There is a growing concern among human rights advocates that states—in particular capital-importing ones—are not doing enough to protect their societies against human rights abuses related to foreign investments. The common conviction is that this has to do with the “regulatory chill” caused by international investment agreements (IIAs). States reportedly hesitate to pursue regulations and policies promoting human rights, in fear of being sued in the international arbitration provided for by IIAs for unduly interfering with foreign investors’ interests.

Various solutions are suggested to tackle this problem. Most importantly, specific clauses are proposed for inclusion in IIAs explicitly confirming the host state’s right to regulate to protect and promote human rights. Some suggest that a hierarchy of norms should be adopted in international law to ensure that international human rights law overrides international investment law.

However, the protection of investments is itself a domain of human rights law. To quote Clarence Darrow, the famous “attorney for the damned”: “Even the rich have rights.” Foreign investors, like everyone else, are entitled to the “peaceful enjoyment” of their “possessions” envisaged e.g. in Protocol 1 to the European Convention on Human Rights, and this is essentially what the protections granted to them under international investment law are about.

The conflict between investment law and human rights law is therefore no different than a conflict between any other norms of a fundamental character. Resolving disputes about a measure violating one fundamental norm for the sake of another is more an act of balancing and ensuring proportionality of the regulation in question, than a zero-sum exercise of deciding which fundamental norm should prevail.

Common objections against traditional IIAs and the investor–state dispute resolution procedures typically envisaged in them

The main concern of IIA critics in this context is whether investment tribunals are well placed and equipped to balance the rights of investors on one hand and the rights of communities and individuals who may be affected by the foreign investors’ actions on the other, and whether the investment treaties provide arbitrators with the right authority, legal structure and tools for that exercise.

This concern is understandable, since IIAs are phrased in very general terms which invite broad policy considerations, raising legitimate concerns about the democratic legitimacy of those entertaining these considerations and the uncertainty of their judgments. (Interestingly, the same can arguably be said about human rights treaties, and especially the European Convention on Human Rights and the now well-established doctrine that it must be interpreted and applied as a “living instrument.”1)

But the analysis of investment law jurisprudence shows that “fair and equitable treatment” clauses, expropriation provisions, and other typical IIA terms, properly interpreted, leave ample space for arbitrators to include human rights justifications in their considerations of state actions interfering with foreign investments. And the arbitrators commonly appointed in investor–state disputes should be perfectly capable of doing this. Arguably they are much more restrained in their interpretation of these general clauses than human rights courts have been in some of their most famous judgments expanding the meaning and application of certain fundamental rights enshrined in human rights conventions.

In the same vein, arbitrators hearing investment disputes should not have to be told in a special IIA clause that states have the duty to protect and promote human rights and that this must often necessitate limiting investors’ rights. That this duty is expressed not in the IIA itself but in separate legal instruments (human rights conventions) does not make it less obvious or compelling. In any case, it is difficult to expect that the simple addition of a clause confirming a state’s (rather obvious) “right to regulate to protect human rights” would change much in the practice of investment tribunals. If some arbitrators do not recognize the importance and relevance of human rights law in investment matters, they can hardly be decreed to do this with a single additional clause. The problem of the “regulatory chill” and the solution to it, in my opinion, lies elsewhere and must be solved otherwise.

The real nature and cause of the “regulatory chill”

In order not to interfere unduly with investors’ rights, human rights policies and regulatory efforts—or all efforts to regulate investments or other individual rights and freedoms in the public interest, for that matter—must be conducted properly, i.e. with sufficient foresight, planning, awareness of and respect for vested rights and legitimate expectations, as well as with expertise, consequence, candour and transparency.

Investors seldom challenge host states’ regulations or policies genuinely protecting human rights, for their purpose and intended effects. Instead, they most often question the manner in which those regulations and policies are designed, introduced and pursued by the administration. They complain that the laws introducing them are surprising, or designed or applied disproportionately, negligently, in a discriminatory manner, or in bad faith. That is far from demanding that human rights objectives be sacrificed on the altar of investment returns.

The problem is that host states often lack the capability or motivation to implement human rights policies and reforms in accordance with the principles of sound administration and good governance, because of the weakness of the states and their societies’ civic institutions, or because of regulatory capture. As a result, reforms possibly affecting foreign investors’ rights may be passed over because of an often unconscious expectation that they would inevitably lead to international liability, as the administration would not be capable of implementing them properly, or doing so would be too much of a hassle for the state.

It is only right that states are afraid to pursue ill-prepared reforms or to implement reforms improperly, because of possible justified complaints by foreign investors under international investment agreements. But it is not right for states to be unafraid of failing to pursue those reforms properly, and being held accountable for that omission by their own citizens.

It is impossible to deny what human rights advocates say about the imbalance of power between foreign investors on one hand and local communities in the host states affected by those investors’ activities on the other. While foreign investors have a mighty legal or borderline-political remedy against the state to protect their interests, in the form of international investor–state arbitration, local communities are often at the mercy of the host state’s ineffective political and economic institutions when they want to do something about their state’s failure to regulate to protect their basic interests. The additional remedies provided by the system of international human rights protection are rather symbolic when examined from the practical perspective of particular cases and claimants.

And while foreign investors may not be responsible for bringing about this state of affairs, it cannot be denied that they often benefit from it. Due to the withering of the host state’s institutions, they frequently face inadequate or less-effective regulation and can therefore generate extra returns.

The solution: A new paradigm of international cooperation

This problem cannot be solved by downgrading the protection of investors’ legitimate interests envisaged by IIAs against abuses by host states. Indeed, this is what dishonest governments may seek to achieve by hypocritically invoking human rights concerns in disputes with investors – seeking to justify abusive, reckless or outright dishonest regulatory steps by the notion of the “right to regulate” or the precedence of human rights laws, while at the same time using the notion of “IIAs’ chilling effect” to justify their governance failures to their citizens. It is no solution to “level-down” the protection standards.

But the imbalance of power must be addressed. To eliminate the potential for a vile mutualism between dysfunctional governments and opportunistic foreign investors, the threat of potential investor claims must always be balanced by an equally strong counterthreat of possible citizen complaints against the state which fails to protect its society against foreign investment-related abuses. The only way to truly achieve this is by strengthening the host states’ political, economic and civic institutions.

There are limits to what can be demanded of investors in this regard. The requirement for multinational enterprises to abide by proper human rights standards even when the local regulations fail to enshrine them, or the push towards submission of related disputes by multinational enterprises to specially designed business and human rights arbitration, can certainly temporarily substitute for the host state’s governance failures. It could be considered in addition what further specific requirements could be added to the instruments formulating the responsibilities of multinational enterprises, with regard to how international businesses can contribute more positively to the development of local institutions of civil society. But the primary responsibility for maintaining the balance between the strength of the system protecting foreign investors’ rights and the strength of the system of law available to communities and individuals affected by such investors’ actions should be the responsibility of the states.

Capital-exporting states have a particularly significant role to play in this regard. The imbalance of power between foreign investors and local communities in host states became possible mainly as a result of unilateralism and self-interestedness of states in international relations. It came about because capital-exporting states cared only, or at least predominantly, for their own particular interests and the interests of their own investors in negotiating IIAs, and not about the wellbeing of the supranational communities in which they operated. Certainly, the capital influx facilitated by traditional bilateral investment treaties has lifted many developing states from misery and onto the path of development and democratisation. But it did not require extraordinary perspicacity to predict that without steps to ensure that social and civic development would follow economic growth, these states would quickly become “stuck in transition”2, causing a backlash against globalisation and international cooperation and disillusion with democracy and the market economy.

The first international project to take these considerations and concerns to heart has been the European Union. It aims to promote a more holistic and sustainable vision of development of its member states, and for that purpose it demands that they abandon the “entitlement” approach in favour of “fidelity,”3, and to shift from unilateralism to multilateralism. This is the only model of international economic cooperation in which it is truly possible to strike a proper balance between the legitimate interests of foreign investors on one hand and the societies of the host states on the other. The tensions and controversies which this shift can cause could clearly be seen after the Court of Justice handed down its decision in the infamous Achmea case (C‑284/16). Whether this decision was legally correct or not, and whether it was right or wrong policy-wise, it certainly represented a ramification of an unavoidable and desirable trend to converge and fully intertwine the promotion of a favourable investment climate with the promotion of social and civic development of host states and to make sure that the earlier goal is never pursued without the latter.

The future and the solution to the “regulatory chill” problem lies not in the cosmetic or symbolic amendments to IIAs but in the development of modern “supranational” legal regimes providing for full convergence and the right interplay of international trade law, international investment law and the international law of human rights.