The Impact of Investment Treaty Law on Host States: Enabling Good Governance? Dr Mavluda Sattorova University of Liverpool

Evolution of investment treaty objectives: from the prohibition of takings to the obligation to act in compliance with good governance standards Rationale: the investor’s right to claim damages against the host state encourages government to refrain from illegal behaviour and encourages host states to improve governance practices IIAs act (i) catalyst of regulatory reform in host states (ii) a substitute of otherwise lacking and ineffective governmental institutions in host states

Genesis of the good governance rationale: Metalclad v Mexico, Tecmed v Mexico, Occidental v Ecuador: “a duty to ensure transparent, stable and predictable legal framework” construed as part of the fair and equitable treatment standard IIAs: Article 10(12) Energy Charter Treaty; Article 2(7) US- Ecuador BIT: a standalone substantive obligation “to create and maintain effective means of asserting claims and enforcing rights” Article 2(4) Italy-Jordan BIT: an obligation “ to create and maintain in its territory a legal framework apt to guarantee to investors the continuity of legal treatment”

Descriptive analysis: do investment treaties intend to transform governance and promote the rule of law in contracting states? does this objective withstand geopolitical shifts and changes in the investment treaty landscape? ie is it a shared goal of parties to North-North and South-South BITs to promote rule of law and good governance? Prescriptive (normative) analysis: should states be held to monetary liability for a failure to ensure good governance? should investors be entitled to monetary redress even if they were aware of the host states inability to live up to good governance standards?

Achievability of the good governance objective: existing arguments Schill: “damages as a remedy sufficiently pressure States into complying with and incorporating the normative guidelines of investment treaties into their domestic legal order” Echandi: international investment law can act as a deterrent mechanism against short-term policy reversals and assist developing countries in promoting greater effectiveness of the rule of law at the domestic level Muchlinski, Ortino & Schreuer: “standards of due process and good governance required for foreign investment may spill over into domestic law and may set new standards also for the domestic legal system” However, the claim that investment protection treaties promote the rule of law and improve governance on a national level has not yet been supported either theoretically or through empirical appraisal

Achievability of the good governance objective: socio-legal and interdisciplinary insights Can IIAs foster good governance and the rule of law in host states? If host states are expected to respond to investment treaty norms by adjusting their legal orders to ensure ex ante compliance with the prescribed standards of governmental conduct, government officials ought to understand the scope and meaning of investment protection guarantees To what extent are government officials aware of and influenced by investment treaty disciplines in making their decisions? Preliminary empirical findings: decision-makers with whom investors interact in the course of their business, especially in developing countries, are rarely if at all aware of the fact that their behaviour may lead to host state liability under IIAs

Insights from law & economics scholarship: In order for investment treaty law to have an incentivising and transformative effect on national governance practices in a host state, (i) an internal loss-allocation regime should be in place to ensure that monetary losses incurred as a result of damages awards are shifted (ii) to a governmental agency which has managerial, supervisory, and budgetary authority and political power over bureaucrats whose activities lead to state liability.

Insights from domestic legal systems: Analyses of existing internal administrative systems and of the budgetary and payment mechanisms have shown that liability does not necessarily lead to a risk-averse bureaucratic behaviour. This conclusion draws on case-studies of national legal rules governing the payment of damages in connection with claims against state organs and government officials. Thus, host governments may often fail to respond to liability rules in the expected manner.

Regulatory chill Theoretically, if one accepts the argument that investment treaty standards act as a powerful incentive to change bureaucratic practices and culture in host states, then the very existence of such incentivising effect can be seen as confirming the possibility of a chilling effect on governmental decision-making. Regulatory chill as an excessive risk-reduction behaviour on the part of the respondent host state Other forms of chilling effect: a backlash against investment treaty law and withdrawals from existing IIAs

Recalibrating investment treaty law to enhance its role in forstering good governance? the definition of investment and whether it covers investments made in contravention of the host state laws: only when IIAs refuse protection to illegal investment that the incentivizing effect can take place both in relation to host government behavior and that of foreign investors Remedies: Is the goal of investment treaty remedies to induce compliance or rebalance? Is it to induce compliance in the concrete case (which may be achieved through injunctive relief) or in relation to government acting vis-a-vis an undefined group of investors Non-pecuniary remedies: could they be more effective than monetary relief in inducing governments to act in a certain manner or discouraging them from certain behaviour?