rethinking global governance, from the Graduate Institute, Geneva

Institutionalizing Subsidiarity in the Reform of Investment Adjudication

By Nico Krisch
Professor of International Law,
Graduate Institute of International and Development Studies

 

Synopsis: Current negotiations on the reform of investor-state dispute settlement aim at establishing credible constraints on adjudicators. If (re)designed based on the principle of subsidiarity, international investment adjudication could supplement rather than substitute or challenge domestic processes. Here is what that institutional design choice would mean for the standard of review, the role of domestic judicial procedures, the selection of adjudicators and complementary institutional safeguards.

 

Key words: Investor-state dispute settlement (ISDS), United Nations Commission on International Trade Law (UNCITRAL), dispute settlement, subsidiarity, institutional design

 

One of the main challenges for the reform of investor-state dispute settlement – currently under debate at the United Nations Commission on International Trade Law (UNCITRAL) – stems from the perception that some investment tribunals construe international legal rules too widely and, as a result, intrude into the policy space of states when they assess whether states have violated investor rights under bilateral (or multilateral) treaties on investment protection. Responding to this challenge effectively will require the institutionalization of greater restraint in the design of future mechanisms for the settlement of such disputes. A step in this direction would be the explicit introduction of a principle of subsidiarity in any new, or revised, mechanism. Making investor-state dispute settlement a truly ‘subsidiary’ remedy would help to make it a limited corrective of, rather than a substitute for, domestic legal processes and national policy choices.

The principle of subsidiarity has found increasing interest in the context of international courts, international institutions and global governance institutions more generally. First introduced in the European Union (EU) as a general norm for the distribution of powers between national and European institutions (see Article 5(3) of the Treaty on European Union), subsidiarity has recently been adopted as an instrument to ensure greater restraint in the European Court of Human Rights. With slight variations, it is also present in the International Criminal Court (as ‘complementarity’) as well as a variety of regional integration institutions and courts. The principle establishes a presumption in favour of decision-making at lower levels and is widely seen as an adequate reflection of democratic standards for issues on which decisions taken in one state do not directly and significantly affect core interests of citizens of other states (see here, and here). This applies to issues of economic policy, including investment, insofar as states have not unambiguously accepted international rules constraining them.

Institutionalizing subsidiarity would have implications for different aspects of the design of investment adjudication, especially the standard of review, the role of domestic judicial procedures, the selection of adjudicators and complementary institutional safeguards.

 

Standard of Review

When applied to international courts, subsidiarity is typically expressed through a principle of limited scrutiny. In the context of the European Court of Human Rights, state parties have, for example, linked it expressly with the application of a ‘margin of appreciation’ in favour of national institutions (See Article 1 of Protocol 15 to the European Convention on Human Rights). In cases of doubt about the interpretation of international rules, such limited scrutiny translates into deference to domestic political processes as well as domestic judicial proceedings, which are presumed to be closer to the issue and also to enjoy greater legitimacy for defining key issues of public policy.

The operation of a principle of deference becomes all the more pressing in contexts in which the applicable rules leave ample room for differing interpretations – as with concepts such as ‘legitimate expectations’ or ‘fair and equitable treatment’ in the investment treaty context which, despite recent efforts, are difficult to define with precision for emergent issues. Applying deference, international adjudicators would review domestic acts only for whether the national interpretation and application of international standards was outside the boundaries of ‘reasonable construction’ and ‘factual appreciation’.

 

Domestic Judicial Procedures

Subsidiarity can only be applied effectively in international adjudication if domestic institutions have had the possibility to form a considered view of the issue – otherwise there would be no domestic decision to scrutinize or to defer to. Given the often complex institutional interplay that leads to restrictions on investments (especially in federal and otherwise decentralized political systems) this wold best be realized through a comprehensive assessment of a given case by a national institution before international adjudication is triggered. Typically such an assessment would be made by a court, preferably a high court in the domestic judicial system which could form a view on the pertinent questions of legal interpretation as well as the factual situation at issue.

As a result, the principle of subsidiarity would suggest a requirement to pursue local remedies, as already contained in some international investment agreements. Such a requirement would not necessarily lead to undue delays in the resolution of a dispute if coupled with time limits or the establishment of particular domestic procedures (such as single-instance court proceedings) in such cases. The core requirement would be that one national court should have had the opportunity to consider the case in substance with sufficient (though potentially limited) time for submissions, hearings and deliberation. International investment adjudication would then be merely complementary to, and a limited corrective of, such domestic procedures.

 

Selection of Adjudicators

The operationalization of subsidiarity depends upon the adjudicators applying it; standards of review will always be open to varying interpretations depending on the background understandings of the interpreter in question. As a result, the selection and appointment of adjudicators becomes a key issue. If investors occupy a central role in this process, as is typically the case in investment arbitration today, it is unlikely that considerations of subsidiarity and deference will carry significant weight; investors will tend to choose adjudicators exercising strict scrutiny on national decisions. Subsidiarity would better be served if states appointed the adjudicators, especially if appointments were not for a single case but for a greater number of future cases in which states may appear both as respondents as well as the claimants’ home state. This would ensure that, when contemplating appointments, states would consider the appropriate degree of deference from both perspectives.

Institutionally, this would suggest the need to establish a more durable institution, along the lines of an investment court or a standing arbitral body. It would also suggest selecting adjudicators with a public law (rather than commercial law) background as these are typically more familiar with restraints on the scrutiny of public decisions and will be keen to avoid divergences between the treatment of foreign and local investors.

 

Complementary Institutional Safeguards

Experience with the principle of subsidiarity, in the European Union as well as federal states, suggests that it has only limited effects if it is not coupled with institutional safeguard mechanisms – in and of themselves, courts at a higher (federal or international) level tend to practice less restraint over time. The EU has thus introduced a procedure which allows a group of national parliaments to trigger the reconsideration of EU legislation if they regard it as an infringement of the principle of subsidiarity. This cannot be transposed to international investment adjudication, but other options for safeguards might be available. One possibility would be to establish an inter-governmental supervisory body, not unlike the Dispute Settlement Body at the World Trade Organization, which could (by a requisite qualified majority) reject the interpretation of investment rules in a particular case, or trigger a reconsideration by a larger group of judges or arbitrators.

 

Conclusion

The principle of subsidiarity can give helpful guidance for the reform of international investment adjudication. It does not rule out such adjudication as such, but it suggests that significant limitations be placed on it. Respect for subsidiarity in a reformed ISDS would require deference by international adjudicators – selected by states –, an important role for domestic judicial processes, as well as complementary institutional safeguards. This would reflect respect for the idea that it is up to states to define the level of investment protection they seek to provide, and that international tribunals ought to respect, and when possible defer to, national choices in this regard. Investor-state dispute settlement has for long appeared to privilege investor interest over public goals and concerns. Making it truly a subsidiary mechanism, designed only to remedy grave deficiencies in the domestic process, would help to put it into its proper place.

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