Author: Aarohi Chaudhuri*
Sources of Arbitration Law
International Institutions and Rules
Investor State Dispute Settlement (ISDS) has conventionally been a mechanism for investors to bring claims against states, for violating obligations under an international investment agreement (IIA). Importantly, these obligations bind only state signatories, and not investors. Oftentimes, this leads to a clash between investment friendly state policy as mandated by an IIA, and the international human rights law (IHRL) obligations a state owes to its citizens. This paper argues that the imposition of IHRL obligations directly onto investors and not just states, can reconcile conflict between these two sets of obligations under international law.
Such a model raises two questions: (i) Whether IHRL obligations can be applied horizontally (to private parties and not just states) despite the presence of an IIA; and (ii) Whether IHRL obligations should be applied horizontally. I will deal with each of these questions in turn.
HORIZONTAL HUMAN RIGHTS AND SELF-CONTAINED REGIMES
Typically, human rights are intended to be vertical, or exercised by a citizen against the state. However, with private actors being capable of impacting the enjoyment of these rights by citizens, rights jurisprudence has allowed for these to be applied horizontally, or against encroachment by private bodies. This horizontal application may be direct, or allowing for human rights claims being brought directly against the infringing private actor before the appropriate fora; or indirect, or allowing for claims to be brought by rights bearers against states that fail to regulate or sanction private actors that violate human rights. The dominant global scheme is of indirect horizontality, where the onus is on states to ensure compliance with human rights by private actors. Not doing so constitutes a breach of their IHRL obligations. This creates a situation of competing obligations, where a state may implement, for example, an increased minimum wage as mandated by IHRL norms for labor, but in turn give rise to a challenge under an IIA by an affected investor.Note, that in such a case there is no corresponding obligation on the investor to comply with the same IHRL provisions. Instead, the IIA is read as a ‘self-contained regime’ or ‘complete code’ which encompasses the totality of obligations between signatory states and investors thereunder. Such an interpretation resists the direct horizontal application of IHRL to investors, as it considers specific IIA clauses to trump any other general international law obligations the parties may be under. Before engaging with why this is problematic, I will look at whether the presumption of IIAs as self-contained regimes is rebuttable.
The incorporation of rules from other systems of international law such as IHRL into IIA obligations is possible in two ways: (1) explicitly, through specific conflict norms such as hierarchy clauses within IIAs that indicate the priority an investment protection obligation has in relation to other obligations of states; or (2) implicitly, through general conflict norms such as the principle of ‘systemic integration’. Hierarchy clauses prioritizing IHRL norms require express drafting into IIAs negotiated between states, and have thus far failed to materialize. However, the latter is closer to an interpretational rule, and only requires invocation by arbitral tribunals.
Broadly, ‘systemic integration’ refers to the principle that even if a tribunal only has substantive jurisdiction regarding a particular instrument of international law (such as an IIA), it must interpret that instrument harmoniously with both other systems, and the general body, of international law. Arguably, this is expressed through Art. 31 (3) (c) of the Vienna Convention on the Law of Treaties, which requires interpretation of treaties (including IIAs) taking into account ‘any relevant rules of international law applicable in the relations between the parties’. Tribunals that reject systemic integration typically rely on the lex specialis doctrine, to hold that in event of a conflict, IIAs as special legal instruments trump the application of other general substantive international laws for investor-state disputes.However, as stated by the ILC, even the special law on a particular subject matter cannot be dissociated from the nature and purpose of the general law it seeks to deviate from. This means that IIAs cannot be read in a vacuum, and must operate within the framework of IHRL. In Sawhoyamaxa Indigenous Community v. Paraguay, the Inter-American Court of Human Rights (IACHR) dealt with this same question of a state’s competing obligations under IHRL and an IIA. It found that the latter could not trump the former despite the defense of lex specialis, because an IHRL treaty ‘stands in a class of its own’ and ‘generates rights for individual human beings and does not depend entirely on reciprocity among States’. Therefore, the unique nature of IHRL implies that it can be read into IIAs. In Urbaser v Argentina, a tribunal even noted that IHRL obliges all parties, public and private, not to act in derogation of human rights, and that the BIT in that case had to be read harmoniously with IHRL. Another example is the deference of IIAs to jus cogens, tribunals have recognized that general international law pertaining to jus cogens would trump any conflicting protected investment. Therefore, IIAs are not independent or self-contained regimes that exist in isolation from other systems of international law.
REFORMING THE STATUS QUO IN INVESTOR-STATE ARBITRATION
This section will first lay out the concerns that exist within the status quo of IIAs, and then illustrate how the direct application of IHRL to investors will address these concerns.
First, regulatory chill. Conflicts between two systems of international law can be ‘narrow’ or ‘broad’. Narrow conflicts refer to a direct clash between two sets of a state’s obligations- such as abiding by strict global carbon emission standards at the cost of an investor’s commercial interests. Broad conflicts, on the other hand, are more subtle but equally pervasive. They comprise of situations where states are precluded from regulation as required by IHRL, due to the threat of a potential investor-state claim. The reason for these conflicts is that the state is the only party bound by both sets of obligations, and thus in case of a conflict must always sacrifice one to ensure the other- a tradeoff investors do not have to make.
Second, reduced access to justice for rights bearers. Access to an effective remedy is necessary for the adequate enjoyment of rights. However, investors have raised claims and obtained injunctive relief against state court orders that preserve human rights to their detriment. For example, in Chevron v. Ecuador, the investor, a petroleum company, had polluted the Amazon rainforest, risking the lives of indigenous communities. These communities obtained an order for damages from an Ecuadorian state court. In response, the investor raised a claim under the Ecuador-US BIT for ‘denial of justice’ due to a wrongful court order, and obtained not just compensation, but also an injunction against Ecuador to nullify its state court’s order. This indicates that if IIAs do not recognize IHRL obligations for investors, states are effectively powerless to enforce human rights judicially under threat of an aggrieved investor claim.
Third, the inability to regulate or ensure adequate legal remedies for citizens as mandated by Constitutional or IHRL obligations often dissuades states from entering into IIAs that feature ISDS mechanisms. This aversion towards ISDS will either (1) compel investors to enter markets with reduced investment security; or (2) discourage investors from entering markets with unpredictable regulatory environments, and thus weaken global trade and investment. Therefore, a model like systemic integration to resolve this dichotomy is critical.
The implication of systemic integration as a common rule of interpretation would be threefold: defenses based on (1) ‘unclean hands’ of investors, and (2) substantive obligations under other systems of international law; or (3) counterclaims on the basis of non-compliance with IHRL by investors.
The ‘clean hands’ is a good faith doctrine that requires aggrieved parties to comply with their own obligations before claiming a remedy. In international law, therefore, an actor with ‘unclean hands’ would have been guilty of violating their own obligations, and would either be jurisdictionally barred from raising a claim, or would have less of a locus before the forum to claim damages. Systemic integration would read this to mean that a state can rely on the investor’s own breach of IHRL as a mitigating defense before an IIA claim.
Substantive obligations refer to a state’s obligations under other treaties it is a party to. For example, a state challenged for having enforced stringent anti-tobacco legislation to comply with international tobacco control conventions can claim this separate system of international law as a substantive defense against a claim of violating a fair and equitable standard of treatment.
Counterclaims are parallel suits brought by states before the same tribunal for a breach of the investor’s substantive obligations. Typically, tribunals have interpreted this restrictively to require clear obligations within the IIA on a consenting investor. As the language of IIAs is usually asymmetrical and only discusses state specific obligations, counterclaims are rarely recognized. On the other hand, tribunals have also accepted jurisdiction over IHRL grounded counterclaims for the very reason that IIAs cannot be read in a vacuum. Allowing for IHRL obligations as an accepted basis for counterclaims can therefore provide states a more robust process for guaranteeing the protection of rights within an investor leaning IIA environment.
The asymmetric nature of ISDS has been criticized for going beyond mere investment protection, and encroaching into state sovereignty. This has also led multiple states to be apprehensive about encouraging ISDS clauses in their trade agreements. As discussed above, this results in either poor investment security, or reduced flow of investment. A large reason for this is that IHRL norms, among other regulatory priorities, are particularly intrinsic to and inseparable from a state’s obligations. It is critical for ISDS tribunals to recognize these competing priorities, and follow trends such as systemic integration that allow for such conflicts to be resolved.
 Veolia Propreté v. Arab Republic of Egypt, ICSID Case No. ARB/12/15, Notice of Arbitration (Jun. 25, 2012).
 Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Award (Nov. 30, 2017).
 Vienna Convention on the Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331, art. 31(3)(c).
 Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability ¶262 (Apr. 9, 2015); CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award ¶¶113-121, 344-378 (May 12, 2005).
 Martti Kosketiemmi et al., Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission, ¶64, U.N. Doc. A/CN.4/L.682 (Apr. 13, 2006), available athttps://undocs.org/en/ A/CN.4/L.682.
 Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award (Dec. 8, 2016).
 Sawhoyamaxa Indigenous Community v. Paraguay. Merits, Reparations and Costs Inter-Am. Ct. H.R. (ser. C) No. 146, ¶140 (Mar. 29, 2006).
 Bear Creek v. Peru ICSID Case No. ARB/14/21 Partial Dissent, Prof. Philippe Sands QC (Nov. 30, 2017), Urbaser v. Argentina ARB/07/26, supra note 6.
 Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award (Apr. 15, 2009).
 Supra note 17.
 Chevron Corporation and Texaco Petroleum Corporation v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23.
 Id., Third Interim Award on Jurisdiction and Admissibility, 3.116 (Feb. 27, 2012).
 Id., Second Partial Award on Track II, 10.13(i) (Aug. 30, 2018).
 Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (Jul. 8, 2016).
 Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award (Dec. 7, 2011).
 SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Procedural Order No. 2 (Oct. 16, 2002); Hesham T. M. Al Warraq v. Republic of Indonesia, UNCITRAL, Final Award ¶659 (Dec. 15, 2014).
 Supra note 6.
 UNCITRAL Secretariat, Possible reform of investor-state dispute settlement (ISDS), UNCITRAL Working Group III, A/CN.9/WG.III/WP.142 (Sept. 18,2017), available at https://undocs.org/en/A/CN.9/WG.III/WP.142; see also Puma Energy Holdings (Luxembourg) SARL v. the Republic of Benin, SCC Case No. SCC EA 2017/092.
 The Economist, Investor-state dispute settlement – The arbitration game (Oct 11, 2014), available at https://www.economist.com/finance-and-economics/2014/10/11/the-arbitration-game.
*Aarohi Chaudhuri is a B.A. LL.B. (Hons.) Candidate at the National Law School of India University.