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1. International investment law as a

field of international law

INTRODUCTION
Once deemed to be an ‘exotic and highly specialised’ domain,1 inter-
national investment law is now moving mainstream.2 Due to economic
globalization and the rise of foreign direct investments, the regulation of
the field has become a key area of international law. Under international
investment agreements (IIAs), states parties agree to provide a certain
degree of protection to investors who are nationals of contracting states,
or their investments. Such protection generally includes compensation in
case of expropriation, fair and equitable treatment, non-discrimination
and full protection and security, among others.
Most contemporary investment treaties include investor–state arbitra-
tion for the settlement of disputes that may arise between the foreign
investor and the host state. Under this mechanism, foreign investors may
bring claims directly against the host state before international arbitral
tribunals. Investors are not required to exhaust local remedies and no
longer depend on diplomatic protection to defend their interests against
the host state. Investor–state arbitrations are heard by ad hoc or institu-
tionalized arbitral tribunals whose arbitrators are selected by the disput-
ing parties and/or appointing institutions. The internationalization of
investment disputes has been conceived as an important valve for
guaranteeing a neutral forum and depoliticizing investment disputes.3

1
ILC, Fragmentation of International Law: Difficulties Arising from the
Diversification and Expansion of International Law, Report of the Study Group
(Martti Koskenniemi) UN Doc. A/CN.4/L.682 (13 April 2006) para. 8.
2
S.W. Schill, ‘W(h)ither Fragmentation? On the Literature and Sociology
of International Investment Law’ (2011) 22 EJIL 875–908.
3
I.F.I. Shihata, ‘Toward a Greater Depoliticization of Investment Disputes:
The Roles of ICSID and MIGA’ (1986) 1 ICSID Review–FILJ 1–25.

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2 Proportionality, reasonableness and standards of review

Arbitral tribunals have reviewed state conduct in key sectors including

but not limited to water services, cultural heritage, environmental protec-
tion and public health.4 Consequently, many of the recent arbitral awards
have determined the boundary between two conflicting values: the
legitimate sphere for state regulation in the pursuit of the public interest,
on the one hand, and the protection of private interests from state
interference, on the other. With awards that have reached as high as $50
billion,5 the field has attracted the increasing attention of states, investors
and the media, as well as the public at large.
Despite its flourishing, investment treaty law and arbitration is facing a
‘legitimacy crisis’.6 Concerns have arisen regarding the magnitude of
decision-making power allocated to investment treaty tribunals.7 Some
scholars contend that investor–state arbitration lacks democratic insight.8
Others lament that investor–state arbitration operates as a self-contained
regime, privileging the interests of foreign investors while ‘structural[ly]
disregard[ing]’ those of ‘more weakly organized and less powerful
groups, and of vulnerable individuals’.9 There is uncertainty over the
relevance or irrelevance of norms external to investment law, such as
human rights law, within investment treaty arbitration.10 The debate has
focused not so much on the question as to whether international
investment agreements limit state sovereignty – at the end of the day, this
is what international agreements do, limiting state sovereignty in order to

4
See e.g. A.M. Daza-Clark, International Investment Law and Water
Resources Management (Brill 2016); V. Vadi, Public Health in International
Investment Law and Arbitration (Routledge 2012); J.E. Viñuales, Foreign Invest-
ment and the Environment in International Law (CUP 2012); V. Vadi, Cultural
Heritage in International Investment Law and Arbitration (CUP 2014).
5
See e.g. Yukos Universal Ltd (Isle of Man) v. The Russian Federation,
UNCITRAL, PCA Case No. AA227, Final Award, 18 July 2014, para. 1827.
6
S.D. Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration:
Privatizing Public International Law Through Inconsistent Decisions’ (2005) 73
Fordham LR 1521–625.
7
See generally M. Waibel, A. Kaushal, K.-H.L. Chung and C. Balchin
(eds), The Backlash against Investment Arbitration (Kluwer Law International
2010).
8
B. Choudhury, ‘Recapturing Public Power: Is Investment Arbitration’s
Engagement of the Public Interest Contributing to the Democratic Deficit?’
(2008) 41 Vanderbilt Journal of Transnational Law 775–832.
9
R.B. Stewart, ‘Remedying Disregard in Global Regulatory Governance:
Accountability, Participation, and Responsiveness’ (2014) 108 AJIL 211–70, 211,
221.
10
B. Simma, ‘Foreign Investment Arbitration: A Place for Human Rights?’
(2011) 60 ICLQ 573–96.

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International investment law as a field of international law 3

provide states with perceivably greater benefits – but ‘over the extent to
which IIAs delimit state sovereignty’ and its ability to regulate.11
While developing countries have deemed investment treaty arbitration
politically biased against them,12 emerging economies and industrialized
countries alike have expressed some concerns about this mechanism.13
For instance, Bolivia, Ecuador and Venezuela sent a formal notice to the
International Centre for the Settlement of Investment Disputes (ICSID)
declaring their withdrawal from the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States
(ICSID Convention).14 Brazil has never ratified the ICSID Convention,
nor has it ratified any treaty that provides for investor–state arbitration.15
South Africa, India and Indonesia ‘have announced that they will not
conclude any more investment treaties’.16 Ecuador has denounced all of
its bilateral investment treaties (BITs).
Against this background, this chapter aims to briefly illustrate the
fundamental features of international investment law and arbitration. A
preliminary investigation of the field seems not only appropriate but also
essential to assess whether notions such as proportionality, reasonable-
ness and standards of review can (or do) help solve the investment
regimes’ pressing challenges. The chapter proceeds as follows. First, after
providing some historical background, it explores the normative frame-
work that governs foreign direct investment. Second, it highlights the
most salient features of investor–state arbitration. Third, it explores the
backlash against investment treaty law and arbitration. It then concludes
that this area of law remains under-theorized, and that more theoretical
studies of the same are needed in order for it to develop in conformity
with and contribute to international law.

11
E. Guntrip, ‘Self-Determination and Foreign Direct Investment: Reimagin-
ing Sovereignty in International Investment Law’ (2016) 65 ICLQ 829–57,
829–30.
12
A. Shalakany, ‘Arbitration and The Third World: A Plea for Reassessing
Bias Under the Specter of Neoliberalism’ (2000) 41 Harvard ILJ 419–68.
13
K. Miles, ‘Investor–State Dispute Settlement: Conflict, Convergence and
Future Directions’ (2016) European Yearbook of International Economic Law
273–308.
14
M. Clark, ‘Venezuela’s Withdrawal from the ICSID Convention’, Associ-
ation for International Arbitration Bulletin, October 2012, 2.
15
J. Kalicki and S. Medeiros, ‘Investment Arbitration in Brazil’ (2008) 24
Arbitration International 423–45.
16
M. Sornarajah, Resistance and Change in the International Law on
Foreign Investment (CUP 2015) 1.

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4 Proportionality, reasonableness and standards of review

1.1 MULTILATERAL FAILURES AND BILATERAL

SUCCESSES
International investment law constitutes an important part of public
international law governing foreign direct investments.17 Defined as ‘the
transfer of tangible or intangible assets from one country into another for
the purpose of their use in that country to generate wealth under the total
or partial control of the owner of the assets’,18 foreign direct investment
(FDI) is an all-encompassing concept, including almost any kind of
business activity. While there is still no comprehensive global treaty
governing foreign investments, there are over 3,304 IIAs.19 IIAs include
BITs, regional investment treaties, free trade agreements (FTAs) or
sectoral agreements with investment provisions, such as the Energy
Charter Treaty.20
Efforts to establish global rules to protect foreign investments and a
World Investment Court to settle potential disputes between host coun-
tries and investors have been pursued by industrialized countries for a
long time.21 A first attempt to create a unified global investment law was
made at the Bretton Woods conference in 1944. Agreeing on the
importance of promoting economic relations to foster peace and eco-
nomic growth, the conference participants established the International
Monetary Fund (IMF)22 to secure financial stability and facilitate inter-
national trade, and the International Bank for Reconstruction and Devel-
opment (IBRD)23 to finance the post-war reconstruction of Europe. The
conference participants also considered establishing an International

17
J.E. Alvarez, The Public International Law Regime Governing Inter-
national Investment (Hague Academy of International Law 2011). For an
historical overview, see A. Newcombe and L. Paradell, Law and Practice of
Investment Treaties (Kluwer Law International 2009) 3–57.
18
M. Sornarajah, The International Law on Foreign Investment, 3rd edn
(CUP 2010) 8.
19
UNCTAD, World Investment Report 2016 (UN 2016) xii.
20
Energy Charter Treaty, opened for signature 17 December 1994, in force
16 April 1998, 34 ILM 360.
21
See e.g. R. Dattu, ‘A Journey from Havana to Paris: The Fifty-Year Quest
for the Elusive Multilateral Agreement on Investment’ (2000–2001) 24 Fordham
ILJ 275–316.
22
Articles of Agreement of the International Monetary Fund (IMF), 22 July
1944, in force 27 December 1945, 2 UNTS 40.
23
Articles of Agreement of the International Bank for Reconstruction and
Development (IBRD) as amended in 1965, 606 UNTS 294.

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International investment law as a field of international law 5

Trade Organization (ITO), governing both trade and investment. How-

ever, the Havana Charter never came into force.24
Although the World Trade Organization (WTO),25 which came into
being in 1995, in some ways has become ‘the missing leg’ of the Bretton
Woods ‘stool’,26 the moves to adopt multilateral investment rules initiated
at the Doha Ministerial Conference in 2001 had to be abandoned at the
Ministerial Conference in Cancun in 2003, due to the growing opposition
from developing countries and strong criticism from civil society. Fol-
lowing the 2015 Ministerial Conference in Nairobi, the EU suggested
that investment could form part of the new issues for negotiation in the
WTO,27 but it remains to be seen whether the suggestion will be broadly
endorsed.
When the Organization for Economic Co-operation and Development
(OECD), a group of 30 industrialized countries, attempted to launch a
Multilateral Agreement on Investments (MAI),28 this effort collapsed.
Civil society opposed the MAI, perceiving it to be a one-sided instru-
ment, unilaterally prepared by OECD countries to ensure higher stand-
ards of protection and legal security for foreign investors. It did not
adequately take into account the developmental needs of the host states,
omitting crucial environmental and social issues.29
However, some authors contend that global rules on foreign investment
exist already.30 On the one hand, some multilateral instruments, such as
the Energy Charter Treaty, govern foreign investments albeit in specific
sectors. The ICSID Convention constitutes a multilateral procedural
instrument establishing the ICSID. Several WTO instruments deal

24
Charter for an International Trade Organization (‘Havana Charter’), Final
Act of the United Nations Conference on Trade and Employment, held at
Havana, Cuba from 21 November 1947 to 24 March 1948, UN Document
E/Conf. 2/78.
25
Agreement Establishing the World Trade Organization, 15 April 1994, 33
ILM 1994.
26
See J. Jackson, The World Trading System (MIT Press 2002) 32.
27
European Commission, ‘Joint Statement by Commissioners Malmström
and Hogan ahead of the 10th WTO Ministerial Conference in Nairobi’, News
item, 14 December 2015.
28
OECD Multilateral Agreement on Investment, Consolidated Text and
Commentary, Draft DAFFE/MAI/NM(97)2.
29
See S. Picciotto, ‘Linkages in International Investment Regulation: The
Antinomies of the Draft Multilateral Agreement on Investment’ (1998) 19
University of Pennsylvania JIEL 731–68.
30
S.W. Schill, The Multilateralization of International Investment Law
(CUP 2009).

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6 Proportionality, reasonableness and standards of review

directly with aspects of foreign investments. For instance, the Agreement

on Trade-Related Aspects of Intellectual Property Rights (TRIPS)31
covers intellectual property, which can be a form of investment.32 The
General Agreement on Trade in Services (GATS)33 covers the provision
of services through a commercial presence in another country. In
addition, the Agreement on Trade-Related Investment Measures
(TRIMS)34 deals with performance requirements associated with foreign
investment. On the other hand, although never ratified, the Havana
Charter inspired many investment provisions.35 Because of the similar-
ities among these different investment treaties and the fact that they tend
to be negotiated from a limited set of model BITs, it has been argued that
investment treaties are incrementally building a de facto global invest-
ment regime.36 Some even consider these recurring provisions as evi-
dence of customary law.37
In parallel, the current absence of a World Investment Court does not
necessarily indicate that this will always be the case. The EU–Canada
Comprehensive Economic and Trade Agreement (CETA)38 and the
EU–Vietnam FTA include an Investment Court System (ICS), a standing
bilateral court and an appellate tribunal for settling the investment
disputes arising from the implementation of the agreements. Both Canada

31
Agreement on Trade Related Aspects of Intellectual Property Rights
(TRIPS), 15 April 1994, Marrakesh Agreement establishing the World Trade
Organization, Annex 1C, 33 ILM 1997 (1994).
32
See generally L. Vanhonnaeker, Intellectual Property Rights as Foreign
Direct Investments (Edward Elgar 2015).
33
General Agreement on Trade in Services (GATS), 15 April 1994, Mar-
rakesh Agreement Establishing the World Trade Organization, Annex 1B, 33
ILM 1167 (1994).
34
Agreement on Trade-Related Investment Measures (TRIMS), 15 April
1994, Annex 1A to the Marrakesh Agreement Establishing the World Trade
Organization (WTO Agreement), 1868 UNTS 186.
35
Havana Charter, Article 12.
36
See generally Schill, The Multilateralization of International Investment
Law.
37
J.E. Alvarez, ‘A BIT on Custom’ (2010) 42 NYU JIL & Policy 17–80, 63.
Contra see M. Sornarajah, ‘A Coming Crisis: Expansionary Trends in Investment
Treaty Arbitration’, in K.P. Sauvant (ed.), Appeals Mechanism in International
Investment Disputes (OUP 2008) 39–80, 44.
38
2016 EU-Canada Comprehensive Economic and Trade Agreement
(CETA). The European Commission proposed the signature of the CETA to the
Council of the EU in July 2016. The European Parliament voted in favour of
CETA on 15 February 2017. The EU national parliaments must approve CETA
before it can take full effect.

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International investment law as a field of international law 7

and the EU have also informally discussed the establishment of a World

Investment Court, analogous to the World Trade Organization Appellate
Body or the European Court of Human Rights.39 They propose the
inception of a standing court with judges nominated by the treaty parties,
and an appellate body.40 Finally, discussions are taking place on a global
scale at the United Nations Commission on International Trade Law
(UNCITRAL).41
Notwithstanding the persistent failures at the multilateral level, states
have successfully negotiated IIAs at the bilateral and regional levels.
Most IIAs are BITs.42 Comprehensive economic cooperation agreements,
FTAs and mega-regionals also include provisions on investments.43
Whether regional agreements can provide a platform for future multi-
lateral investment rules or undermine multilateralism remains to be
seen.44
States sign IIAs for both economic and political reasons. States
generally expect that the conclusion of such treaties will encourage
FDI.45 Therefore, both developed and developing countries strategically
push IIAs albeit for different reasons. On the one hand, host countries –
generally developing and least developed countries – compete to attract

39
See C. Malmström, ‘In Davos, Discussing Investment Disputes’, Euro-
pean Commission Blog, 19 January 2017; A. Roberts, ‘The Shifting Landscape
of Investor–State Arbitration: Loyalists, Reformists, Revolutionaries and Un-
decideds’, International Economic Law and Policy Blog, 15 June 2017.
40
Ibid.
41
G. Kaufmann-Kohler and M. Podestà, ‘Challenges on the Road toward a
Multilateral Investment Court’, 201 Columbia FDI Perspectives, 5 June 2017.
42
UNCTAD, World Investment Report 2016, 101 (reporting 2,946 BITs by
the end of 2015).
43
Ibid.
44
T. Voon, ‘Consolidating International Investment Law: The Mega-
Regionals as a Pathway towards Multilateral Rules’ (2017) World Trade Review
1–30, 6 (arguing that regional agreements can gradually lead to multilateralism).
But see W. Alschner, ‘Regionalism and Overlap in Investment Treaty Law:
Towards Consolidation or Contradiction?’ (2014) 17 JIEL 271–98, 284 (arguing
that regionalism constitutes an obstacle to multilateralism).
45
Some works doubt IIAs’ positive impact on investment flows. See M.
Hallward-Driemeier, ‘Do Bilateral Investment Treaties Attract Foreign Direct
Investment? Only a Bit … And They Could Bite’, Policy Research Working
Paper No. 3121 (World Bank 2003). However, other research suggests that IIAs
can have a positive impact on investment flows. See J. Tobin and S. Rose-
Ackerman, ‘Foreign Direct Investment and the Business Environment in Devel-
oping Countries: The Impact of Bilateral Investment Treaties’ (2005) Yale Law
and Economics Research Paper No. 293, 1–52.

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8 Proportionality, reasonableness and standards of review

FDI and assume broad obligations for the protection of foreign investors
in order to attract foreign investments. According to Guzman, LDCs ‘face
a prisoner’s dilemma’: while, as a group, they would be better off if they
did not ratify IIAs, ‘each individual LDC is better off “defecting” from
the group by signing a BIT that gives it an advantage over other LDCs in
the competition to attract foreign investment’.46 Most developing coun-
tries adopting BITs overestimated the economic benefits of BITs, signed
them because of ‘foreign policy considerations’,47 and ‘entirely ignored’
their costs, including the risk of investment treaty claims, ‘until their own
country was hit by a claim’.48
On the other hand, industrialized countries sign IIAs to obtain favour-
able standards. In the aftermath of World War II, the customary inter-
national law governing foreign investment was ambiguous and lacked
adequate enforcement mechanisms.49 These flaws in the international
investment regime hindered foreign investments; risk-adverse investors
did not invest where there was little predictability regarding the protec-
tion of foreign investments under international law.50 Consequently,
capital exporting states began to fill this legal gap by negotiating BITs.51
Nowadays, the traditional distinction between capital importers and
capital exporters has become blurred. Not only do industrialized coun-
tries compete to attract FDIs, but emerging economies also pursue
their own investment treaty-making agenda.52 The emerging awareness
that both industrialized and developing countries compete for FDIs (and
can be respondent in investment arbitration) has entailed a gradual

46
See A. Guzman, ‘Explaining the Popularity of Bilateral Investment
Treaties: Why LDCs Sign Treaties that Hurt Them’ (1997) 38 Virginia JIL
639–88, 667.
47
C. Dupont and T. Schultz, ‘Towards a New Heuristic Model: Investment
Arbitration as a Political System’ (2016) 7 JIDS 3–30, 16.
48
L.N. Skovgaard Poulsen, ‘Bounded Rationality and the Diffusion of
Modern Investment Treaties’ (2014) 58 International Studies Quarterly 1–14, 2
(noting, at 5, that ‘decision-makers tend either to exaggerate or entirely to ignore
low-probability, high-impact risks’).
49
J.W. Salacuse, ‘The Emerging Global Regime for Investment’ (2010) 51
Harvard ILJ 427–74, 439.
50
J.W. Salacuse and N.P. Sullivan, ‘Do BITs Really Work? An Evaluation
of Bilateral Investment Treaties and Their Grand Bargain’ (2005) 46 Harvard ILJ
67–130, 76.
51
Ibid. 68–70.
52
V. Vadi, ‘Converging Divergences: The Rise of Chinese Outward Foreign
Investment and Its Implications for International (Investment) Law’ (2012)
Yearbook of International Investment Law 705–724.

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International investment law as a field of international law 9

recalibration of investment treaties. Nowadays, IIAs tend to reflect a

more balanced approach to the protection of foreign investments than that
taken in past decades.53 In fact, recent IIAs include preambles, exceptions
and carve-outs that restate the importance of non-economic concerns in
international investment law and arbitration.

1.2 CONTENTS OF INVESTMENT TREATIES

While investment treaties differ in their details, their scope and content
have become standardized over the years, as negotiations have been
characterized by an ongoing sharing and borrowing of concepts.54 The
inclusion of the most favoured nation clause in most BITs also drives
convergence in treaty interpretation. Moreover, arbitral tribunals have
constantly drawn upon earlier cases – which, albeit not binding, consti-
tute persuasive precedents – leading to the coalescence of a jurisprudence
constante.55 This section briefly examines this common lexicon of
investment treaty law.56
Typically, after defining foreign investors and their investments, IIAs
include provisions on non-discrimination (both national treatment and
most favoured nation treatment), minimum standards, and fair and
equitable treatment. Other common provisions in investment treaties
concern the repatriation of profits and other investment-related funds or
the promise to freeze the existing regulatory regime for the duration of
the investment (stabilization clauses). A small number of investment
treaties also include provisions prohibiting certain forms of performance
requirements – i.e. obligations on investors to act in ways considered

53
J.E. Alvarez, ‘The Return of the State’ (2011) 20 Minnesota JIL 223–64.
54
C. McLachlan, ‘The Principle of Systemic Integration and Article
31(3)(c) of the Vienna Convention’ (2005) 54 ICLQ 279–320.
55
See F.G. Sourgens, ‘Law’s Laboratory: Developing International Law on
Investment Protection as Common Law’ (2014) 34 Northwestern JIL & Business
181–247 (providing a theory of persuasive precedent in investor–state arbitra-
tion); A.K. Bjorklund, ‘Investment Treaty Arbitral Decisions as Jurisprudence
Constante’, in C. Picker, I. Bunn and D. Arner (eds), International Economic
Law: The State and Future of the Discipline (Hart Publishing 2008) 265–80. But
see G. Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’
(2007) 23 Arbitration International 357–78; Z. Douglas, ‘Can a Doctrine of
Precedent be Justified in Investment Arbitration?’ (2010) 25 ICSID Review –
FILJ 104–110.
56
C. McLachlan, L. Shore and M. Weiniger, International Investment
Arbitration (OUP 2007) 6.

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10 Proportionality, reasonableness and standards of review

beneficial for the host economy, mostly relating to local content, joint
ventures, technology transfer and employment of nationals.
Protection against unlawful expropriation and guarantees of compen-
sation in the event of nationalization, expropriation or indirect expropri-
ation constitute the core of investment treaties. In general terms, states
can expropriate private property; such expropriations are lawful provided
certain conditions are met.57 For instance, according to Article 1110 of
the North American Free Trade Agreement (NAFTA):

No Party may directly or indirectly nationalize or expropriate an investment

of an investor of another Party in its territory or take a measure tantamount to
nationalization or expropriation of such an investment, except: (a) for a public
purpose; (b) on a non-discriminatory basis; (c) in accordance with due process
of law and Article 1105(1); and (d) on payment of compensation.58

The concept of expropriation is broadly construed in investment treaties

that not only protect foreign assets from the direct and full taking of
property, but also from de facto or indirect expropriation. Indirect
expropriation refers to measures that do not directly take investment
property, but that interfere with its use, depriving the owner of its
economic benefit.59 Interference in the use of property or with the
enjoyment of its benefits can constitute indirect expropriation even where
the property has not been seized and the legal title of the property has not
been affected.60 If a host state targets a foreign investor by imposing very
high taxes or regulatory requirements that may make the foreign invest-
ment economically unviable, this can constitute an indirect expropriation.
In particular, the central question raised by the so-called indirect
expropriation is how to draw the line between legitimate regulations that
do not give rise to compensation and regulatory takings that do.61 States
have an inherent right to regulate domestic affairs, including business
activities.62 Moreover, due to the rise of international treaties, ‘states are

57
P. Comeaux and N. Kinsella, Protecting Foreign Investment under Inter-
national Law (Oceana Publications 1997) 77–8.
58
NAFTA, Article 1110.
59
B. Stern, ‘In Search of the Frontiers of Indirect Expropriation’, in
A. Rovine (ed.), Contemporary Issues in International Arbitration and Mediation
(Martinus Nijhoff 2008) 29–51.
60
Starrett Housing Corp. v. Iran, 16 Iran–US CTR (1983) 112, 154.
61
V. Lowe, ‘Regulation or Expropriation?’ (2002) 55 Current Legal Prob-
lems 447–66.
62
ADC Affiliate Ltd and ADC & ADMC Management Ltd v. Hungary,
ICSID No. ARB/03/16, Award, 2 October 2006, para. 423.

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International investment law as a field of international law 11

increasingly becoming subject to international obligations that require

[them] to regulate’.63 There is no settled approach to cases where
investors allege that certain regulatory measures constitute a compensable
form of expropriation. Thus, as Professor Schreuer points out, today, the
most difficult question for an arbitrator faced with an allegation of
expropriation is not so much whether the requirements for a legal
expropriation have been met, but whether there has been an expropriation
in the first place.64
Because IIAs include vague standards of investment protection, they do
not give arbitral tribunals ‘clear guidance as to the scope of obligations
assumed under the treaties’.65 Such vagueness can be an added value as it
can ‘accommodate new facts that the lawmaker might not be able to
foresee or some valuable aims that might be involved in the situation’.66
Moreover, ‘too detailed a regulation might be difficult, if not impossible, to
apprehend and apply’.67 Therefore, some vagueness ‘leav[es] some room
for adjustment when necessary and avoid[s] unnecessary complexity’.68
However, such vagueness has raised the question as to whether criteria
such as proportionality and reasonableness can help the arbitrators to
interpret and apply investment treaty provisions.

1.3 INVESTOR–STATE ARBITRATION

Investor–state arbitration has moved ‘from a matter of peripheral aca-
demic interest to a matter of vital international concern’.69 Since the
1980s, investor–state arbitration has become a standard feature in inter-
national investment treaties for the settlement of disputes that arise

63
S. Olynyk, ‘A Balanced Approach to Distinguishing Between Legitimate
Regulation and Indirect Expropriation in Investor-State Arbitration’ (2012) 15
International Trade and Business LR 254–96.
64
C. Schreuer, ‘The Concept of Expropriation under the ETC and other
Investment Protection Treaties’ (2005) 2 TDM 1–10.
65
S.W. Schill, ‘Enhancing International Investment Law’s Legitimacy: Con-
ceptual and Methodological Foundations of a New Public Law Approach’ (2011)
52 Virginia JIL 57–102, 66–7.
66
F.J. Urbina, ‘A Critique of Proportionality’ (2012) 57 American Journal
of Jurisprudence 49–80, 63.
67
Ibid.
68
Ibid.
69
S.D. Franck, ‘Development and Outcomes of Investment Treaty Arbitra-
tion’ (2009) 50 Harvard ILJ 435–89, 435.

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12 Proportionality, reasonableness and standards of review

between the foreign investor and the host state.70 Under this mechanism,
foreign investors may bring claims against the host state before inter-
national arbitral tribunals. This differs from the traditional paradigm of
states as the only subjects of international law and the only ones having
the capacity to raise international claims against other states in legal
proceedings.71 Not only is the number of investment treaty arbitrations
continuously rising, reaching a total of 696 publicly known cases by the
end of 2015,72 but the high profile of several investment disputes in key
areas has caused investor–state arbitration to attract the sustained interest
of policy makers, scholars and the public at large. Investor–state arbitra-
tion is a truly global phenomenon: 124 states were sued via investor–state
arbitration between 1990 and 201473 and ‘investors from over 70
countries have filed investment arbitrations representing increasingly
diversified industries’.74
Investor–state arbitration depoliticizes disputes between foreign invest-
ors and the host states.75 It constitutes a rule-based dispute-settlement
mechanism for resolving investment disputes76 that shield such disputes
from power politics77 and insulates them from the diplomatic relations
between states.78 The depoliticization of investment disputes benefits:
(1) foreign investors; (2) the host state; and (3) the home state.79 First,
foreign investors no longer have to rely on the vagaries of diplomatic
protection;80 they no longer depend on the discretion of their home states
as to whether a claim can be raised against another state.81 Rather, they

70
D. Sedlak, ‘ICSID’s Resurgence in International Investment Arbitration:
Can the Momentum Hold?’ (2004) 23 Penn State International LR 147–71.
71
A. Newcombe and L. Paradell, Law and Practice of Investment Treaties
(Kluwer Law International 2009) 44–5.
72
UNCTAD, World Investment Report 2016, 104.
73
R. Wellhausen, ‘Recent Trends in Investor–State Dispute Settlement’
(2016) 7 JIDS 117–35, 126.
74
Dupont and Schultz, ‘Towards a New Heuristic Model’, 22.
75
S. Puig, ‘No Right without a Remedy: Foundations of Investor–State
Arbitration’ (2013–2014) 35 University of Pennsylvania JIL 829–61, 848.
76
Ibid.
77
Ibid. 853.
78
S. Puig, ‘Recasting ICSID’s Legitimacy Debate: Towards a Goal-Based
Empirical Agenda’ (2013) 36 Fordham ILJ 465–504, 485–7.
79
A. Roberts, ‘Triangular Treaties: The Extent and Limits of Investment
Treaty Rights’ (2015) 56 Harvard ILJ 353–417, 390.
80
Puig, ‘No Right without a Remedy’, 844.
81
M. Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer
Law International 2000) 61–84.

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International investment law as a field of international law 13

can bring direct claims and make strategic choices in the conduct of the
proceedings.82 In this regard, investor–state arbitration can facilitate
access to justice for foreign investors83 and provides a neutral forum for
the settlement of investment disputes.84 It is perceived to be necessary to
render meaningful the more substantive investment treaty provisions.85
Second, the depoliticization of investment disputes protects the host
state,86 by reducing the interference of the home country in the domestic
affairs of the host state. It prevents or ‘limit[s] unwelcome diplomatic,
economic and perhaps military pressure from strong states whose nation-
als believe they have been injured’.87 Third, the depoliticization of
investment disputes also protects the home state in that it no longer has
‘to become embroiled in investor–state disputes’.88
While investor–state arbitration has become increasingly popular
among investors, and the number of investment treaty arbitrations has
grown significantly, the regime has attracted criticism by scholars, states
and society. The principal concern is that international investment law
and arbitration can adversely affect state regulatory autonomy in import-
ant public policy-related fields, and even prevent regulation in such fields
(the so-called regulatory chill).89 Some scholars contend that the invest-
ment regime is facing a ‘legitimacy crisis’.

1.4 THE ‘LEGITIMACY CRISIS’ OF INTERNATIONAL

INVESTMENT LAW
Is international investment law and arbitration facing a ‘legitimacy
crisis’? A multidimensional concept used in different fields of study,
legitimacy indicates the acceptance of a legal system.90 A system is

82
Puig, ‘Recasting ICSID’s Legitimacy Debate’, 485.
83
F. Francioni, ‘Access to Justice, Denial of Justice and International
Investment Law’ (2009) 20 EJIL 729–47.
84
Puig, ‘No Right without a Remedy’, 846.
85
T. Wälde, ‘The “Umbrella” (or Sanctity of Contract/Pacta sunt Servanda)
Clause in Investment Arbitration’ (2004) 1 TDM 1–13.
86
Roberts, ‘Triangular Treaties’, 389–90.
87
J. Pauwelyn, ‘At the Edge of Chaos? Foreign Investment Law as a
Complex Adaptive System’ (2014) 29 ICSID Review 372–418, 404.
88
Roberts, ‘Triangular Treaties’, 390.
89
G. Van Harten and D.N. Scott, ‘Investment Treaties and the Internal
Vetting of Regulatory Proposals: A Case Study from Canada’ (2016) 7 JIDS
92–116.
90
J.M. Coicaud, Legitimacy and Politics (CUP 2002) 10.

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14 Proportionality, reasonableness and standards of review

considered to be legitimate when it operates in a manner that is

consistent with widely held values, norms and beliefs. The legitimacy of
the international legal system in general and the investment treaty regime
in particular has been discussed intensively.91 Scholars have questioned
whether international (investment) law lacks input legitimacy, criticizing
how arbitrators are selected, the procedures by which arbitral awards are
rendered and the power exercised.92 They have questioned whether
international investment law lacks output legitimacy, that is, reasonable
performance.93 They have also questioned whether international (invest-
ment) law has yielded to power struggles, neglected non-economic
interests in favour of economic ones and privileged foreign investors over
states.94
Legitimacy concerns relate to both substantive and procedural aspects
of the investment regime.95 From a substantive perspective, international
investment law in general, and investor–state arbitration in particular, are
seen as having an increasing impact on sovereign policy objectives.96
States sign and ratify IIAs to attract FDIs and promote (sustainable)
development.97 However, they do not surrender their ability to govern.98
Yet, investment arbitrations can (and have) touch(ed) upon key public

91
On the legitimacy of international investment law see e.g. D. Schneider-
man, ‘Legitimacy and Reflexivity in International Investment Arbitration: A New
Self-Restraint?’ (2011) 2 JIDS 471–95; C.N. Brower and S.W. Schill, ‘Is
Arbitration a Threat or a Boom to the Legitimacy of International Investment
Law?’ (2008) Chicago JIL 471–98.
92
J. Bonnitcha, L.N. Skovgaard Poulsen and M. Waibel, The Political
Economy of the Investment Treaty Regime (OUP 2017) Ch. 9.
93
Ibid.
94
R. Wolfrum, ‘Legitimacy of International Law from a Legal Perspective:
Some Introductory Considerations’, in R. Wolfrum and V. Roeben (eds), Legitim-
acy in International Law (Springer 2008) 1–24, 2.
95
D.D. Caron, ‘Investor–State Arbitration: Strategic and Tactical Perspec-
tives on Legitimacy’ (2009) 32 Suffolk Transnational LR 513–24, 514–15.
96
Guntrip, ‘Self-determination and Foreign Direct Investment’, 829–30.
97
G. Scelle, ‘Essai sur les sources formelles du droit international’, in
Recueil d’Etudes sur les sources du droit en l’honneur de François Gény (vol.
III) (Sirey 1934) 400–430, 410 (highlighting the dédoublement fonctionnel of
states).
98
C.M. Ryan, ‘Meeting Expectations: Assessing the Long-Term Legitimacy
and Stability of International Investment Law’ (2008) 29 University of Pennsyl-
vania JIL 725–62, 752.

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International investment law as a field of international law 15

interests, ranging from access to water99 to tobacco control,100 and from

environmental protection101 to cultural heritage management.102 As a
result, both scholars and practitioners contend that international invest-
ment law and arbitration is constraining the regulatory autonomy of the
state.103 Concerns have arisen that IIAs ‘become a charter of rights for
foreign investors, with no concomitant responsibilities or liabilities, no
direct legal links to promoting development objectives, and no protection
for public welfare in the face of environmentally or socially destabilizing
foreign investment’.104
Alongside these substantive concerns, several procedural factors feed
into the perception of a legitimacy crisis. Investor–state tribunals are
constituted ad hoc, under different arbitral rules. The fact that arbitrators
are untenured can fuel the perception of conflicts of interest within or
between arbitral tribunals. While the selection of arbitrators can lead to
requests for disqualification, such requests are rarely successful, fuelling
a presumption of bias. There is no appellate court to ensure consistency
in their rulings. Inconsistent awards have caused concern,105 leaving
many observers with the impression that international investment arbitra-
tion lacks coherence.106 Lack of transparency may preclude public
awareness of the very existence of investor–state arbitrations. Forum-
shopping – either by using the most-favoured-nation (MFN) clause, or by

99
See A.M. Daza-Clark, International Investment Law and Water Resources
Management (Brill 2016).
100
See V. Vadi, Public Health in International Investment Law and Arbitra-
tion (Routledge 2012).
101
See J.E. Viñuales, Foreign Investment and the Environment in Inter-
national Law (CUP 2012).
102
See V. Vadi, Cultural Heritage in International Investment Law and
Arbitration (CUP 2014).
103
See generally M. Waibel, A. Kaushal, K.-H.L. Chung and C. Balchin,
‘The Blacklash against Investment Arbitration: Perceptions and Reality’, in
M. Waibel, A. Kaushal, K.-H.L. Chung and C. Balchin (eds), The Blacklash
against Investment Arbitration: Perceptions and Reality (Kluwer Law Inter-
national 2010) xxxviii.
104
H. Mann, ‘The Right of States to Regulate and International Investment
Law: A Comment’, in UNCTAD, The Development Dimension of FDI: Policy
and Rule-Making Perspectives (UN 2003) 212–23.
105
Compare Lauder v. Czech Republic, UNCITRAL, Final Award, 3 Septem-
ber 2001 and CME Czech Republic BV v. Czech Republic, UNCITRAL, Partial
Award, 13 September 2001 and Final Award, 14 March 2003.
106
S. Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration:
Privatizing Public International Law through Inconsistent Decisions’ (2005) 73
Fordham LR 1521–625, 1537–8.

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16 Proportionality, reasonableness and standards of review

corporate restructuring in order to be protected by a given IIA – risks

altering ‘the delicate equilibrium between the complainant’s freedom of
choice … and protection to the defendant’, in addition to increasing the
risk of conflicting awards.107
In response to growing unrest about the international investment law
regime, states have increasingly felt the need to protect their regulatory
space and to limit arbitral discretion. While a few developing countries
withdrew from the ICSID system,108 other countries moved away from
the Energy Charter Treaty. While several countries terminated existing
IIAs,109 others omitted investor–state arbitration from the provisions of
their treaties.110 Finally, several states are revising their model BITs,
reducing the level of protection provided by such templates, and expand-
ing the scope of exception clauses.111 States have also shown growing
reluctance to comply with orders and awards of investment tribunals.112
The ongoing debate as to the perceived legitimacy of the international
investment regime highlights the need for some rethinking of the system.
Such debate has both evolutionary and revolutionary potential.113 On the
one hand, evolutionary approaches assume that the international invest-
ment regime is experiencing growth pains, but many legitimacy concerns
‘can be resolved over time’.114 Evolutionary approaches rely on the
traditional tools of treaty interpretation to fine tune international invest-
ment law to emerging circumstances. On the other hand, revolutionary
approaches assume that the overall structure of the international invest-
ment regime is deeply flawed and requires some major reforms.115
Revolutionary approaches suggest, inter alia, returning to state-to-state

107
L.E. Salles, Forum Shopping in International Adjudication (CUP 2014)
46.
108
See S. Ripinsky, ‘Venezuela’s Withdrawal from ICSID: What it Does and
Does Not Achieve’, ITN, 13 April 2012 (noting that Bolivia, Ecuador and
Venezuela have withdrawn from the ICSID Convention).
109
T. Voon and A.D. Mitchell, ‘Denunciation, Termination and Survival: The
Interplay of Treaty Law and International Investment Law’ (2016) 31 ICSID
Review 413–33.
110
J. Kurtz, ‘Australia’s Rejection of Investor–State Arbitration: Causation,
Omission and Implication’ (2012) 27 ICSID Review 65–86.
111
Ryan, ‘Meeting Expectations’, 761.
112
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 64.
113
D. Behn, ‘Legitimacy, Evolution, and Growth in Investment Treaty
Arbitration: Empirically Evaluating the State of the Art’ (2015) 46 Georgetown
JIL 363–415, 369.
114
Ibid.
115
Ibid.

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International investment law as a field of international law 17

dispute resolution, the introduction of an appeals body to review arbitral

awards, and the institution of a permanent World Investment Court.116
The use of concepts such as proportionality, reasonableness and
standards of review in international investment law and arbitration can
simultaneously belong to both evolutionary and revolutionary scenarios.
On the one hand, de lege lata, proportionality, reasonableness and
standards of review can be seen as jurisprudential techniques to interpret
vague investment treaty provisions and balance private and public
interests in investor–state arbitration. Some even argue that proportional-
ity and reasonableness are general principles of international law, and
therefore can be applied as sources of law within investment arbitra-
tion.117 On the other hand, de lege ferenda, proportionality, reasonable-
ness and standards of review can be inserted in the text of IIAs.118
In both evolutionary and revolutionary scenarios, legitimacy concerns
do not play only a negative role indicating dissatisfaction with how the
system works. They can also have a positive function in that they can be
perceived as tools to strengthen the system’s perceived legitimacy by
raising important issues, stimulating debate and spurring novel
approaches.119 They should be taken into account to allow the investment
treaty system to develop properly. Whether states will opt for evolution-
ary or revolutionary approaches to the system remains to be seen.

1.5 THE DIFFERENT CONCEPTUALIZATIONS OF

INVESTMENT TREATY ARBITRATION
International investment law and arbitration oscillates between national
and international law, and private and public law, historically ‘borrowing
elements from different legal structures’.120 Given its hybrid features,
international investment law and arbitration has been considered to be a
system of its own kind and has been analogized to different legal
systems, including international commercial arbitration, public law and
international law (and within the latter, principally, albeit not exclusively,

116
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 168 (list-
ing the various institutional reform proposals but endorsing evolutionary
approaches).
117
See Chapter 3 and 4 below.
118
For instance, different parts of the CETA refer to proportionality. See e.g.
Article 8.39.5 of CETA (on the adjustment of costs).
119
Ryan, ‘Meeting Expectations’, 761.
120
Puig, ‘Recasting ICSID’s Legitimacy Debate’, 479.

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18 Proportionality, reasonableness and standards of review

WTO law and human rights law).121 These analogies are heuristic models
used to better understand international investment law and arbitration,
and to make sense of the related available knowledge. These analogies
are descriptive in nature, and reflect and emphasize some aspects of the
system rather than others.
However, far from having a purely theoretical character, the selection
of the appropriate analogy is a struggle for the soul of international
investment law. In this respect, the appropriate analogy does not merely
concern the form, methods and procedure, but also the substance, aims
and objectives of international investment law. The debate on the
appropriate analogy is a struggle for interpretive power, with the resulting
ability to impose a predominant discourse and tame divergent narratives.
As Schill aptly points out, ‘a culture clash of different epistemic
communities’ is taking place, ‘because private commercial and public
international lawyers often have different perspectives on, and different
philosophies about, the role of law, the state, and the function of dispute
resolution’.122
The outcome of this debate is important because it will likely influence
the evolution of the field. Not only can analogies explain the past and
present of international investment law and arbitration, but they can also
shape its future. While different analogies compete for describing and
explaining international investment law and arbitration, they can (and
have) facilitate(d) the transplantation of concepts from given legal fields
to the investment regime.123
This section illuminates the way international investment law and
arbitration has been compared to other systems such as international
commercial arbitration, public law adjudication and international law.
Within international law, it also examines how international investment
law has been analogized to human rights law and WTO law. After
highlighting the promises and pitfalls of such comparisons, the section
briefly concludes that comparisons are not neutral, and that the selection
of the comparator often depends on the perspective of who draws the

121
See generally V. Vadi, Analogies in International Investment Law and
Arbitration (CUP 2016); A. Roberts, ‘Clash of Paradigms: Actors and Analogies
Shaping the Investment Treaty System’ (2013) 107 AJIL 45–94; V. Vadi, ‘Critical
Comparisons: the Role of Comparative Law in Investment Treaty Arbitration’
(2010) 39 Denver JIL & Policy 67–100.
122
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 72.
123
For an analogous argument in relation to other legal fields, see S. Roy,
‘Privileging (Some Forms of) Interdisciplinarity and Interpretation: Methods in
Comparative Law’ (2014) 12 IJCL 786–807, 787.

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International investment law as a field of international law 19

analogy. At the same time, analogies are useful epistemic tools to study
the international investment regime and identify trajectories of the field.
They also enable scholars and practitioners to better contextualize the
debate on the use of criteria such as proportionality, reasonableness and
standards of review in international investment law and arbitration.

1.5.1 The Commercial Law Paradigm

Because of the procedural rules that govern it, investor–state arbitration

has been analogized to commercial arbitration.124 Arbitrators are
appointed by the parties and/or an appointing institution; most hearings
are held behind closed doors. The parties select the applicable law, and
there is no appeal mechanism. Awards rendered against host states are, in
theory, readily enforceable against host state property worldwide, due to
the widespread adoption of the New York125 and Washington Conven-
tions,126 which provide for the prompt enforceability of foreign arbitral
awards and ICSID awards respectively. The awards have only limited
avenues for revision and cannot be amended by the domestic courts.127
Furthermore, ICSID arbitrations are wholly exempted from the super-
vision of local courts, with awards being subject only to an internal
annulment process.128 The grounds for annulment are narrow and con-
cern due process issues: i.e. the tribunal was not properly constituted; it
manifestly exceeded its powers; there was corruption on the part of a
member; there was a fundamental serious departure from a procedural
rule; or the award did not state the reasons on which it was based.
The procedural features of investor–arbitration can be explained in
light of the origins of the system.129 For a long time, most investment
disputes had a commercial nature; and both home and host states

124
N. Blackaby, ‘Investment Arbitration and Commercial Arbitration (or the
Tale of the Dolphin and the Shark)’, in J.D.M. Lew and L. Mistelis (eds),
Pervasive Problems in International Arbitration (Kluwer Law International
2006) 217–33.
125
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (New York Convention) 10 June 1958, 330 UNTS 38.
126
Convention on the Settlement of Investment Disputes between States and
Nationals of Other States, Washington DC, 18 March 1965, in force 14 October
1966, 575 UNTS 159.
127
New York Convention, Article V.
128
ICSID Convention, Article 53.
129
Pauwelyn, ‘At the Edge of Chaos?’, 408.

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20 Proportionality, reasonableness and standards of review

preferred to keep the dispute behind closed doors.130 Nowadays, invest-

ment disputes include not only contract but treaty claims and relate to a
wide variety of state conduct, ranging from its commercial behaviour to
regulation.131 Yet, ‘as much as the types of claims and disputes changed,
the method of settling these disputes remained the same’.132 The com-
mercial arbitration perspective emphasizes the private law aspects of
investor–state arbitration, such as party autonomy and party equality.133
However, ‘investment treaty arbitration differs from international com-
mercial arbitration in several regards, namely the subject matter of the
disputes [and] the relationship of the parties’.134 While commercial
arbitration generally involves private parties and concerns disputes of a
commercial nature, investor–state arbitration involves states and private
actors and may concern disputes of a public law nature.135 As investment
treaty arbitrations are often regulatory disputes, the resulting awards
‘may directly affect the social fabric of the host state’.136 Moreover,
‘investment treaty arbitration affects third parties and their behavior
intensely, as the outcome of arbitrations … not only affect future
interpretations of similar standards and shape the expectations of invest-
ors and states about the decision-making of tribunals, but also affect
investment treaty making’.137

1.5.2 The Public Law Paradigm

International investment law has been conceptualized as being akin to

domestic public law, because of functional analogy.138 Like domestic
public law, international investment law governs ‘the relation of private

130
Ibid.
131
Ibid.
132
Ibid.
133
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 72.
134
Ibid. 75.
135
See J. Paulsson, ‘International Arbitration is not Arbitration’ (2008) 2
Stockholm International Arbitration Review 1–20.
136
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 76.
137
Ibid. 85.
138
G. Van Harten, Investment Treaty Arbitration and Public Law (OUP
2007); S. Montt, State Liability in Investment Treaty Arbitration: Global Consti-
tutional Law and Administrative Law in the BIT Generation (Hart Publishing
2009); A. Kulick, Global Public Interest in International Investment Law (CUP
2012); S.W. Schill, ‘International Investment Law and Comparative Public Law:
An Introduction’, in S.W. Schill (ed.), International Investment Law and Com-
parative Public Law (OUP 2010) 3–38.

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International investment law as a field of international law 21

economic actors and governmental power’.139 In the same way that

domestic public law protects private property, prohibits discrimination
and endorses rule of law standards for the treatment of private interests,
international investment law provides for the protection of foreign direct
investments, prohibits discrimination and ‘endorse[s] rule of law stand-
ards for the treatment of foreign investors by states’.140
While investment treaty arbitration structurally resembles a private
model of adjudication, substantively, it gives arbitrators a comprehensive
jurisdiction over what are essentially regulatory disputes.141 Adjudication
over a state’s acta jure imperii implies a significant departure from the
conventional use of international commercial arbitration.142 Arbitral
awards ultimately shape the relationship between a state, on the one
hand, and private individuals, on the other,143 determining matters such as
the legality of governmental activity, the degree to which individuals
should be protected from regulation, and the appropriate role of the
state.144 Many of the recent arbitral awards have concerned the determin-
ation of the appropriate boundary between two conflicting values: the
legitimate sphere for state regulation in the pursuit of public goods; and
the protection of foreign investment from state interference.
The public law perspective views international investment law and
arbitration as constraining the exercise of state power vis-à-vis private
interests.145 It considers the international investment regime as governing
the transnational relationship between foreign investors and the host
state, rather than international relations among states.146 It encourages
arbitral tribunals to interpret and apply vague investment treaty pro-
visions ‘expan[ding] public law thinking within the existing structure of
investment treaty arbitration itself’.147 Proponents of the public law
perspective recommend using public law concepts such as proportionality

139
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 60.
140
Ibid. 59.
141
G. Van Harten, ‘The Public–Private Distinction in the International
Arbitration of Individual Claims against the State’ (2007) 56 ICLQ 371–94, 371.
142
Z. Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’
(2003) 74 BYIL 151–289, 221–2.
143
Van Harten, Investment Treaty Arbitration and Public Law, 70.
144
M. Sornarajah, ‘The Clash of Globalizations and the International Law on
Foreign Investment’ (2003) 12 Canadian Foreign Policy 1–32, 17.
145
C.E. Foster, ‘A New Stratosphere? Investment Treaty Arbitration as
“Internationalized Public Law”’ (2015) 64 ICLQ 461–85, 463.
146
Ibid.
147
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 57.

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22 Proportionality, reasonableness and standards of review

in investor–state arbitration148 ‘to guide the interpretation of investment

treaties, to understand the role and powers of investment treaty tribunals,
and to develop suggestions for legal reform’.149 Moreover, comparative
public analysis can be used to identify general principles of law, which
are a source of international (investment) law according to Article
38(1)(c) of the Statute of the International Court of Justice.150
The literature advancing a public law approach to international invest-
ment law and arbitration ‘has been invaluable in generating an awareness
… that investment disputes are public in character’.151 It has also
highlighted the important linkage between comparative law and inter-
national law in the genesis of general principles of international law. It
has contributed to bringing international investment law to the forefront
of international legal debate.
However, ‘international investment law remains an international dis-
cipline that is detached from the domestic public law of any one state’.152
Public law approaches risk ‘confusing resemblance with equivalence’.153
The fact that investor–state arbitration is analogous to judicial review
does not mean that it is judicial review.154 Arbitral tribunals have
narrower remedies than constitutional courts.155 Arbitral tribunals rarely
award restitution; rather, they award compensation and damages.156
While public law approaches emphasize the role of states as trustees of
their population’s well-being, they risk neglecting the fact that states
‘have certain basic obligations toward the rest of humanity’ under public
international law,157 thus overlooking ‘the power of international law to
advance international public policy in economic and non-economic

148
B. Kingsbury and S. Schill, ‘Public Law Concepts to Balance Investors’
Rights with State Regulatory Actions in the Public Interest: The Concept of
Proportionality’, in S. Schill (ed.), International Investment Law and Compara-
tive Public Law (OUP 2010) 75–105.
149
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 60.
150
Ibid. 89.
151
Foster, ‘A New Stratosphere?’, 462.
152
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 86.
153
J.E. Alvarez, ‘Is Investor–State Arbitration Public?’ (2016) 7 JIDS
534–76, 545.
154
Ibid.
155
Ibid.
156
B. Sabahi, Compensation and Restitution in Investor–State Arbitration
(OUP 2011) 91.
157
E. Benvenisti, ‘Sovereigns as Trustees of Humanity: On the Accountabil-
ity of States to Foreign Stakeholders’ (2013) 107 AJIL 295–333, 308.

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International investment law as a field of international law 23

spheres in an integrated and coordinated way’.158 The public law

approach risks increasing the fragmentation of international law and
diluting its universality.159 Finally, by mandating the adoption of public
law analogies and the migration of constitutional ideas from the domestic
sphere to the international realm, there is a risk of neglecting the cultural
background of such concepts and their suitability to public international
law in general and international investment law in particular.160 There-
fore, international law scholars have argued that while investor–state
arbitration has public law features, it remains ‘a creature of public
international law’.161

1.5.3 The International Law Paradigm

International investment law and arbitration is a subfield of public

international law.162 International investment agreements are international
law treaties. Not only do investment treaty obligations ‘apply irrespective
of internal law’,163 but, as Crawford suggests, ‘[i]nvestment law … is
about the way in which we bring the state under some measure of
control, which is the main aspiration of general international law’.164 The
limited powers available to states to review arbitral awards confirm the
primacy of international law obligations over national law.
International investment law ‘borrows important legal infrastructure
from international law’.165 International law governs the interpretation
and application of investment treaties, including the jurisdiction, com-
petence and powers of arbitral tribunals.166 Like other international courts
and tribunals, arbitral tribunals have to settle disputes in conformity with

158
Foster, ‘Investment Treaty Arbitration as Internationalized Public Law’,
481.
159
Ibid.
160
Vadi, Analogies in International Investment Law and Arbitration,
195–207.
161
Alvarez, ‘Is Investor–State Arbitration Public?’, 540.
162
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 73.
163
Alvarez, ‘Is Investor–State Arbitration Public?’, 566.
164
J. Crawford, ‘International Protection of Foreign Direct Investment:
between Clinical Isolation and Systematic Integration’, in R. Hofmann and C.J.
Tams (eds), International Investment Law and General International Law: From
Clinical Isolation to Systemic Integration? (Nomos 2011) 17–28, 22.
165
Puig, ‘Recasting ICSID’s Legitimacy Debate’, 480.
166
Ibid.

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24 Proportionality, reasonableness and standards of review

international law.167 Customary rules of treaty interpretation, as restated

by the Vienna Convention on the Law of Treaties, and in particular
Article 31(3)(c), enable ICSID arbitrators to take into account other
international law regimes when interpreting an IIA.168
Considering international investment law and arbitration as a subfield
of international law means that IIAs are viewed as contributing to the
governance of international relations between states.169 In parallel, such
an approach ‘brings with it the expectation that legal relations between
states will serve as vehicles for carrying forward … international public
policies for economic, social, cultural, health, environmental and vital
related purposes’.170 Within public international law, economic aims and
objectives ‘are pursued as only one dimension of an integrated set of
public policies’.171
In order to clarify and operationalize vague investment treaty pro-
visions, public international lawyers propose comparative reasoning,
drawing parallels between international investment law and other fields
of public international law that fulfill analogous functions in restraining
the exercise of state power vis-à-vis non-state actors. They propose
‘crossregime analysis, drawing, for example, on WTO or human rights
law’.172 For instance, private enforcement of international investment law
has been analogized to the private enforcement of human rights law; the
limited influence of states on the arbitral process has been analogized to
the limited influence that WTO member states have on the WTO
dispute-settlement proceedings. Not only can such an approach ‘ensure
cross regime consistency’ and defragment the fragmentation of inter-
national law ‘by stressing commonalities and openness of international
investment law towards other international regimes’, but it can also
reinforce the perceived legitimacy of the international investment
regime.173

167
C. McLachlan, ‘Investment Treaties and General International Law’
(2008) 57 ICLQ 361–401; S.W. Schill, ‘System-Building in Investment Treaty
Arbitration and Lawmaking’ (2011) 12 German LJ, 1083–1110, 1088.
168
Alvarez, ‘A New Stratosphere? Is Investor–State Arbitration Public?’,
548, 560.
169
Foster, ‘Investment Treaty Arbitration as Internationalized Public Law’,
463.
170
Ibid.
171
Ibid. 473.
172
Schill, ‘Enhancing International Investment Law’s Legitimacy’, 88.
173
Ibid. 88.

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International investment law as a field of international law 25

Even accepting the theoretical merit of comparative reasoning in a

developing field such as international investment law and arbitration, in
practice, international lawyers must be mindful that analogies are not
neutral, and the selection of the given comparator can have significant
implications on the field.174 Within the matrix of international law, some
specific analogies are drawn between international investment law and
human rights law, on the one hand, and between international investment
law and international trade law, on the other.

1.5.3.1 Human rights law

Human rights law and international investment law are often juxtaposed
for both substantive and procedural reasons.175 At the substantive level,
human rights law and international investment law provide for analogous
standards of protection.176 Suffice it to mention that the following binary
standards are available under international investment law and human
rights law respectively: denial of justice and the right to a fair trial; full
protection and certain aspects of the rights to privacy, liberty and life;
expropriation and the right to property; fair and equitable treatment and
due process; national treatment and non-discrimination.177
At the procedural level, access to investor–state arbitration shares
many characteristics of the direct right of action before human rights
courts.178 While states are the traditional subjects of international law,
both human rights law and international investment law empower indi-
viduals to bring claims against states before international courts and
tribunals. Both branches of international law are characterized by a

174
Vadi, ‘Critical Comparisons’, 100 (‘comparisons are not a neutral or
objective phenomenon’).
175
See generally U. Kriebaum and C. Schreuer, ‘The Concept of Property in
Human Rights Law and International Investment Law’, in S. Breitenmoser (ed.),
Liber Amicorum Luzius Wildhaber: Human Rights Democracy and the Rule of
Law (Nomos 2007) 743–62. See also C. Tomuschat, ‘The European Court of
Human Rights and Investment Protection’, in C. Binder, U. Kriebaum,
A. Reinisch and S. Wittich (eds), International Investment Law for the 21st
Century: Essays in Honour of Christoph Schreuer (OUP 2009) Ch. 34.
176
See M. Paparinskis, ‘Analogies and Other Regimes of International Law’,
in Z. Douglas, J. Pauwelyn and J.E. Viñuales (eds), The Foundations of
International Investment Law: Bringing Theory into Practice (OUP 2014) Ch. 3.
177
Ibid.
178
C. Reiner and C. Schreuer, ‘Human Rights and International Investment
Arbitration’, in P.-M. Dupuy, F. Francioni and E.-U. Petersmann (eds), Human
Rights in International Investment Law and Arbitration (OUP 2008) 82–96.

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26 Proportionality, reasonableness and standards of review

bottom-up approach to dispute settlement, which make them very

dynamic fields of study.
However, international investment law and human rights law have
different aims and objectives, as well as different substantive and
procedural features.179 Such differences discourage making any broad
analogies. While international investment law aims at promoting (sustain-
able) development, international human rights law aims at protecting,
promoting and fulfilling human rights. While international investment
law primarily pursues economic objectives, international human rights
law pursues other values. Obligations under international investment law
are bilateral and reciprocal; obligations under human rights law are erga
omnes and do not rely on reciprocity.180 This does not mean that there
may not be some forms of meaningful overlap, as economic development
can be a factor in human well-being.
The procedural requirements for having access to investment treaty
arbitration differ considerably from those for having access to human
rights courts. For instance, in human rights law, the exhaustion of local
remedies is a procedural requirement for the admissibility of a claim. By
contrast, in international investment law, the exhaustion of local remedies
is required only with regard to denial of justice claims – i.e. the claimant
cannot invoke denial of justice without prior exhaustion of local rem-
edies. However, the exhaustion of local remedies may not be necessary
for other investment treaty claims; rather, it may be precluded by the
fork-in-the-road provision. This provision allows the investor to select the
desired venue for filing his/her claim, but precludes subsequent recourse
to other dispute-settlement mechanisms. Therefore, arbitral tribunals do
not merely constitute an additional forum with respect to state courts (as
is the case for all international human rights courts), but they are also an
alternative to the latter.
While human rights instruments have advocated a human-rights-
sensitive interpretation of international investment agreements,181 it is
worth mentioning that such an approach can have a dual effect. On the

179
M. Hirsch, ‘Investment Tribunals and Human Rights: Divergent Paths’, in
P.-M. Dupuy, F. Francioni and E.-U. Petersmann (eds), Human Rights in
International Investment Law and Arbitration (OUP 2008) 97–114.
180
E. de Wet and J. Vidmar (eds), Hierarchy in International Law: The Place
of Human Rights (OUP 2012).
181
See e.g. Economic and Social Council, Commission on Human Rights,
Sub-commission on the Promotion and Protection of Human Rights, Report of
the High Commissioner for Human Rights, Trade and Investment, E/CN.4
/Sub.2/2003/9, 2 July 2003.

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International investment law as a field of international law 27

one hand, it can enhance the state’s right to regulate in the public interest,
thus restricting investors’ property rights. On the other hand, it can also
reinforce the protection of investors’ rights. For instance, a number of
regional human rights instruments protect property rights, and there is a
growing body of human rights jurisprudence involving the protection of
property rights. However, some scholars wonder whether arbitrators
would be able to apply human rights law in a way that is consistent with
the interpretation provided by human rights courts.182

1.5.3.2 WTO law

International investment law and international trade law are often viewed
as similar due to perceived substantive, sociological and procedural
commonalities.183 From a substantive perspective, the case for drawing
such an analogy is evident. Both regimes govern global economic
integration, promote transnational business, and aim to foster (sustain-
able) development.184 Both seek to overcome protectionism and limit
discrimination.185 Both are ‘branches of international economic law’.186
Moreover, certain international trade treaties present an articulated
regime that the investment treaties presuppose. For instance, the TRIMS,
the TRIPS and the GATS bring FDI into the trade fold.187 If international
investment law and international trade law are not yet merging,188 they

182
J.E. Alvarez, ‘Beware: Boundary Crossings – A Critical Appraisal of
Public Law Approaches to International Investment Law’ (2016) 17 JWIT
171–228, 214.
183
Vadi, Analogies in International Investment Law and Arbitration, 209.
184
Ibid.
185
But see N. DiMascio and J. Pauwelyn, ‘Non-Discrimination in Trade and
Investment Treaties: Worlds Apart or Two Sides of the Same Coin?’ (2008) 102
AJIL 48–89 (suggesting that while international investment law is about protect-
ing foreign investors and individual rights, international trade law is about
liberalization and state-to-state exchange of market opportunities).
186
D. McRae, ‘The World Trade Organization and International Investment
Law: Converging Systems – Can the Case for Convergence be Made?’ (2014) 9
Jerusalem Review of Legal Studies 13–23, 14.
187
Agreement on Trade-Related Investment Measures (TRIMS), 15 April
1994, Marrakesh Agreement Establishing the World Trade Organization, Annex
1A, 1868 UNTS 186; Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS), 15 April 1994, Marrakesh Agreement Establishing the
World Trade Organization, Annex 1C, 1869 UNTS 299; General Agreement on
Trade in Services (GATS), 15 April 1994, Marrakesh Agreement Establishing the
World Trade Organization, Annex 1B, 1869 UNTS 183.
188
S. Puig, ‘The Merging of International Trade and Investment Law’ (2015)
33 Berkeley JIL 1–59, 1.

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28 Proportionality, reasonableness and standards of review

certainly converge to a certain extent.189 From a sociological perspective,

Members of the WTO Appellate Body often sit on investor–state
arbitration.190
From a procedural perspective, arbitral tribunals and the WTO dispute-
settlement organs essentially share the same functions by settling inter-
national disputes in accordance with international economic law. WTO
panels, the Appellate Body, and arbitral tribunals are often asked to strike
a balance between economic and non-economic concerns. Disputes that
cross the boundary between the two regimes are increasing.191 Moreover,
analogizing international investment law to international trade law can
facilitate the cross-pollination of concepts and provide predictability.192
Given ‘the almost universal participation in the WTO’ of states that are
parties to IIAs, WTO law would be relevant in investor–state arbitration
under Article 31(3)(c) of the VCLT, which requires adjudicators to ‘tak[e]
into account, together with context … any relevant rules of international
law applicable in the relations between the parties’.193
However, there are significant institutional differences between the two
systems. While the WTO is an international organization administering a
‘cohesive multilateral system’, IIAs have a bilateral or regional scope and
almost never set up an organization.194 The very concept of ‘international
investment law is an academic systematization’ based on ‘a comparative
analysis’.195
The respective dispute-settlement mechanisms also differ. While only
states can file claims before the WTO panels and the Appellate Body,
foreign investors can pursue investor–state arbitration without any inter-
vention from the home state. After bringing trade disputes before ad hoc
panels, states can file appeals on matters of law before a permanent
Appellate Body. The WTO Appellate Body only reviews legal errors and
ensures consistency in interpretation. Instead, only rarely have appeals
mechanisms been included in IIAs. Annulment proceedings are limited to

189
J. Kurtz, The World Trade Organization and International Investment
Law: Converging Systems (CUP 2016).
190
Puig, ‘The Merging of International Trade and Investment Law’, 14.
191
Vadi, Analogies in International Investment Law and Arbitration.
192
L. Hsu, ‘Applicability of WTO Law in Regional Trade Agreements:
Identifying the Links’, in L. Bartels and F. Ortino (eds), Regional Trade
Agreements and the WTO Legal System (OUP 2006) 525–52, 551.
193
G. Sacerdoti, ‘Trade and Investment Law: Institutional Differences and
Substantive Similarities’ (2014) 9 Jerusalem Review of Legal Studies 1–12, 11.
194
Ibid. 6–7.
195
Ibid. 7.

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International investment law as a field of international law 29

ascertaining grave breaches of due process.196 In case of breach, while

the WTO dispute-settlement mechanism usually provides for re-
establishing the status quo ante, arbitral tribunals usually award the
payment of compensation.197 Furthermore, while remedies at the WTO
only have prospective character, arbitral tribunals can authorize damages
to the foreign investors.
Finally, while economic analysis has always played an important role
in international trade law and the settlement of international trade
disputes, legal analysis has predominated in investment disputes. In
international trade law, ‘economists and trade policy experts wrote and
administered the General Agreement on Tariffs and Trade (GATT). The
lawyers came along later’.198 Instead, international investment law ‘has
always been the concern of lawyers’.199 Lawyers draft IIAs; lawyers have
adjudicated investment disputes.200

1.5.4 Preliminary Conclusions

These paradigms for categorizing investment treaty arbitrations all have

merits and weaknesses and may diverge and converge on specific aspects.
Most notably, none of them – except perhaps the international law and
public law paradigms due to their comprehensive nature – fully captures
the complex phenomenon of investor–state arbitration.
These paradigms are not normative; rather they are descriptive in
nature and emphasize some aspects of investment treaty arbitration over
others. They are useful theoretical tools to better configure and under-
stand investment treaty arbitration. While investor–state arbitration is a
relatively recent phenomenon and remains under-theorized, awareness of
the existence of different paradigms promotes a better understanding and
functioning of the same.

FINAL REMARKS
In an effort to make their regulatory framework for FDI more attractive
to foreign investors, states ratify IIAs. Such adhesion necessarily involves

196
Ibid. 9.
197
Ibid. 8–9.
198
McRae, ‘The World Trade Organization and International Investment Law’,
16.
199
Ibid.
200
Ibid.

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30 Proportionality, reasonableness and standards of review

the surrender of a part of, or limitation of, their sovereignty in exchange

for certain benefits.201 In this regard, however, IIAs are more intrusive
than trade agreements as foreign investment takes place within the
borders of a state. As one author puts it, ‘they may condition … measures
taken by governments … in the realm of regulation’.202 In addition,
investment treaties provide foreign investors with direct access to
investor–state arbitration.
However, the right to regulate is a basic attribute of sovereignty under
international law.203 In certain cases, not only do states have a right to
regulate, but they also have a duty to do so because of international obliga-
tions. In these cases, regulation has the function of safeguarding inter-
nationally recognized values, and state compliance with its international
obligations ‘actually serve[s] as a means to reassert sovereignty’.204
Therefore, according to some scholars, investment treaty law and
arbitration is facing a ‘legitimacy crisis’, as arbitral awards can affect
public policy, but there is uncertainty over the relevance or irrelevance of
norms protecting non-economic values within investment treaty arbitra-
tion. Furthermore, while developing countries have deemed investment
treaty arbitration politically biased against them, even industrialized
countries have expressed some concerns about this mechanism. The
criticisms on the functioning of investment treaty arbitration in relation to
public goods should be taken into account to allow the investment treaty
system to develop in accordance with public international law.
Against this background, this study now explores the migration of
constitutional ideas from constitutional law to international investment
law and arbitration. It then addresses the fundamental question as to
whether proportionality, reasonableness and standards of review can
facilitate the achievement of a better balance between the public and
private interests within international investment law and arbitration or
whether they risk fostering expansive interpretations of investment treaty
provisions that can further jeopardize the legitimate pursuit of public
interests by the host states.

201
See generally W. Shan, P. Simons and D. Singh (eds), Redefining
Sovereignty in International Economic Law (Hart Publishing 2008).
202
L.E. Peterson, The Global Governance of Foreign Direct Investment:
Madly Off in All Directions (Friedrich Ebert Stiftung Publisher 2005) 4.
203
M. Sornarajah, ‘Right to Regulate and Safeguards’, in UNCTAD, The
Development Dimension of FDI: Policy and Rule Making Perspectives (UN
2003) 205.
204
K. Raustiala, ‘Rethinking the Sovereignty Debate in International Eco-
nomic Law’ (2003) 6 JIEL 841–78.

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