Originally from Investment Treaty Arbitration and International Law - Volume 10

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I.    INTRODUCTION

Obligations contained in bilateral investment treaties (BITs), including, in particular, a State’s duty to afford investors fair and equitable treatment (FET), are rooted in and intended to invoke customary international law. Indeed, the FET standard incorporates into BITs the minimum standard of treatment of aliens under customary international law; it does not create a new, autonomous standard of protection binding upon the treaty parties.

Nonetheless, tribunals, at least outside of the NAFTA context, are increasingly finding that the FET standard permits them to enter awards against respondent States on the basis of a lower threshold of actionable conduct and/or standards that are disconnected from the ambit of customary international law.  By incrementally expanding the scope of the FET standard beyond what the States negotiating these BITs intended, these arbitral decisions have come to threaten the bona fide exercise of state sovereignty and are causing States to rethink their commitment to the BIT system.  

To be sure, there is a growing perception, particularly among States and NGOs, that the arbitral system is biased, favoring foreign investment over legitimate noninvestment policy choices, including the protection of public health, cultural heritage, labor standards, and the environment.   These critics argue that international investment law — and particularly the FET standard, the standard most used by tribunals to find treaty breach — has become “a threat to state sovereignty, to the integrity of domestic public law and its values, and ultimately to national self-determination,” in particular because the “legality of a state’s exercise of public power is reviewed under standards crafted by international arbitrators who are appointed by the disputing parties and have no genuine democratic legitimacy.”  Fear that the FET standard is threatening national sovereignty is not based on “overblown hysterics.” It is instead the reason that a growing number of sovereigns have already denounced the international investment system and why so many others have come to regard the investment law regime as being in a “crisis of legitimacy.”