Interpreting Investment Treaties as Incomplete Contracts: Lessons from Contract Theory

Abstract

Bilateral investment treaties (BITs) are incomplete contracts as contracting states leave contractual gaps inadvertently, necessarily or strategically open. When an investment dispute is brought to international arbitration, these gaps must be filled. Investment tribunals thus not only have a dispute settlement function, but are also gap-filling norm-setters. The degree to which this gap-filling role is exercise must depend, however, on the degree of contractual incompleteness. First generation BITs are highly incomplete contracts containing only brief and vague provisions delegating much of the gap-filling to tribunals. Second generation BITs, in contrast, are complex and comprehensive agreements. Their degree of incompleteness is considerably lower with contracting states employing a range of different gap-filling alternatives to courts such as comprehensive contracting or escape clauses all of which warrant judicial restraint and formalism. Second generation BITs can also assist arbitral gap-filling in first generation treaties. As tribunals lack the sophistication to either reach ex ante or ex post efficient norm-setting, they should defer to how contractual gaps are closed by the same contracting parties in second generation BITs rather than devising their own solution.