICSID Convention (Mihaly International Corp. v. Democratic Socialist Republic of Sri Lanka, para. 33).

As we consider the focus of the next chapter of investment protection, a crucial question arises: is the optimal avenue for developing investment law through BITs or domestic law? Host states have, over time, attempted a political approach to rebalance the “bargain” by modifying definitions in BITs (Kenneth Vandevelde 2009, pp. 186-187). Arbitral tribunals, adopting a legal approach, refine their interpretation of “investment”. This approach is exemplified in the Fedax v. Venezuela case which employs a “criteria approach” to define investments and establish prerequisites for protected investments. The Salini v. Morocco case, known for creating the “Salini Test”, sets criteria for an investment’s eligibility. However, a recent divergence of opinion among tribunals, particularly regarding the development clause, indicates ongoing debate. (Victor Pey Casado and President Allende Foundation v. Republic of Chile, L.E.S.I. S.p.A. and ASTALDI S.p.A. v. République Algérienne Démocratique et Populaire; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine). The development clause, often included in investment agreements and BITs, aims to ensure that foreign investment is not protected unless it contributes positively to the economic, social, and environmental development of the host country.

In summary, host states, aiming to foster economic development, have provided additional protection for foreign investments through BITs. Despite efforts to rebalance the “bargain”, harmful investments still receive extensive protection, challenging sustainable development goals. To address this, a proposed solution involves establishing a “sustainable foreign direct investment definition” which excludes detrimental investments from BIT protection. Our proposal of domestic law solutions—explored later—offers a more effective mechanism for excluding harmful investments.

C. The State’s Right to Regulate

The third element of the “imbalanced bargain” focuses on the constriction of the state’s right to regulate by BITs. While protecting foreign investors from unfair measures is acknowledged, our suggestion delves into the challenge of distinguishing between opportunistic and bona fide regulatory measures. The legitimacy crisis surrounding the regime, and particularly the threat of regulatory chill, is discussed. These concerns arise from the difficulty in balancing the protection of foreign investors with the state’s regulatory autonomy, leading to potential reluctance in enacting or enforcing regulations perceived as necessary for public welfare.

This paper advocates for the termination of BITs, emphasizing that they have failed in achieving their objectives. The imminent termination of BITs is evidenced by states initiating the process in response to the prevailing legitimacy crisis. This proposal advocates a shift from international to domestic law, offering a pragmatic solution to core issues, and preserving international arbitration but introducing a doctrinal gateway for consistency.

II. The Doctrine of Acquired Rights

Our proposal advocating domestic law as an alternative to BITs is based on the doctrine of acquired rights. The concept of acquired rights is a legal principle that protects rights which have already been acquired or established by individuals or entities under the law. It is a pivotal element within our suggested domestic investment law.

A. International Doctrinal Confirmation

Anticipating criticism about the shift from international (BITs) to national (domestic law), we address the key question of state succession’s impact on “acquired rights”. Affirmed by international tribunals, this principle, rooted in public international and municipal law, gained legitimacy in the landmark Saudi Arabia and Aramco case (see also Golâenberq; Permanent Court of International Justice). The doctrine of acquired rights was historically controversial because newly independent Global South states perceived it to threaten their sovereignty. However, this controversy largely evaporated in the early 1990s as developing and developed countries came into agreement over the importance of  Hence, I argue for a revival of the acquired rights doctrine. Apart from the historical controversies on the application of this doctrine in the international sphere and considering that in our proposal the disputes between host states and investors shall be settled through international arbitrators, the international formal recognition of the doctrine is attached to its importance in the field of investment law and confers upon its legitimacy in content and principle.

B. The Content of the Doctrine

The doctrine of acquired rights typically prevents governments or other parties from retroactively changing laws or regulations in a way that would deprive individuals or entities of rights they have already obtained. Initially, the doctrine was a safeguard against state interference with property rights, and has international recognition. Our proposed National Foreign Investment Law (“NFIL”) safeguards FDIs against post-investment regulatory changes. The scope of acquired rights within the NFIL is limited to rights explicitly acquired through it. We propose a definition encompassing tangible and intangible rights, aligned with NFIL standards. As compared to stabilization clauses, NFILs better ensure alignment with host state constitutional principles.

C. Acquired Rights and Sustainable Development in National Foreign Investment Law (“NFIL”)

In our proposed NFIL, the concept of “right” within “acquired rights” is pivotal. Valid legal rules establishing rights would seamlessly align with sustainable development goals due to the hierarchy of norms. The NFIL, being more adaptable than BITs, would be crafted to appeal to non-governmental organizations (NGOs) by incorporating constitutional principles. To exemplify, if principles like environmental protection are embedded in the host state’s constitution, any investor rights conflicting with these principles would be null and unconstitutional. This aligns investor interests with the host state’s constitutional values, increasing predictability for investors and fostering sustainable and responsible FDIs. As a result, the proposed regime aims to contribute to sustainable development goals by advocating for sustainable FDI rather than merely more FDI. Moreover, it has been noted that it is more beneficial for investors to conduct economic policies that reconcile with their stakeholders’ interests and hence avoid criticism of societies and NGOs.

In defining “acquired” within “acquired rights”, the distinction between pre-establishment and post-establishment rights is crucial. Our proposal addresses concerns around pre-establishment rights. We suggest that NFIL should refrain from granting such rights. Host states not obligated to admit foreign investments (Droit international économique. Dalloz 2003, pp. 361-365), gain more control over FDI inflow without compromising fairness. The absence of pre-establishment rights in NFIL avoids an overly liberalizing perception and allows states to tailor liberalization levels to their policy stances.

D. Stabilization Clauses and the Doctrine of Acquired Rights

Our proposal centers on activating the doctrine of acquired rights in the NFIL, akin to stabilization clauses but with notable distinctions. Stabilization clauses, often criticized for hindering sustainable development, freeze a broad scope of regulations (and sometimes freeze the whole legal framework) at the time of the investment. In contrast, our concept of acquired rights focuses on freezing specific regulations and offers more precise control. The proposed “right” concept, mandating alignment with constitutional principles, echoes suggested remedies for stabilization clause shortcomings related to environmental and social considerations.

In essence, our NFIL approach strikes a balance: it promotes sustainable FDI by aligning investor rights with host state values, avoids broad pre-establishment rights, and offers a nuanced alternative to stabilization clauses.

III. Domestic Law as an Alternative and a Solution

Following the examination in Part I, this Part questions the relevance of BITs and explores domestic law as an alternative. It proposes two remedies for investor disputes: an Investor-State Dispute Settlement (“ISDS”) clause within the NFIL and the theory of acquired rights. Domestic law, viewed through the lens of other legal frameworks like labor law, offers a stable source for managing host state-investor relationships. The chapter underscores the equivalence of domestic law to BITs’ goals and its effectiveness as a superior instrument.

A. Investor Remedies in Domestic Law

Our suggestion of a NFIL proposes incorporating an ISDS clause into the NFIL and utilizing the theory of acquired rights. It contends that domestic law can offer a stable legal framework, addressing investor concerns and facilitating long-term relationships between investors and host states. The next section challenges the notion that domestic law lacks stability and emphasizes the importance of aligning investor interests with host state constitutional principles.

B. Serving the Same Objectives

Comparing domestic law to BITs, our proposed NFIL represents a credible legal framework, providing stability, predictability, and precise obligations. The NFIL with ISDS clauses contributes to investment liberalization by supplanting the Most Favored Nation (“MFN”) treatment (in principle) with a standardized legal framework. The NFIL, characterized by its legal structure comprising general and abstract rules, encompasses all foreign investors within a unified legal framework. Consequently, it supplants the MFN standard of protection by incorporating all foreign investors falling under the definition of investment in the relevant NFIL, irrespective of the BITs their home country has established with the host state.

In the pursuit of a solution to balance investor protection and regulatory flexibility, the next section focuses on the role of domestic law. Our approach suggests a distinction between investors’ rights and privileges while maintaining the state’s right to regulate.

C. The State’s Right to Regulate

The suggested NFIL would offer a framework to differentiate between compensable and non-compensable measures. A NFIL should define investors’ rights and privileges at the time of investment, ensuring that acquired rights remain unchanged, while privileges, such as the renewal application for operating a hazardous waste landfill, may be subject to legitimate regulatory changes.

Regarding general regulatory measures, the NFIL allows states to enact measures for public interest reasons without arbitration concerns provided they do not infringe on acquired rights. This grants host states the flexibility to adjust policies for future investors without being bound by previous investors’ rights.

Privileges obtained by investors can be modified for public interest, yet opportunistic changes may lead to compensation claims. The NFIL’s meticulous drafting is essential to clearly define the scope of acquired rights, minimizing potential debates.

D. Achieving a Multilateral Agreement on Investment (“MAI”)

Our proposed NFIL serves as a potential solution for achieving a MAI by fostering consensus on standards of protection. By allowing states to freely compete within their domestic laws, regulatory competition emerges. This competition encourages jurisdictions to attract FDI by adopting protective frameworks in their NFIL.

The concept of “regulatory competition” within domestic law enables states to compete for FDI with shared objectives, such as protecting, attracting, and liberalizing investment. Countries could compete to attract FDIs by incorporating an extensive Fair and Equitable Treatment standard of protection in their NFIL. This form of competition through domestic law has been witnessed previously, such as in tax law competitions enacting lower minimum wages for employees compared to other countries,  or enhancing flexibility in the labor market.

Some may argue that this competition results in a “race to the bottom” on environmental standards. However, as well as a “Delaware effect”—a race to the bottom with regard to lax restrictions—competition might alternatively result in a “California effect” —a race to the top with regard to restrictions on corporations.

Eventually, regulatory competition will reveal which tools work better to achieve the common objectives, as with different approaches competing through the NIFL, some will witness failure and others will witness success in attracting investment.  As a result, states with approaches that have failed will tend to duplicate the approaches that have succeeded until we attain a consensus on at least fundamental substantive content, and hence regulatory competition will pave the way to attain a MAI on the substantive level.

In summary, the proposed domestic law approach offers a balanced mechanism, allowing states to regulate for the public interest while maintaining a competitive environment for attracting FDI. This perspective aligns with the principles of regulatory competition and has the potential to pave the way for a multilateral consensus on investment standards.

Conclusion

The international investment law framework, aimed at promoting FDI and ensuring its protection, faces a crisis due to insufficient empirical support, unintended extra protection through BITs, and concerns about encroachment on host states’ regulatory rights.

In light of these challenges, terminating BITs is essential.  Domestic law is a superior tool. Domestic law can achieve common goals, remove constraints on regulatory capacity, and align with global sustainable development objectives. It also serves as a crucial step towards a multinational investment agreement, providing a standardized legal framework for international investment law.

*Abdelhameed Dairy is a seasoned legal professional with expertise in case management, legal research, and client relations.

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