Recapturing public power: is investment arbitration's engagement of the public interest contributing to the democratic deficit?

Vanderbilt Journal of Transnational Law, May, 2008 by Barnali Choudhury

A. Investment Treaties: From Shield to Sword

Foreign investment constitutes the single largest source of external finance for developing countries. (22) Accordingly, developing countries have sought ways to encourage this form of financing from foreign investors. (23) At the same time, foreign investors have identified developing countries as a source of beneficial financial returns and as a means of establishing themselves in future key markets. (24) This circumstance has incited considerable interest in foreign investment. (25)

However, foreign investors have continually expressed concern over investing in states where they are subject to the state's lawmaking authority but are unable to participate in the state's political or public policy processes. (26) As a result, disputes stemming from foreign investments have warranted a unique process. (27) Traditionally, foreign investment disputes were settled by force. (28) Colonial powers would resolve an investment dispute by imposing implied or actual force on their subjected colonies in a process termed "gunboat diplomacy." (29)

Around the nineteenth century, however, states moved from gunboat diplomacy to actual diplomacy, in the form of treaties of Friendship, Commerce and Navigation (FCN treaties). (30) Originally intended only to facilitate trade and shipping, FCN treaties increasingly began to include provisions protecting foreign investments. (31) The treaties emphasized the protection needed for individual investors engaged in trade and included provisions for most-favored nation treatment (32) and the guarantee of prompt, adequate, and effective compensation for an expropriation. (33) Nevertheless, FCN treaties did not provide for direct dispute resolution, and international law generally barred foreign investors from initiating a direct cause of action against a state. (34) Rather, aggrieved investors were forced to rely on politicking, in hopes that their home state's government would take up the claim on their behalf. (35) Alternatively, investors were forced to litigate against the host government in its own national courts. (36) However, neither option proved very fruitful for investors because the first option did not guarantee investors any compensation, even if the host government's actions were found illegal, and investors rarely found success litigating against the host state in its own courts. (37)

In the 1960s, states began to develop bilateral investment treaties (BITs) in order to create more favorable investment climates. (38) An integral aspect of these post-FCN investment treaties was the introduction of a direct dispute-resolution forum for a foreign investor against the host state. (39) The post-FCN treaties no longer required the investor to seek aid from her home government nor, in most cases, to exhaust local remedies. (40) Today, an aggrieved investor can, after consultation and negotiation with the host state, submit her claim against the host state for resolution under the auspices of an arbitral body, such as the International Centre for the Settlement of Investment Disputes (ICSID) or the rules under the United Nations Commission on International Trade Law (UNCITRAL). (41)