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Journal of International Economic Law Advance Access published online on May 18, 2009
Journal of International Economic Law, doi:10.1093/jiel/jgp022
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© Oxford University Press 2009, all rights reserved

International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis

Anne van Aaken*

Correspondence: *Max-Schmidheiny Tenure Track Professor of Law and Economics, Public Law, International and European Law at the University of St. Gallen, Guisanstrasse 36, CH-9010 St. Gallen, Switzerland. E-mail: anne.vanaaken{at}unisg.ch. Many thanks to Benedict Kingsbury and Joseph HH Weiler for giving me the opportunity to present the article at the IILJ International Legal Theory Colloquium at NYU Law School as well as for their comments. I gratefully recognize the comments received during the colloquium from Kevin Davis, Robert Howse, José Alvarez, Tillmann Braun, Juan Pablo Bohoslavsky, Mila Gudkov and Matt Haar. I also thank Rekha Oleschak and Stefan Voigt for helpful comments and one anonymous referee.


  Abstract

This article analyzes international investment protection law by using tools of economic contract theory. Contract theory has been applied to international trade law, but investment law has not yet been analyzed under this methodology. International Investment Agreements may be interpreted as a mechanism for overcoming commitment problems between investor and host state in order to generate mutual benefits. States trade credibility for sovereignty as international investment law restricts the regulatory conduct of states to an unusual extent, subject to control through compulsory international adjudication. A well-known problem in contract theory is how to deal with uncertainty. Changing conditions are a prevalent characteristic in investment law. Contract theory finds that too strict and inflexible contracts may impair the joint surplus of the contracting parties. Thus, a trade-off arises between ex ante commitment on the one hand and flexibility ex post in order to uphold the efficiency of the contract on the other. Those problems become virulent in unforeseen crises, such as financial or economic ones. This article analyzes commitment and flexibility mechanisms in international investment protection law and proposes to use similar mechanisms as in WTO law to design more optimal contracts.


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