Depolluting the Doctrine on Causation in International Investment Law

Abstract

Abstract For any investment-treaty arbitration that reaches the merits phase, the following question will invariably arise: “Did the state’s conduct cause the investor’s loss?” This is the causation question. If the investor proves the causal link, it takes a significant step towards ultimate success, whereas failure delivers a terminal blow. To determine this question, arbitral tribunals have adopted a two-tiered test consisting of “factual causation” and “legal causation.” Because the same test has been endorsed by the International Law Commission in the commentary attaching to the Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA), they appear to be right in this adoption. But they are wrong. Testing for legal causation has no place in investment-treaty arbitration. For one, testing for legal causation is such an imprecise process that it usually makes arbitral tribunals’ legal reasoning on questions of causation obscure. Second, the purpose that testing for legal causation serves in domestic law, where it was developed, is not a purpose that international investment law is concerned with. In domestic law cases, legal causation is a tool to place losses arising from unavoidable accidents where adjudicators think that they most fairly fall. By contrast, investor-state disputes do not involve unavoidable losses. The fear will be that without legal causation, states face indeterminate legal responsibility for investment losses. For various reasons, however, this fear is unfounded.