2. Hayekian frameworks

Neoliberal legality is hardly a coherent body of uniform thinking. Others have pointed out that neoliberal thought is a ‘messy hybrid’ that has moved through various stages and which is ‘doomed to coexist with its unloved others’, namely, the state.Footnote ¹² Not having adequately worked out a coherent relationship with the state, neoliberal thought seems perpetually in flux, if not in crisis, never being able to live up to its rhetorically unachievable premises.Footnote ¹³ Despite this variability in neoliberal thought, I want to take up economic theorist Friedrich Hayek as an exemplary figure and tease out connections between his work and neoliberal legality.

Hayek found state planning anathema to individual liberty and the rule of law. In The Road to Serfdom (1944), published the same year as Polanyi’s The Great Transformation, Hayek condemned macroeconomic steering as a form of substantive justice that undermines competition and spontaneous social ordering.Footnote ¹⁴ Polanyi, by contrast, was confident that ‘history’s rudder was set firmly’ in the direction of more state interventionFootnote ¹⁵ – the economic system would no longer ‘lay down the law to society’.Footnote ¹⁶ It may be that Polanyi was right for much of the twentieth century and that Hayek has been in the ascendance as of late in so far as neoliberal legality has taken hold in the rules and institutions of international economic law.Footnote ¹⁷

This is because the miserly view of the state, associated with regime shifts which Jessop labels ‘roll-back’ and ‘roll-out’ and ‘roll-back’ neoliberalism,Footnote ¹⁸ is entirely congenial with the version of the rule of law elaborated in Hayek’s The Constitution of Liberty. In the interests of satisfying the generality and equality elements of ‘the rule of law’, Hayek wrote, states should be ‘limited in the same manner as any private person’.Footnote ¹⁹ There will, therefore, be no objection to states ‘engaging in all sorts of activities’ so long as they do so ‘on the same terms as citizens’.Footnote ²⁰ The rule of law requires, Hayek writes, ‘the enforcement of general rules, laid down irrespective of the particular case, and equally applicable to all’.Footnote ²¹ This is not to say that states cannot also enact coercive laws. They can perform a range of ‘wholly legitimate’ activitiesFootnote ²² addressing subjects like crimes, factory, sanitary or health legislation. Or they might engage in ‘service activities’ such as the provision of education, roads, land registries, all of which provide a ‘favorable framework for individual decisions’.Footnote ²³ Outside of enforcing necessary laws upon others, states must be made to behave as if they were private actors competing in the marketplace. The state must, he writes, ‘in all other respects … operate on the same terms as everybody else’.Footnote ²⁴ This is a version of ‘roll-out’ neoliberalism in so far as state institutions are expected to be restructured so as to favour the marketization of all aspects of social and political life.Footnote ²⁵

Business firms, Hayek declares, are justified in looking with considerable ‘distrust’ upon all state enterprise: ‘There is great difficulty in ensuring that such enterprise will be conducted on the same terms as private enterprise; and it is only if this condition is satisfied that it not objectionable in principle.’Footnote ²⁶ For Hayek, state enterprise is not objectionable so long as it is confined to narrow parameters, making government as ‘innocuous as possible’.Footnote ²⁷ Otherwise, it becomes a ‘danger to liberty’.Footnote ²⁸ Applying rules equally applicable to all, ‘including those who govern … makes it improbable that any oppressive rules will be adopted’.Footnote ²⁹ Government otherwise is disentitled from preferring its own enterprises so that others can use their ‘mental powers to the full’ and, consequently, make ‘the greatest contribution that [one] is capable of to the community’.Footnote ³⁰

Hayek might be thought of as addressing in these passages only public enterprise that has yet to be privatized. His account of the rule of law, however, is more ambitious – it applies to all state action. Prohibited are state functions that intervene in the material situation of existing polities. Distributive justice is thereby ruled out of order.Footnote ³¹ Only maintenance of a status quo of ‘spontaneous ordering’ is permitted. Government ‘should possess no monopoly for a particular service of the kind’ for which it raises revenue. States ‘should discharge these functions in such a manner as not to disturb the much more comprehensive spontaneously ordered efforts of society’.Footnote ³² The object is to ‘reduce the total of [government] coercion to a minimum’.Footnote ³³ The aim, as Hayek declared, is the ‘dethronement of politics’.Footnote ³⁴ It resembles the neoliberal shift associated with the ‘roll-back’ of policies and institutions.Footnote ³⁵

Law, for Hayek, performs critical functions by facilitating private market transactions and guaranteeing the orderly distribution of private decision-making.Footnote ³⁶ It does so via a ‘permanent legal framework which enables the individual to plan with a degree of confidence and which reduces human uncertainty as much as possible’.Footnote ³⁷ Hayek, in this way, appears faithful to the ordoliberal understanding that law performs functions under the direction of the economy, and not the other way around.Footnote ³⁸ The state ceases to serve public interests but is expected to behave along the lines of imagined private actors. The implication, though not spelled out, is that states have a capacity to discern how market actors behave – that state actors have an ability to mimic private purposes.

But they do not have an ability to pursue anything resembling the common interest. Such pursuits are what Hayek associates with the term ‘planning’.Footnote ³⁹ This is because states simply do not have the capacity to imagine a public good. Our ‘powers of imagination make it impossible to include in our scale of values more than one sector of the needs of the whole society … nothing but partial scales of value exist’.Footnote ⁴⁰ Only individuals are entitled to determine their own proper ends, Hayek maintains, in which case, the state remains only ‘one “person” among others’. The state simply is an unreliable steward of social change. Even if it is a more powerful person than others, it will have only a limited view of proper ends, subjects on which many minds will disagree.Footnote ⁴¹

If Hayek’s epistemology is premised upon the inscrutable behaviour of private market actors, it turns out that Hayekian legality requires precisely these sorts of predictions. If states are expected to apply ‘non-calculable, immeasurable values’, these will be difficult, if not for Hayek impossible, to ascertain. He could not, therefore, entirely escape the trap that he labelled ‘constructivism’.Footnote ⁴² The problem of uncertainty that animates Hayek can, for this reason, never be ‘entirely eradicated’.Footnote ⁴³ Nevertheless, Hayek maintained that only if states are confined to operating upon the ‘same terms’ as private enterprise can their actions be properly calculable and predictable. If states are expected to operate as if they are private persons, the state is stripped of its capacity of protecting society by mitigating the effects of markets upon citizens. It ‘forecloses principled debate’ regarding matters of vital concern to democratic publics.Footnote ⁴⁴ This is a concern that is further addressed in Section 3.

From all that has been said, it would be a mistake to treat Hayek as being preoccupied solely with the privatization of public services. Rather, his prescription is for states to behave as if they were market actors. Privatization is not his exclusive ambition, though such schemes correspond well to it. Not much turns, then, on the distinction between privatization and deregulation. Feigenbaum, Henig and Hamnet, for instance, offer a robust definition of privatization that contemplates measures that run along a continuum that include not only asset sales but contracting out, user fees, and deregulation.Footnote ⁴⁵ They are all in the service, they argue, of redefining the role of the state. This robust view of privatization captures well Hayek’s programmatic ambition of not just reduction, but transformation, of the state.Footnote ⁴⁶ The dream, in short, is to ‘depoliticize’ functions that previously were the subject of bargaining. Political deliberation and accountability are displaced in favour of models of ‘governance’ that require governments to internalize the private preferences of market actors.Footnote ⁴⁷ No other rationality is to be contemplated, though some measures buffering the markets’ most detrimental effects can be envisaged. In the next part, I turn to a discussion of a part of international law that roughly resembles Hayek’s portrayal of the state.

3. Sovereign immunity presuppositions

Hayek did not elaborate extensively on international law. He envisaged, for a time, multilevel federation as a mechanism for limiting government to the pursuit of proper ends.Footnote ⁴⁸ He also mentioned, in his last book, what he described as ‘true international law’ that which ‘would limit the powers of national governments to harm each other’.Footnote ⁴⁹ It was others – those whom Solobodian associates with the ‘Geneva School’, such as E.-U. Petersmann – who would push the Hayekian dream to international levels.Footnote ⁵⁰

Hayek’s model of the rule of law, nevertheless, nicely complements international law’s state immunity doctrine. State immunity doctrine distinguishes between states acting in their sovereign capacity (jure imperii) and states as ‘traders’, participating in private market transactions (jure gestionis).Footnote ⁵¹ When states act in their sovereign capacity, their actions attract immunity under international law. States are not immune from suit under municipal law, however, when they engage in ordinary ‘commercial transactions’.Footnote ⁵² States become vulnerable to suit precisely when they perform functions deemed beyond basic state functions.

As Robert Wai argues, the doctrine of state immunity is premised upon understandings about the proper role of government – between traditional and novel state functions.Footnote ⁵³ The ‘greater involvement of states in the commercial economy’, observes Wai, the more likely their liability to suit. Yet this should not render ‘the public interest or purpose … any less [legitimate] than with respect to traditional functions of governments’.Footnote ⁵⁴ Wai ties the doctrine’s presuppositions to a version of neoliberalism, rendering less legitimate, and vulnerable to liability, state intervention in markets.Footnote ⁵⁵

The international law of diplomatic protection, the principal precursor to the contemporary investment law regime, fills gaps in state immunity doctrine by policing even sovereign acts. The American-Mexican Claims Commission decision in the Jalapa Railroad case (1937) exemplifies this gap-filling function.Footnote ⁵⁶ Legislative authority in the State of Veracruz declared void certain payments owed to Jalapa for the purchase of its title to railroad and electric light equipment. Amparo proceedings within Mexico yielded no adequate remedy for the investor.Footnote ⁵⁷ On appeal, The Mexican Supreme Court found, instead, that the state Governor exceeded his authority in pledging revenue from oil production to pay for the purchase price. The Claims Commission was of the view that the Mexican Supreme Court misapplied Mexican federal constitutional law. The Commission also found that the state legislative decree violated international law in so far as the legislature acted ‘arbitrarily’, engaging in a ‘confiscatory breach of contract’ and a ‘denial of justice’.Footnote ⁵⁸ This was not an ‘ordinary breach of contract’, the Claims Commission ruled. Rather, the government ‘stepped out of the role of contracting party and sought to escape vital obligations under its contract by exercising its superior governmental power’.Footnote ⁵⁹

Contemporary international investment law has moved significantly beyond these doctrinal confines. International investment law is concerned not only with ‘sovereign’ acts but extends its reach to state action of any kind (unless treaty text directs otherwise).Footnote ⁶⁰ The regime is structured in such a way that investment disputes will arise out of any dispute, regulatory or commercial. Breach of simple commercial contracts can give rise to international liability via investment treaty law, for example. Contract rights are susceptible to expropriation claims or contracts can become ‘internationalized’ via an ‘umbrella clause’.Footnote ⁶¹ The expectation that investors receive ‘fair and equitable treatment’ also elevates contractual commitments to the plane of international liability.Footnote ⁶² States, moreover, will not have available pleas of sovereign immunity from jurisdiction, even in municipal courts with competence to review arbitral awards.Footnote ⁶³

The operational logic of the investment regime is not just to complement national law, but to overtake and supplant it with obligations of a higher and stricter order. Jalapa Railroad continues to be invoked as persuasive authority by investment treaty tribunals.Footnote ⁶⁴ This is because the American-Mexican Claims Commission punished Mexico for bringing politics to bear in its relations with private actors. States are expected to behave, just as Hayek declared two decades later, ‘in the same manner as any private person’.

Sovereign immunity doctrine coincidentally bears a resemblance to the constitutional law of the United States. Dormant commerce clause doctrine, which negatives state action impeding the movement of inter-state commerce, distinguishes between ‘market participant’ and market regulation. States have an ability to restrict trade by preferring local citizens and businesses when they participate in the market. ‘Nothing in the purposes animating the Commerce Clause prohibits a State’, the Supreme Court of the United States observed, ‘in the absence of congressional action, from participating in the market and exercising the right to favor its own citizens over others’.Footnote ⁶⁵ Should a state use its only own funds, for instance, to procure local ‘construction contracts for public projects’, the state is considered a market participant and exempt from the strictures of the dormant commerce clause.Footnote ⁶⁶

University of Colorado law professor Joseph Sax sought to reverse this order of priority under different constitutional doctrine, looking to what comprises a ‘regulatory taking’ of property under the fifth and fourteenth amendments of the US Constitution. Sax proposed distinguishing between governments performing a ‘private enterprise’ function in contrast to those performing a ‘governing’ function. It is only where economic loss occurs as a result of government exercising its enterprise capacity, thereby enhancing its own resource position, that compensation would be required. In its enterprise function, Sax writes, government ‘is very much like those who function in the private sector of the economy’.Footnote ⁶⁷ In other cases where the government acts ‘merely in its arbitral [or governing] capacity’, by mediating disputes between citizens and groups, no compensation will be owed under the takings rule.Footnote ⁶⁸

Courts have declined to adopt Sax’s proposal, imposing responsibility for regulatory takings, subject to a series of pliable factors,Footnote ⁶⁹ irrespective of whether private actors suffer economic loss as a consequence of states behaving as mediator or competitor. One reason for this reluctance may be that courts prefer holding governments to account for a broad range of state action under the takings rule (as in investment law). Ultimately, as Dana and Merrill advise, it is a question of ‘how much goodness we can expect from government,’ the answer to which turns upon one’s own political theory.Footnote ⁷⁰

4. Investment law predilections

Frederico Ortino has observed a trend line in investment treaty arbitration under the expropriation, FET and umbrella clauses that works a similar distinction between ‘contractual conduct’ and ‘governmental conduct’.Footnote ⁷¹ States can be absolved of liability if state conduct is ‘contractual and not sovereign in nature’, the Hamester v. Ghana tribunal observed.Footnote ⁷² Ortino complains that this distinction ‘lacks clarity’. It is the ‘institutional character of the actor and [not] the nature of the function being performed’ that should be determinative of liability.Footnote ⁷³ It is particularly problematic, he adds, ‘in light of the general consensus … that a breach of contract may give rise to a breach of an investment treaty’.Footnote ⁷⁴ He does not, however, offer a means of working through the distinction between legitimate and illegitimate uses of public authority that will trigger state liability under an investment treaty.Footnote ⁷⁵

Jean Ho points to a number of contract-based FET claims where tribunals have relied upon the distinction, concluding that only breaches jure imperii attract liability.Footnote ⁷⁶ There is, nonetheless, much ‘uncertainty’ in applying this binary. Ho complains that tribunals have not offered much ‘explanation for their chosen classification’.Footnote ⁷⁷ In two such instances, the first concerning, amongst other infractions, delay in expropriating land for highway constructionFootnote ⁷⁸ and, in the second, the forcible expulsion of company personnel by the Pakistani army,Footnote ⁷⁹ Ho maintains that it is at least arguable that these were sovereign acts requiring the provision of compensation.Footnote ⁸⁰ In the former dispute, delays and disruptions in contractual performance were not attributed by the tribunal to state misconduct. In the latter dispute, expulsion was prompted in order ‘to protect’ personnel from ‘potential harm’ caused by disgruntled unpaid local workers hired by the investor.Footnote ⁸¹ Both tribunals appeared to be of the view that respondent states were doing what states are expected to do, even as they exercised sovereign authority in the context of a contractual relationship. That is, the states behaved in ways that were not novel or unexpectedly disruptive of market relations. They, nevertheless, could just as easily be characterized, as Ho would prefer, as sovereign acts that attract state liability.

In the discussion that follows, I draw on a small set of tribunal awards that work an analogous binary. These are disputes launched for breaches of expropriation, FET, or umbrella clauses that are premised on breaches of contractual commitments. Like others, I view the dichotomy between contractual and sovereign state behaviour as overly simplistic an explanation for what is going on in these disputes.Footnote ⁸² I suggest that a better explanation for the dichotomy operating in these cases is similar to one that motivated Hayek: that between state behaviour in the service of market logic and behaviour far removed from that expected of profit-seeking market actors. Only the latter attract the pejorative label of ‘political’ and, consequently, liability under investment treaty. In order to substantiate the claim that international investment law punishes states for Hayekian misbehaviour – that the regime will not condone states acting politically – I take up a few disputes, by way of example.Footnote ⁸³ To be clear, the argument is not that the Hayekian mindset explains every dispute in which tribunals have complained about political behaviour. Instead, it is argued that this sub-set of cases reveal such a tendency. The focus of this section is on how investment arbitration furthers Hayek’s dream by insisting that states behave as if they were private firms.

Biwater is a successful and politically well-connected UK company while Tanzania is, by most measures, one of the poorest countries in the world.Footnote ⁸⁴ Water and sewerage services in Dar es Salaam, its largest city, are highly unreliable, if not unavailable, for swathes of its rapidly growing urban centre. Under pressure from international financial institutions, Tanzania embarked on a comprehensive programme of structural adjustment in 1986, ‘aimed at dismantling the system of state controls and promoting the private sector’.Footnote ⁸⁵ An element of the structural reform agenda was the privatization of public utilities, including water services provided by the state entity Dar es Salaam Urban Water and Sewerage Authority (DAWASA).

In the pursuit of this policy path, Biwater Gauff secured a ten-year contract, through its subsidiary City Water, to provide water and sewerage services previously carried out by DAWASA. Biwater significantly underbid in order to secure this concession. It also invested little of its own capital. Instead, the bulk of the funding came from development bank sources and DAWASA itself.Footnote ⁸⁶ Biwater Gauff invested a ‘modest’ US$ 8.5 million as working capital, mostly in ‘removable assets’ like computers.Footnote ⁸⁷

Water rates immediately rose without any appreciable improvement in service, households having to ‘pay twice’ for their water – first to City Water and then again to water vendors at even higher rates.Footnote ⁸⁸ Despite the many incentives provided to City Water, including potentially lucrative plant equipment contracts and a VAT holiday until at least year six, City Water quickly fell into financial difficulty. Though its business plan was deemed ‘acceptable’ to the World Bank,Footnote ⁸⁹ within the first 12 months, City Water ‘was in breach of many key provisions of the Lease Contract’, admitted Bank President Paul Wolfowitz,.Footnote ⁹⁰

After repeated misbehaviour by the investor, state actors responded by terminating the lease, prompted first by DAWASA’s board of directors and then by cabinet upon a motion tabled by Minister of Water and Livestock Development, Edward Lowassa. Lowassa, candidate for Prime Minister in the upcoming election, publicly censured City Water. ‘Revocation was made’, he declared, ‘following persistent complaints by city residents over the incompetence of the firm’ and non-payment of tariff and rental fees.Footnote ⁹¹ All of which, in the circumstances, sounds incontrovertible. Minister Lowassa subsequently addressed a meeting of DAWASA staff assuring them that they would hold onto their jobs. This was an event that was described as a ‘political rally’ by the investment tribunal.Footnote ⁹²

The investor initiated investment arbitration under a 1996 UK-Tanzania BIT, alleging that there had been an expropriation, unreasonable and discriminatory treatment, and a denial of fair and equitable treatment. The theory of the case was that politics had tainted commerce: that the company had been sacrificed at the altar of political expediency rather than on the basis of rational economic calculation. The wager was that investment arbitration’s logic would punish political actors operating under a different rationality than one based on a market model, that is, one having to do with an estimation of the best interests of the residents of Dar es Salaam.

The tribunal found an expropriation of the investment had taken place. This was because the state behaved in ways that departed from ‘normal’ contractual behaviour and this gave rise to state liability under international law.Footnote ⁹³ For the purposes of its analysis, the tribunal drew on the distinction between circumstances where the state acts ‘merely as a contractual partner’ and those circumstances where it acts ‘ius imperii, exercising elements of governmental authority’. For the latter, the tribunal relied upon the French public law idea of ‘puissance publique’.Footnote ⁹⁴ In circumstances where the state intervenes as might a ‘private shareholder’, the state would not be liable under treaty. By contrast, in those circumstances where the state acts on its ‘prerogative of puissance publique to perform acts which exceed the normal course of conduct of a State shareholder’, then the state is more likely to be liable.Footnote ⁹⁵ At the beginning of the breakdown of the relationship, the tribunal acknowledged, ‘the normal contractual process was underway’ but a short while later, the ‘normal course of contractual termination was disrupted’.Footnote ⁹⁶ Notice to terminate the lease contract itself was not, for this reason, an expropriation as termination had been ‘foreshadowed’. This constituted ‘“ordinary behaviour” of a contracting counterparty’.Footnote ⁹⁷ Instead, it was Minister Lowassa’s press conference of 13 May 2005, announcing termination of the lease contract, which was ‘outside the ordinary activity of a contracting counterparty’.Footnote ⁹⁸ Communicating the cabinet decision on 17 May 2005 via this ‘rally’ amounted to an act of puissance publique by the republic which was unreasonable and ‘motivated by political considerations’.Footnote ⁹⁹ A number of other exercises of public power – the unilateral withdrawal of VAT exemptions, the takeover of management control of the company, and the forced deportation of City Water management – were ‘well beyond’ the ambit of normal contractual behaviour.Footnote ¹⁰⁰

Taken together, the cumulative effect of these acts of state, prior to the expiry of the notice of termination, amounted to an expropriation violative of treaty obligations.Footnote ¹⁰¹ Arbitrator Gary Born, partially dissenting on the question of damages, described this as a ‘classic instance of expropriation’.Footnote ¹⁰² The tribunal also found that there was a denial of FET given these same circumstances, relying on almost identical language.Footnote ¹⁰³ In support of these findings, the tribunal invoked the adjectives ‘normal’ or ‘ordinary’ 16 times in the course of its reasons. The tribunal, however, did not award damages to Biwater Gauff. At the moment when Tanzania departed from the profit-seeking behavioural model, the tribunal determined that the economic value of City Water was ‘nil’.

The Biwater tribunal, as have others, inquired into whether exercises of state power fell within the realm of puissance publique, treating it as a proxy for acts jus imperii.Footnote ¹⁰⁴ This is an elusive concept in French public law associated with the work of French constitutional theorist Maurice Hauriou.Footnote ¹⁰⁵ In his Précis Élémentaire de Droit Constitutionnel, Hauriou describes it as a ‘purely political power’, which can, in principle, regulate economic liberty.Footnote ¹⁰⁶ Puissance publique generates the requisite equilibrium between public power and individual property.Footnote ¹⁰⁷ The administrative state, for Hauriou, was not in the service of the economy but in the service of a general interest in individual liberty and social stability. Hauriou admits, in other words, that it is a legitimate exercise of puissance publique to participate in the economy when it is for the public good.Footnote ¹⁰⁸ Hauriou acknowledged that legislative intervention ‘is incessant, because circumstances are continually suggesting new ways of using a liberty that are injurious to others’.Footnote ¹⁰⁹ Hauriou preferred not to distinguish rigidly between government delivery of public services and government performance of economic activities, as the latter had ‘profound political consequences’.Footnote ¹¹⁰ The concept works, then, to legitimate state authority, not to narrow its ambit.Footnote ¹¹¹ The tribunal proceeded seemingly unaware of this fact.Footnote ¹¹²

The tribunal’s reasons in Biwater Gauff bring clearly to the surface the systemic rationality of international investment law, which is to punish states who do not behave as if they were private firms. This same rationality was at work in Impregilo SpA v. Argentine Republic (2011).Footnote ¹¹³ The dispute arose out of a concession contract to provide and expand water and sewerage services to residents of Buenos Aires. The value of the concession diminished dramatically as an economic crisis roiled Argentina in 2001. This prompted the adoption of a series of emergency measures, including termination of the 1-to-1 pegging of the Argentine Peso to the US Dollar, a measure than ran afoul of the concession contract. In response to Impregilo’s claim that contractual breach rose to the level of a breach of the Argentine-Italy BIT, the tribunal acknowledged that ‘only the State as a sovereign can be in violation of its international obligations’.Footnote ¹¹⁴ Not only did the contract not preclude access to treaty remedies, but Impregilo’s allegations of expropriation, denial of fair and equitable treatment, in addition to that of national treatment, went ‘beyond mere contractual breaches’.Footnote ¹¹⁵ The tribunal, however, found it ‘unnecessary to express an opinion’ on this issue, as Impregilo was not a party to the concession contract but only a principal shareholder in the concessionaire.Footnote ¹¹⁶

The tribunal in El Paso v. Argentina Footnote ¹¹⁷ was asked to assess financial harms suffered by the Delaware-based company as a consequence of these same emergency measures. El Paso held a financial stake in a number of Argentine companies that provided electrical, natural gas, and gas processing services taken up at the invitation of the Argentine government during the wave of privatization in the 1990s. The investor claimed that Argentina’s actions were extraordinary and requested that the investment tribunal consider whether the government and its agencies took measures in the ‘normal exercise of regulatory powers’.Footnote ¹¹⁸ The tribunal accepted the invitation, recharacterizing the question as one of whether the government’s measures were ‘outside the acceptable margin of change’.Footnote ¹¹⁹ The tribunal was convinced that the state’s behaviour was abnormal. By virtue of the cumulative effects of the state’s actions, Argentina was considered to have gone ‘too far’.Footnote ¹²⁰ The state’s measures, in the aggregate, amounted to what the tribunal described as a ‘creeping’ violation of FET.Footnote ¹²¹

Some tribunals have resisted the urge to punish states when they decline to behave like business firms. In Hamester v. Ghana, the tribunal was asked to find host state liability for the collapse of joint venture agreement with the Ghana Cocoa Board to rehabilitate and modernize an old Ghanaian cocoa processing factory. The question of whether the Board’s conduct could be attributed to the state arose as a jurisdictional question for the tribunal. As in Biwater Gauff, the tribunal sought ‘an act of puissance publique which could be attributed to the state’, in contrast to a mere contractual claim.Footnote ¹²² The tribunal accepted that such grounds existed in a variety of acts engaged in by agents of the state (the police and the relevant cabinet minister) and by the Government’s export ban.Footnote ¹²³ However, even if attributable to the state, none of these actions gave rise to a violation of the treaty. The alleged treaty violations, though ‘skilfully repackaged, are inextricably linked to the JVA [joint venture agreement] and are in reality contract[ual] claims’.Footnote ¹²⁴ The ‘wholesale elevation’ of all contractual claims into treaty claims, the tribunal warned, ‘risks undermining the distinction between national legal orders and international law’.Footnote ¹²⁵

5. Polanyian second movement

To what extent are there tendencies operating in the opposite direction? Can investment treaty arbitration aim in a direction different from its prevailing ‘prejudice’ in favour of ‘economic determinism’?Footnote ¹²⁶ Polanyi described an initial movement in which states actively constructed markets. Contrary to the prevailing mythos, markets were not spontaneous and unplanned but required deliberate statecraft. The market was the outcome, Polanyi wrote, ‘of a conscious and often violent intervention on the part of government which imposed the market organization for non-economic ends’.Footnote ¹²⁷ The complicity of states in the construction of markets, and the subsequent curtailing of their deleterious effects, are central to both movements described in the Introduction. There remained limits, however, that the market system would declare intolerable, even concerning measures for societal self-protection. Accusations would be made that such measures, if useful, were unnatural and economically harmful,Footnote ¹²⁸ amounting to a ‘road to serfdom’, as Hayek famously declared.Footnote ¹²⁹ A similar initial movement, as that described by Polanyi, has been at work in investment law. States have been complicit in generating the structural and legitimating supports for international investment law.Footnote ¹³⁰ States, for the meanwhile, remain unreliable stewards for resistance to its expanding tentacles into the host state policy space. Yet states, paradoxically, are also the only viable means of unlocking the legal constraints that they have embraced. How does a countermovement emerge in such circumstances?

Modest proposals for reform have been placed on the table by the United Nations Conference on Trade and Development (UNCTAD) in light of what the UN agency describes as a ‘legitimacy crisis’ in investment dispute settlement.Footnote ¹³¹ These include excising or limiting substantive treaty protections, enhancing carve-outs, and establishing new dispute settlement mechanisms modelled on the WTO,Footnote ¹³² a mechanism that is being touted by the European Union as a new ‘investment court’. This is the same model being promoted by the EU bloc of states at the United Nations Commission on International Trade LAW Working Group III negotiations.Footnote ¹³³

Proposals to enhance the state’s ‘right to regulate’ have been placed at the top of UNCTAD’s agenda for reform. They represent well the cramped possibilities available to states to push back against the regime’s constraints on public policy spaceFootnote ¹³⁴ José Alvarez describes such proposals as exhibiting a Polanyian logic of ‘double movement’. For Alvarez, Polanyi’s second movement is characterized by ‘greater government regulation’.Footnote ¹³⁵ Government, however, was already present in the first movement, according to Polanyi’s account, generating the conditions for the spread of markets. In the second, protective countermovement, there occurs ‘an enormous increase in continuous, centrally organized and controlled interventionism’.Footnote ¹³⁶ The state, by this time, is ‘handing over’ of affairs ‘to a definite number of concrete institutions the mechanisms of which ruled the day’.Footnote ¹³⁷ The disaggregation of society into ‘economic and political spheres’ is nonsensical.Footnote ¹³⁸ The state, after all, is already there. Thinking otherwise is ‘utopian’ – a ‘singular departure’ from societies of the past, complained Polanyi.Footnote ¹³⁹

If aspiring to such an institutional separation is symptomatic of the investment treaty regime, then it is safe to assume that Polanyi would not have been satisfied with expanding host state policy space under the rubric of ‘right to regulate’ clauses. What Alvarez labels ‘recalibration’,Footnote ¹⁴⁰ loosens up investment treaty obligations with the intention of freeing up more host state regulatory space but it amounts to no ‘enormous increase’ in state control. Nor does it seem compatible to label as a ‘protective countermovement’ that which delegates to investment arbitrators (in addition to investors, whom Alvarez describes as ‘de facto law makers’)Footnote ¹⁴¹ the authority to distinguish between the abnormal and normal; between treaty-backed private rights and what arbitrators consider to be good public policy. Reliance on private dispute settlement, under these constraints, reinforces the rule of economic rationality.Footnote ¹⁴² It hardly amounts to what Polanyi had in mind, namely, ‘a network of measures and policies … integrated into powerful institutions designed to check the action of the market’.Footnote ¹⁴³ Nor does it allow for the sort of freedom Polanyi envisaged, where the ‘social relations of human beings to each other become clear and transparent … [where we can] assume responsibility for the social effects of our existence’ that take place ‘on the other [untransparent] side of the market’.Footnote ¹⁴⁴ These more ambitious measures are simply ruled out of order.

What Polanyi envisaged as evidence of the countermovement were not legally constrained limits on state action but economic regulation, such as that initiated by the Roosevelt administration in the wake of the Great Depression. It was positive government action – in stabilizing and making markets more accountable by legislative and administrative means via the New Deal institutions – that was paradigmatic of the double movement.Footnote ¹⁴⁵ While the New Deal did not go so far as to ‘substantially redistribute national income’, observes a leading historian of the period, the institutional arrangements it inaugurated can be summarized by the word ‘security’: ‘achieving security was the leitmotif of virtually everything the New Deal attempted’.Footnote ¹⁴⁶ ‘While the actual content of property rights might undergo redefinition at the hands of legislation’, Polanyi wrote, ‘assurance of formal continuity is essential to the functioning of the market system’.Footnote ¹⁴⁷ In such a case, formal market and property rights was as likely to have been left intact, rather than destabilized, by the countermovement. For Dale, this left in place the preconditions for the subsequent rise of neo-liberalism in the 1980s.Footnote ¹⁴⁸

What is required, therefore, is something more, along the lines of what Frerichs recommends, that ‘reflects rationalities and values of other social spheres’.Footnote ¹⁴⁹ Such an endeavour calls for institutions that may be ‘market breaking’, rather than ‘market making’.Footnote ¹⁵⁰ It requires re-equipping the state to perform its ‘function as the mediator of exploitation’.Footnote ¹⁵¹ It is not enough to ‘collapse’ state authority so that it serves power imbalances already present in private markets.Footnote ¹⁵² Rather, it is to recognize that state intervention, what Hauriou labels puissance publique, requires political capacity to be ‘incessant, because circumstances are continually suggesting new ways of using [economic] liberty that are injurious to others’.Footnote ¹⁵³

There are many possible paths that states and societies might take along these lines. Consider, for example, how Indigenous and local communities may choose to take control of land use or natural resource development. Once having done so, practices that do not resemble orthodox development paradigms become possible. For instance, the people of the Standing Rock Sioux and their supporters have sought to block construction of the Dakota Access Pipeline over their traditional lands and waterways in Minnesota for several years.Footnote ¹⁵⁴ In another such instance, three First Nations and their supporters in British Columbia are seeking to halt logging of old growth Cedar forests on their lands in Fairy Creek without their consent.Footnote ¹⁵⁵ To the extent the Indigenous and local communities are successful in halting pipeline construction or forestry practices destructive of traditional territory or customary practices, they will have adopted strategies that reflect non-market rationality. Proposals, endorsed by G-7 finance ministers, to adopt an international agreement to tax the profits of large multinationals at a minimum of 15 per cent regardless of where they maintain their headquarters, are less disruptive of markets but deviate from neoliberal orthodoxy.Footnote ¹⁵⁶ Such measures to recoup lost taxes are modest and mostly compatible with the rights of large multinational firms but rub against the idea that maximum profits should be kept in private hands and state redistribution kept to a minimum.Footnote ¹⁵⁷

In order to begin reconstructing the state along lines that do not serve only the interests of private enterprise, the binary choice Hayek insists upon between the individual and society or between liberalism and communitarianism must be rejected. Each side of this debate need each other to survive, as each contain elements ‘intrinsic to each’ other. Boltanski and Thévenot recommend searching for a set of ‘higher common principles’ that will generate agreement among diverse persons about what constitutes the proper ends of positive law.Footnote ¹⁵⁸ Whatever the content of those higher principles upon which public power can be justified, the idea that the state can serve public purposes needs reviving. We need reminding that government is the ‘genuine instrumentality of an inclusive and fraternally associated public’.Footnote ¹⁵⁹ There should be no expectation that societal consensus is complete or final. Instead, we should expect such settlements to be partial, temporary, and subject to continual revisionFootnote ¹⁶⁰ – precisely the sort of instability associated with democratic politics that investment arbitrators appear to abhor.