Investor-State Contracts, Host-State “Commitments” and the Myth of Stability in International Law – Vol. 24 No. 3

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Authors: Lise Johnson* and Oleksandr Volkov**

Published: December 2013


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.

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*Lise Johnson is the Senior Legal Researcher on Investment Law and Policy at the Vale Columbia Center on Sustainable International Investment.
**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.