Corporations as Lawmakers

CORPORATIONS AS LAWMAKERS Development, FDI, and Investment in Latin America Symposium hosted by the Republic of Ecuador with the Vale Columbia Center Inter-American Development Bank, Washington D.C. 4.8.2014 Julian Arato

My project, entitled Corporations as Lawmakers, examines the multinational corporation’s emergent capacity to make international law via a modern “internationalized” power of contract.

I am not here concerned with either indirect lawmaking through influence or what is sometimes called soft or informal lawmaking (e.g. via standard-setting by industry groups). I rather focus on direct, formal lawmaking, by agreement with sovereign states. Through creative treaty-shopping, corporations can today attain robust property-style protection for their contracts with foreign sovereigns. As international legal instruments, these quasi-property entitlements have priority over later-in-time conflicting national laws, including public law and regulation. I thus argue that corporations must today be understood as international lawmakers, whose agreements with states yield major consequences for domestic public law.

I’ll first give a theoretical account of the corporate-sovereign contract as a form of lawmaking by agreement. The idea of making law by agreement is familiar in public international law, where the archetypal legal instrument is a treaty binding only on the states parties. The treaty is not a merely private agreement among states, but a form of public law; contrary national law cannot excuse its breach. Yet domestic contracts are not normally considered “law,” despite some scattered authority in positivist and sociological legal theory. I argue that protected corporatesovereign contracts occupy a space somewhere in between the domestic contract and the international treaty. They can be analogized to either form, but their true force cannot be adequately understood if simply equated with domestic contracts. Despite appearing as a merely private legal instrument in form, the corporate-sovereign contract’s status as a heavily protected international legal instrument significantly inhibits the contracting state’s domestic regulatory freedom. Only the analogy to the treaty as a direct source of international law reveals its depth – as a private legal instrument with major public law effects for the domestic state party to the agreement. In this special context, there is reason to treat the contract as a legal source.

After clearing the theoretical ground, I’ll turn to an in depth account of the emergence of the modern protected corporate-sovereign contract as a form of international law, and the parallel rise of the corporation as an autonomous lawmaker. This startling image arises out of the confluence of three seemingly disparate doctrinal developments: the recognition that corporatestate contracts are entitled to treaty protection (form); the entrenchment of an uncommonly robust level of property protection in international investment law along with the ascription of that property-style protection to corporate-sovereign contracts (substance); and the recognition that multinational corporations can alter or supplement their nationality to shop for treaty protections otherwise unavailable to nationals of their original home state (lawmaking autonomy).

I’ll take each of these trends in turn. I’ll examine, first, the emergence of the protected corporatesovereign contract, from the theory of the internationalized contract in the 1970’s, to the umbrella clause debate of the early 2000’s, and finally to the modern trend to include contract protection in the usual guarantees against expropriation and FET. Second, I’ll turn more in depth to the question of the expansive notion of property underlying these disputes, and the increasing attachment of that idea to contract protection. Finally, I’ll explore the viability of corporate treaty shopping through reincorporation and investment (re)structuring. I’ll conclude that the image of the corporation as lawmaker does not come into focus via analysis of any of these three trends on their own. But taken together these developments produce a recognizable picture: at least within the ambit of the pre-existing web of international investment treaties, the corporation appears as a basically autonomous actor empowered to directly make and enforce international law, with major effects on the domestic regulatory freedom of its contracting partners.

In the final part of the presentation, I’ll turn to a critique of these trends. I’ll start by turning a critical eye to the developments central to the corporation’s ascent from a variety of private law perspectives – grounded in domestic contract and property theory, and the international law of corporate nationality. First, I’ll question the tacit conflation of corporate-sovereign contracts with property protection and property remedies in investment arbitration. I challenge the assumption that such contracts should be treated like property, and suggest that there is room for a more balanced approach to adjudicating internationalized contract claims by appeal to sophisticated contract remedies that envision renegotiation and efficient breach. Second, I’ll level a more direct challenge to the aggressive vision of property implicit in investment arbitration. I contend that the Blackstonian idea of property, long discarded in most domestic systems, is even more destructive in the transnational context. I look to the concepts of deference and the standard of review for ways forward, drawing from another in-progress Article, The Margin of Appreciation in International Investment Law, forthcoming in the Virginia Journal of International Law (2014). And third, I’ll return to the corporation’s autonomy as a lawmaker, derived from its capacity to shop for treaty protection through selective investment (re)structuring. I challenge the easy dismissal of looking through subsidiary investment vehicles as a suspect form of veil piercing. I suggest that the very image of the veil of nationality is prejudicial, and leads too easily to the conclusion that looking through ownership chains is appropriate only given extreme abuse of the corporate form – especially in cases involving corporate-sovereign contracts, where restructuring around privity of contract produces particular problems of fairness.

By way of conclusion, I’ll take a somewhat different approach to critique – focusing on the bigger picture. While stressing that particular reforms to the international law of contracts, property, and corporate nationality are desirable, I accept that the overall image of the corporation as an international lawmaker may be a fait accompli. I thus turn to the question of how to grapple with the corporation’s growing public role from the traditionally hesitant perspective of public international law. I ask whether we must now conceive of the corporation as a kind of qualified subject of international law, and, if so, what normative and prescriptive consequences might follow. I conclude that we must today acknowledge its limited subjecthood, and begin to thereby question the laissez-faire attitude of international law to the corporate form by comparison to the more robust formal understanding of the traditional legal subjects: states and international organizations.