An Interview with Nicolás Perrone on Investment Treaties and the Legal Imagination: How Foreign Investors Play By Their Own Rules

Investment Treaties and the Legal Imagination: How Foreign Investors Play By Their Own Rules, Professor Nicolás Perrone’s newly published book on the international investment regime, was published by Oxford University Press in April 2021. The book pushes us to think about the ways in which the origins of the regime—the people who imagined it and the circumstances in which they did so—shape how it operates today. More importantly, it highlights the narrowness of this founding vision, which leads practitioners today to ignore the fundamentally social and political aspects of investor–state relations. The following is a lightly edited conversation between ITN editor Zoe Williams and Professor Perrone about some of the central ideas of this book.

What prompted you to write this book? What gap in our understanding of investment law and ISDS were you trying to fill?

The book aims to bring together some intuitions that I have had for more than a decade.

First, the debate around investment treaty law goes beyond the tension between foreign investor rights and states’ right to regulate. Framing the discussion in these terms assumes that these rights are either self-defining or easy to interpret. The truth, however, is that property and contract rights are central pieces of social organization, and there is a lot at stake in their interpretation. The question is not only how to balance these two rights but also what you are balancing. Moreover, foreign investment relations are not only about investors and states; you have home states, national elites, and local communities. Importantly, investors and states (or national elites) often work together to advance a project. So, the premise that there is always tension between states and foreign investors is a misrepresentation.

Second, ISDS practice is not a coincidence but the somewhat expected result of a project of multinational actors involved in the natural resource sector, particularly investors and their lawyers. I was always suspicious of the claim that the development of ISDS practice was unpredictable. There is, in fact, a remarkably similar pattern of interpretation that dates back to the early discussions around IIAs. I refer to this as the legal imagination: the relationship between these legal discussions and the world-making project of these individuals. Abs, Shawcross,[1] Royal Dutch Shell, the ICC, the American Bar Association (ABA) and others defined the canon of imagination, and we continue operating within this canon.

The book brings together these two intuitions using history, socio-legal analysis and legal theory (transnational law, property law), trying to be faithful to ISDS practice and representing the field as honestly as possible.

You argue that the current state of the international investment regime rests on “a meta-language of international investment law that is still influential today” What are the basic elements of this meta-language? Why is it important to understand international investment law from this perspective?

This is very important. My claim about a legal imagination is that the norm entrepreneurs developed a vocabulary, a meta-language, to talk about foreign investment relations, and we are trapped in it. Of course, this vocabulary is not entirely new; the norm entrepreneurs built on discussions from the late 19th and early 20th century with the legalist empire practices of the United States and its investors and key international arbitrations during the interwar period.

This vocabulary represents foreign investment relations as transactions, puts foreign investors and states at the same level, and normalizes the premise that states grant incentives to investors, the idea of political risk and arbitration as a way to resolve disputes, and that IIAs can attract FDI. But the norm entrepreneurs never had empirical evidence to support these claims, and some of the examples they give of arbitrary state behaviour were actually cases of terrible investors who paid bribes and interfered in domestic politics.

None of this suggests that states never behave arbitrarily, but the core of foreign investment relations shows investors extracting incentives and enjoying better treatment than domestic investors. Abs, Shawcross, the ICC were in the business of convincing states to offer incentives, rely on their natural resources to develop their economies, and forget about industrialization. Regulatory givings (incentives broadly defined) are as relevant to investment treaty law as regulatory takings, but we have chosen to talk only about the latter.

This meta-language also obscures or renders irrelevant how states ensure foreign investment will benefit the host country, how we facilitate a fair distribution of benefits, costs and risks, or how we handle asymmetric bargaining power. It also occludes the implications of not having exhaustion of local remedies, the importance of performance requirements. Further, it makes the local community invisible, portraying the investment site as a sort of terra nullius where you find only a foreign investor and a state capable of granting licences.

Your story begins with a group of “norm entrepreneurs” in the 1950s and 1960s. What was their goal? Did they get what they wanted?

These norm entrepreneurs were a group of European and U.S. financiers, lawyers and business leaders who raised the alarm after the nationalizations in Iran, Indonesia, and Egypt. Shawcross claimed that states could not expropriate if they had committed not to in concession contracts and that states could give up their right to eminent domain through contract. In this respect, the norm entrepreneurs lost.

But they were also concerned that Global South countries could rely on the doctrine of partial compensation, which was developed by influential international lawyers in the interwar period. We are told that Latin American countries rejected the prompt, adequate, and effective formula, and the United States and Europe insisted on it. The reality was that European countries nationalized entire industries post-World War II. This example was dangerous for investors who feared Global South countries would imitate it as they did, for instance, with the Chilean copper nationalization. Here, the norm entrepreneurs were successful, and compensation in ISDS practice tends to be much higher than in domestic courts.

Their other worry was that states were intervening in the economy too much. So, they defended legal notions such as indirect expropriations and the protection of undertakings (including the protection of legitimate expectations) to discipline this kind of intervention. This way of talking about investment law is remarkably similar to ISDS practice today.

You write “Property can be embedded in social, political and economic organizations that may or may not coincide with states … The notions of private and public express the tension between foreign investor rights and states’ right to regulate, but fail to distinguish this other level of struggle.” Can you expand on the importance of “the local” for your analysis, and as you mention, the way the regime constructs “good” and “bad” property?

This is a critical point, and I think that the literature has not paid enough attention to embeddedness. The private–public tension is only one dimension of what occurs within property or contract rights. The global–local is another relevant dimension. As with the private–public, there is no clear definition or distinction but rather some accommodation that is never final or entirely peaceful. I’ve made the mistake in the past of referring to foreign investor rights as commodity rights, as if they were not embedded in social relations, but this isn’t true. Foreign investors’ rights highlight transnational social relations within the firm, other firms, transnational capitalist elites, or the global market. So, there is a process of accommodation and negotiation between the global, the national and the local. Foreign investors’ rights always have a global and local dimension, as much as a private and a public one.

The relevance of the global–local dimension is that it allows us to see that formally, rights may be domestic, such as an environmental licence, but they may be embedded in the business plan of the foreign investor. This situation is something that ISDS practice takes into account. Essentially, and I am generalizing here, the pattern of interpretation we find is that the global is good and the local is bad. The global represents progress, deserves to be protected and illustrates something reasonable, whereas the local is backward, is arbitrary and should not be protected—or should receive less protection. At the same time, it is never purely one or the other; the question for legal scholars—and it is also relevant from a political economy perspective—is what that balance is and its normative implications.

We’ve published several articles about local communities and ISDS[2], and what you call the “invisibility of local communities” in investment law is an issue that is getting more attention. You write that this invisibility “hinges on the premise that states represent local interests in dealing with foreign investors.” Why do you think this premise is mistaken?

The claim of invisibility rests not only on the basis that communities have no legal standing in ISDS or rights under IIAs. It also relies on the fact that neither investment treaty law nor most of the political economy literature discuss their role. Of course, there are references to local communities in previous work. Still, I think the situation started to change with Lorenzo Cotula and my work, both relying on a property heuristic, which shows that local communities were not being heard but still are central to the factual fabric of ISDS cases.

I think we cannot assume that states represent local interests. Investment treaty law represents relations between foreign investors and states as if they always struggled to obtain the best possible distribution of benefits, costs, and risks. The cases I analyze in the book, however, illustrate that their relations are sometimes very cooperative. Those governments advanced the project and investors’ interests until the situation escalated into social unrest or prompted generalized violence.

The development literature shows that coalitions favouring extractive projects usually consist of national extractive elites, who sometimes happen to be in government, and foreign investors. In this context, assuming that states are on the side of the community and not of the investor may be empirically and normatively wrong. Extractive elites have a different vision for their countries—for the land and people—than local communities and developmental elites.

Who are the relevant “norm entrepreneurs” today? How do they shape the ongoing discussions on reform of the regime?

In the conclusion of the book, I refer to a chapter by David Schneiderman in which he talks about the present norm entrepreneurs. The interests favouring ISDS and IIAs are still there; extractivism is significant in the Global South. At the same time, it is clear that the entire global business community does not care that much about this regime. ISDS makes the most sense for those investors who invest in immobile resources, such as natural resources or infrastructure.

Strong defenders of IIAs and ISDS shape the regime in similar ways today, reproducing a canon of imagination where investors and states are the main actors, where the main problem is political risk, where international investment law is essentially foreign investor rights and ISDS. The main difference between the earlier norm entrepreneurs, and those today, is that many of the latter are also arbitrators and interpret the law.

These individuals may accept some marginal change that seems progressive. For example, John Blair (of Shell and the ICC) championed the idea of voluntary obligations or responsibilities in the 1970s. Today, those who defend ISDS may accept that local communities participate in the proceedings or even that they submit cases against investors. Again, this position would not go against the canon of imagination, and, in fact, it was envisioned in the 1960s, as I point out in the book.

You write “Once we widen our perspective, however, to also concentrate on the social relations that ownership creates among people or how contracts affect third parties and a given society, the autonomy and expectations of other owners and non-owners can hardly be concealed.”

This is a powerful articulation of how limited the traditional understanding of investor rights (and state obligations) is, and any true reform of our approach to foreign investment must take this into account. However, it seems to me that this may be outside the scope of what international investment law (or perhaps international law altogether) can address. I think the tendency of a lot of actors involved in the reform process (and other tangentially related work on human rights and business) is to add international law-based rights and obligations for communities and business, respectively, in an attempt to “re-embed” international law. In 2018, IISD organized an expert meeting to consider exactly this question.

Do you agree with this characterization and think this is the right approach? If not, what does it miss, and what might an alternative be?

I think you are spot on. When you press on this point, you get the intuition that there is a problem. If the issue is that states have given up too much sovereignty, is the solution to ask them to give up even more by internationalizing foreign investor obligations? Foreign investors should comply with domestic law, and obligations should be defined and enforced domestically.

The problem is that, in legal theory terms, we have disrupted the balance of rights and obligations based on assumptions that are often wrong, such as that foreign investors are likely to be mistreated by states. Rights, obligations, and privileges are all related to each other and make a legal system. If you elevate only foreign investors’ rights and get a pattern of interpretation like in ISDS (and also states which generally promote foreign investors’ interests), local communities have limited options but to go international or transnational. They need to catch up with foreign investors. In addition to the book, I have developed this point further in a recent chapter titled International Investment Law as Transnational Law.

But this strategy is risky. Those who defend ISDS see this as an opportunity to consolidate the legal regime, as Blair saw it as an opportunity to expand it in the 1970s. He was a strong defender of corporate social responsibility. If you have vague or voluntary foreign investor obligations, you increase the regime’s legitimacy and strengthen foreign investor rights (because the corresponding obligations are weaker). These obligations would be less specific than under domestic law, and local communities would never have the same legal representation as investors or states in an international setting. Hearings would be far from the community, and the adjudicators would likely be more embedded with the global than the local.

There are two alternatives I can think of, and they can be traced back to the competing imaginations of the 1970s. One is to reinstate the exhaustion of the local remedies requirement. ISDS tribunals’ work would be entirely different if there was a final decision of the host state judiciary. Amongst others, foreign investors would enforce their rights in the local jurisdiction against the background of their obligations to the state and other actors. That final decision may be arbitrary, but then they could go to ISDS. In this scenario, the primary standard of protection would be denial of justice. Of course, you may have direct recourse for uncompensated direct expropriations, but other than that, this should be it. This way of handling the situation considers the conclusions of the UN Group of Eminent Persons and the Charter of Economic Rights and Duties of States. Defenders of ISDS have characterized the latter as a direct attack on private enterprise. Still, if you read the views of those who drafted the charter, you realize that the critique was political, not technical.

The other alternative is to create an international organization where states could discuss and coordinate solutions to general problems related to investment, like COVID-19, and address specific issues or disputes. This institution could have a dispute settlement mechanism (again, available to investors after exhausting local remedies). An advantage of such an organization (like a WTO of investment) would be that states could present complaints on behalf of their foreign investors, in a more transparent setting. Diplomatic channels are obscure, and it is difficult to know what is going on. So, rather than claiming that we will depoliticize investment disputes like Broches and Shihata did, which is impossible because foreign investment is a very political question, we could improve the level of the discussions, make them more transparent, and bring more actors to the table. I can see states discussing foreign investors’ rights and obligations in a setting like this without generating the problems that ISDS does, but I am not saying it would be a panacea either.


Nicolás M Perrone is a Research Associate Professor of International Law at Universidad Andrés Bello, Chile. He is the author of Investment Treaties and the Legal Imagination: How foreign investors play by their own rules (Oxford University Press, 2021).


[1] Hermann Abs, director of Deutsche Bank and Hartley Shawcross, General Counsel for Royal Dutch Shell, together wrote the “Abs-Shawcross Draft Convention on Investments Abroad” in 1959, which laid out standards of investment protection that appear in thousands of IIAs today.

[2] Cotula, L. (2021, March 23) Rethinking investment law from the ground up: Extractivism, human rights and investment treaties. Investment Treaty News.; and Sands, A. (2020,Dec. 29). Does the investment treaty regime promote good governance? The case of mining in Santurbán, Colombia. Investment Treaty News.