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In this article, I discuss possible justifications for such privilege. In contrast, the current investment arbitration regime is intended to function as a substitute for domestic courts, providing an effective legal privilege to foreign investors over local investors and other subjects of the host state law. Together, these elements function to place domestic law and courts in the forefront as the primary recourse for nationals and foreigners alike. We see much of the same in the law developed in a human rights context – for example, under the European Convention of Human Rights (ECHR). It was, and is, reflected particularly in a lenient standard that provides a measure of deference to municipal law and a requirement to exhaust local remedies. However, it shows how the law of diplomatic protection and the minimum standard for the treatment of foreigners, which is still part of customary international law, emerged in a significant way in a dialogue with this concern for equality.
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8 This article does not argue that the protection of foreign investment is illegitimate per se. Being a cornerstone of the rule of law, this is an embedded constitutional principle in the law of most countries. The premise of this challenge is the basic notion of equality before the law. 7 In contrast, the focus of this article is the legitimacy challenge it poses to certain key remedial characteristics of investor-state arbitration, specifically its intended function as a substitute for domestic courts and law. 5 It is still a critique that is sometimes raised and an occasional government concern, but mostly it is directed against the content of substantive standards 6 or launched as an assault on the very existence of the system. 4 Historically, this was one of the fundamental criticisms against international investment law, often associated with the so-called Calvo Doctrine of the 19th century. We may call it the problem of foreign privilege: the essential characteristic and premise of the law that it only protects foreign investors. This article discusses a fundamental, but arguably still underestimated, challenge against the legitimacy of investor-state arbitration. 1 Even moderately defensive voices admit the need for reform, 2 and various reformist initiatives are pending at several levels, including a current work on ‘investor-state dispute settlement reform’ under the United Nations Commission on International Trade Law. In recent years, there has been talk of a legitimacy crisis and a ‘backlash’. The international law protecting foreign investment, and its arbitral mechanism for investor-state dispute settlement (ISDS), has been controversial almost since its inception, and its fundamental legitimacy is persistently debated.
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This has important implications for the reform of the current investment regime, suggesting that it should be redesigned to adopt a more supplementary role and deferential attitude to domestic law and courts – for example, through a requirement to exhaust local remedies. The article discusses possible justifications of such privilege, arguing that only a more traditional international minimum standard rationale provides a convincing justification of special treatment of foreign investment.
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It privileges foreign investors as a select group worthy of more effective legal protection than ordinarily provided under municipal law, challenging the ideal of equality before the law as a basic constitutional value. The article argues that the way in which international investment law has developed in recent years into an effective remedial mechanism that can be invoked by individual foreign investors against host states ignores this historical lesson and now poses a particular challenge to its legitimacy. This article shows how the international minimum standard for treatment of foreigners nevertheless developed in a dialogue with such a concern for equality. It has also been a historical cause of controversy because it requires states to treat foreign investors better than they treat their own nationals. This has historical reasons and is connected to deep-rooted principles of international law. A fundamental feature of international investment law is that it only applies to foreign investment.