European Journal of International Law | 4 January 2023
The originality of outsiders: Innovation in the investment treaty system
by Anthea Roberts, Taylor St John
In recent years, several proposals by states to reform or displace investor-state dispute settlement (ISDS) have gained prominence. Some of these proposals are now the basis for negotiations in United Nations Commission on International Trade Law (UNCITRAL) Working Group III. What can the origins of these proposals tell us about innovation in the investment treaty system? How do proposals for sustaining or disruptive ISDS reforms emerge? Who is behind their development and why did they formulate that approach? The reform proposals that states support at UNCITRAL and beyond vary widely. Some states support incremental procedural reforms with the aim of improving upon, but largely sustaining, existing institutions and practices. Other states support more far-reaching structural reforms that would create new institutions or practices to supplement or replace ISDS, such as the introduction of an appellate body or a multilateral investment court. Still others support more radical, paradigm-shifting innovations that would displace ISDS without providing a direct replacement.1
This variation raises the question of why, in response to many of the same concerns about the legitimacy of ISDS, states have produced such a variety of reform proposals. In answering, it is helpful to start with the handful of state-level factors that scholars have traditionally focused on to explain states’ policies towards ISDS. The first factor is the state’s structural position in the world economy. In earlier decades, scholars divided states into capital exporters, which they viewed as likely to see the system through the lens of what benefited their outbound investors, and capital importers, which they saw as likely to view it through the lens of potential recipients of investment and likely respondents to investor-state disputes. Today, however, no state sees itself exclusively as an exporter of capital with regard to ISDS policy and all states are potential respondents. But there is still a meaningful divide: while some states have a dual identity as both importers and exporters of capital, others are almost exclusively importers.2 The second factor is the state’s general policies with respect to foreign investment and international arbitration and the ideology of its relevant officials. Different national policy priorities and economic ideologies have led officials to see the costs and benefits of ISDS-related actions differently, even when their states’ structural positions and experiences are similar.3 In a similar vein, if states are, or aspire to become, hubs for arbitration, it is likely to influence their policy decisions, although sometimes there are tensions between hubs and their host states.4 The third factor is the state’s experience with ISDS. For instance, states are much less likely to sign investment treaties after facing their first investment treaty claim.5 When states have faced ISDS cases with high domestic political salience or had to pay out considerable sums in damages or costs, presumably this experience makes them more likely to be sceptical of ISDS than states that have been involved in few cases or only low-salience cases or have not had to pay large sums.
We agree that all these factors play a role in the formulation of states’ ISDS reform positions. However, based on five years of ethnographic observation and interviews with officials involved in ISDS reform, we identify another factor that we believe is significant yet under-analysed: which agencies or ministries have been given primary responsibility for crafting ISDS policy and, relatedly, what backgrounds their officials have. A recurring feature that we observe at UNCITRAL is that officials who are ‘outsiders’ to investor-state arbitration are more likely to support innovations that are disruptive to ISDS than officials who are ‘insiders’. Whether these outsiders come to prominence, however, often depends on inter-ministerial allocations of responsibility for ISDS policy, which may change over time.
The field of international commercial arbitration has traditionally been characterized as an insider’s club.6 Although the dynamics in investment treaty arbitration differ in some ways from its commercial cousin,7 practitioners and officials still talk about ‘insiders’ in the investment treaty system – by which they mean the arbitrators and counsel who dominate investment treaty arbitration, as evidenced by statistics on which arbitrators are selected most often for ISDS disputes and which law firms handle the most treaty-based cases.8 The tight web of networks created in ISDS, and the close, dense connections among certain actors – law firms, funders, arbitrators, damages experts – lead to concerns about conflicts of interest in the investment treaty system.9
At UNCITRAL, we observe that the relative insider or outsider status of individual officials – as judged by their proximity to, or distance from, ISDS practice – can play a role in influencing the reform proposals that have emanated from their states. This observation is consistent with a wide cross-disciplinary literature on innovation that suggests that insiders, who tend to be well socialized in a field’s norms and to have a personal and professional stake in its ongoing existence, are more likely to suggest sustaining innovations, while outsiders, who have not spent their careers within a particular field and who are not socialized within or incentivized to maintain the status quo, are more likely to propose disruptive innovations.
The relevance of ministerial competence and the growing influence of outsider officials is most evident in the European Union (EU), the actor that spearheaded the ISDS reform agenda at UNCITRAL.10 When competence shifted to Brussels from member state capitals, a group of officials with no background in investment arbitration assumed responsibility for ISDS policy. When investment treaties and ISDS became politically toxic in Europe, this group needed to find a set of reforms that would help assuage civil society concerns. While external pressure created a window of opportunity for change, the precise reform that the EU officials proposed – jettisoning ISDS in favour of a multilateral investment court – reflected their outsider backgrounds.
The EU’s experience contrasts sharply with that of the USA, the actor that did the most to resist the adoption of UNCITRAL’s ISDS reform agenda. While the EU’s court proposal seeks to displace ISDS, the USA has long championed reforms aimed at improving investor-state arbitration rather than displacing it. Like the EU, the USA is a dual capital exporter and importer, and both are major seats of arbitration. Unlike the EU, however, the US officials charged with developing ISDS policy frequently have extensive experience in ISDS, often including experience in arbitral private practice. The ‘insider’ status of these US officials appears to be one factor that has played a role in the country’s preference for sustaining rather than disruptive ISDS reforms. The differences between the EU and the USA are important given their centrality to the investment treaty system, but the relevance of officials’ insider or outsider status extends well beyond these two actors.
If we pan back to look at the two states with the most extreme positions in the room at UNCITRAL – Brazil, which has never signed up for ISDS and is represented by officials who are true outsiders to investor-state arbitration, and Bahrain, which is seeking to become a regional arbitral hub and is represented by arbitral practitioners who are consummate insiders to ISDS – the same pattern appears. In identifying this pattern, our argument is not normative or predictive; we do not take a stand on whether disruptive or sustaining reforms are better or worse, or which ones are likely to be adopted by other states. We also do not make the claim that the positions of any actor can be traced only to the insider/outsider status of their officials. Our argument is that outsider status increases the chances that officials will develop disruptive innovations, as one of a number of factors influencing state policy.
In section 2 of this article, we introduce our participant-observer methodology. In section 3, we develop our argument about the role that outsiders play in formulating innovations. In subsequent sections, we apply this argument to the investment treaty system, exploring the role of outsider and insider officials in the development of ISDS reforms in four actors: the EU, the USA, Brazil and Bahrain. We conclude by considering how the various individual- and state-level factors identified as influencing the development of ISDS reform policies are likely to interact and by noting that the qualities that lead to innovation often differ from those that lead to diffusion.