Investor-State Contracts, Host-State "Commitments" and the Myth of Stability in International Law - ARIA Vol. 24, No. 3, 2013

Oleksandr Volkov is currently an Associate with Egorov Puginsky Afanasiev & Partners Kiev. The views and opinions expressed in this article are his and do not necessarily reflect the position of the law firm.

The authors thank Andrea Bjorklund, Jack J. Coe, Jr., David Lyons, Anthea Roberts, Lisa Sachs, Andrea Saldarriaga and Karl Sauvant for their helpful comments on earlier drafts.

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Originally from American Review of International Arbitration - ARIA

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I. INTRODUCTION

A new de facto rule is emerging in international investment law that

emphasizes and prioritizes stability for foreign investors. This rule imposes

liability on host governments for measures of general applicability when (a) the

measures cause a shift in the legal framework that (b) is inconsistent with a

commitment or undertaking previously made to a foreign investor. The practical

impact of this new rule is difficult to overstate. Indeed, due to the types of

“commitments” or “undertakings” that tribunals have considered to be protected,

the scope of potential liability under this new rule is extremely vast.

The legitimacy of this new rule giving primacy to stability – and the question

of whether it is in fact an international law norm of treaty, custom, or principle –

are issues that have received little if any analysis in academic literature, and

should be the focus of further study. An important and related question is how this

new and potent principle in the international law realm compares with domestic

law norms governing the same factual circumstances. This paper takes a first step

to examining that question by comparing pronouncements in international

investment law disputes regarding the stability and enforceability of government

“commitments” to foreign investors with doctrines that have been developed in

the United States’ domestic law relating to the nature and scope of enforceable

“commitments” and the government’s ability to interfere with those commitments

through changes to the general legal framework.

This article uncovers a significant gap between the international law cases and

U.S. domestic law principles. The stability that international investment tribunals

deem part of international law is largely a myth in the U.S. cases. In the

international law realm, tribunals have been taking a wide view of enforceable

“commitments” or “undertakings” and have been imposing liability for a broad

range of government measures (even measures of general applicability taken in

the public interest) that interfere with those obligations. In contrast, U.S. courts

apply a number of principles that result in their adopting a much more deferential

stance to the actions of other branches of government, taking both a narrow view

of enforceable “commitments” and the types of interferences with those

commitments that can give rise to governmental liability.

These issues of enforceable “commitments” and guarantees of stability are

explored through the lens of investor-state contracts – which this paper defines

broadly to include any specific legal arrangement between an investor and a state,

such as agreements for the purchase of services, concessions, permits, licenses and

leases. These investor-state contracts are an old and persistent phenomenon, and

indications show that the practice of governments contracting with domestic or

foreign private entities for a diverse range of objectives is on the rise, driven by

cash- and technology-strapped governments striving to meet the needs of their

populations and private firms looking to expand business opportunities.1

Table of Contents:

I. INTRODUCTION II. INVESTOR-STATE CONTRACTS, SOVEREIGN POWER, AND INTERNATIONAL LAW A. State Interference with Investor-State Contracts under International Law: An Overview B. Investment Law Disputes 1. Forms of Commitments on Stability 2. Liability for Legal and Regulatory Change III. INVESTOR-STATE CONTRACTS, SOVEREIGN POWER, AND DOMESTIC LAW – THE U.S. CONTEXT A. Breach of Contract: “Sovereign Acts” and “Unmistakability” 1. Narrowly Viewing Commitments of Stability – the Unmistakability Rule 2. Relaxing the Requirements of the “Unmistakabillity” Test in U.S. v. Winstar Corp.? 3. A Return to Broad Protections for Sovereign Acts and Strict Demands for Unmistakability 4. Beyond “Unmistakability” – Additional Requirements for Enforceability of Government Promises B. Other Legal Challenges 1. Takings Claims 2. Due Process Claims IV. INVESTOR-STATE TRIBUNALS, U.S. LAW, AND IMPLICATIONS FOR INTERNATIONAL LAW V. CONCLUSION