LCIL Friday Lecture: 'The Institutions of Exceptions' - Prof Julian Arato, University of Michigan Law School

Lecture summary: International economic law binds the state in relation to markets – most prominently with respect to cross-border trade in goods and services (trade) and the cross-border flow of capital (investment). The core tension to be managed in treaty design involves the balance between economic disciplines and the sovereign’s reserved regulatory authority – between liberalization and policy space. The trade regime has been fairly successful in striking this balance, while the investment regime has been less so. As a result, a natural tendency among reformers has been to look to trade for lessons and solutions to the challenges of investment treaties. This lecture considers why mechanisms that have worked in the former context have proven unworkable in the latter, and what that means for design going forward.

Both the trade and investment regimes preserve policy space through a process of justification at the dispute settlement stage. Policy justification is built into most trade agreements (and some investment treaties) through formal exceptions clauses. Even in the absence of such clauses, exceptions-style justification has informally penetrated both regimes through adjudicative reasoning and borrowing. This "exceptions paradigm" of justification has worked well in trade treaties, where it has been especially key to securing a workable balance in the WTO/GATT context – in a coherent way, on which actors can plan ex ante. But, where tried, the exceptions paradigm has not worked out in the investment regime. I argue that the difference lies in the institutions within which trade and investment rules and exceptions are embedded. This lecture compares the trade and investment regimes across three institutional nodes: (1) the nature of the right of action (public vs private); (2) the degree of judicial centralization (court system vs ad hoc arbitration); and (3) the available remedies (prospective injunctive relief vs retrospective damages). I suggest that it is trade law's public-oriented institutions that have made the exceptions clause workable – not the other way around. By contrast, investment law's private-oriented institutions make that system particularly inhospitable to exceptions-style justification.

Julian Arato is a professor of law at the University of Michigan Law School. His scholarly expertise spans the areas of public international law, international economic law, and private law. Arato serves as a member of the board of editors of the American Journal of International Law. He is active in the governance of the American Society of International Law, having recently served on the executive council and as co-chair of the international economic law interest group. He also serves as chair of the Academic Forum on Investor-State Dispute Settlement and as a member of the Institute for Transnational Arbitration Academic Council. Since 2018, Arato has served as an observer delegate to the United Nations Commission on International Trade Law Working Group III (ISDS Reform).