Investment Law

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Author: Anna Hankings-Evans

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A. Introduction: Colonial Origins, Global and Regional Trends[edit | edit source]

The evolution of the international law relating to foreign investment was accompanied and inevitably shaped by a long history of dispute over applicable rules and standards. The origins of what today is known as international investment law can be traced to the first half of the 20th century that witnessed significant developments of international norms protecting aliens and their property against interference of the territorial state. These developments were thereby largely shaped by major powers and the protection of their nationals assets in Latin American states. They largely excluded notably colonized territories, as protection of their nationals property was achieved through occupation and the subsequent installment of colonial administrative systems. It was the period of decolonization of Africa and Asia after World War II that significantly contributed to the evolution of today's 'modern' international investment law and ajudication.

I. The Evolution of International Investment Law[edit | edit source]

1. The Colonial Period[edit | edit source]

The law of foreign investment is inextricably linked with the colonial venture and expansion. It was early writings by European institutions on the treatment of aliens that launched the evolution of protection of assets abroad. For instance the Spanish philosopher, theologian, and jurist, Francisco de Vitoria (ca. 1483 – 1546), had insisted in his early encounters with indigenous people and land on a natural right of the Spanish to travel and to trade. It was the observed differences in culture and community that led to the justification of hegemony and colonial exploitation, thus the subsequent protection of forcefully acquired territory.[2] Likewise, the Dutch jurist Hugo Grotius (1583 – 1645), the 'father' of international law, had played an essential role in the legal justification of the colonial expansion into Asia and Africa.[2] Grotius had worked closely with the directors of the Dutch East India Company (officially the United East India Company), a multinational trading and investment company of the 17th century, and developed rights and contract theories for the benefit of the corporation and its commercial, particularly foreign investment interests oversees.[3]

In the 18th and 19th centuries, a large part of the non-Western world had been brought under colonial control, which made the development of rules on the protection of foreign investments largely redundant. Instead, investment protection of assets acquired in colonies was guaranteed by the forceful integration of the colonial legal systems into the imperial state's parliamentary and court system.[2] Colonial state power, motivated by furthering the commercial interests of its trading and investment companies,[4] thus, served as the protector of its nationals' investments abroad.

2. Treaties of Friendship, Commerce, and Navigation and “Unequal Treaties”[edit | edit source]

While so-called “gunboat diplomacy” served as investment protection in colonized territories, trade and investment relations to states which where not under colonial rule, such as China, were often established on the basis of the principle of extraterritoriality. For instance, bilateral treaties between the Qing dynasty in China and the United States as well as other European states that were negotiated governing diplomatic and commercial relations between the parties, stipulated home state jurisdiction, meaning the application of laws of the respective home state to its citizens abroad.[5] Due to the one-sidedness of privileges accorded by these treaties, they were later referred to as 'unequal treaties' by China. The inequality that inhibited these bilateral treaties was thereby a clear contradiction to the proclaimed sovereignty and equality of states under international law. On the other hand, they also manifested a clash of empires, from which one emerged as the victor by contractually establishing the victory of on legal framework over the other.[5]

3. The Quest for a (Customary) International Minimum Standard[edit | edit source]

The international Minimum Standard of Treatment is today considered a customary rule in international law regarding the treatment of aliens and their property within a host State. But it did not establish without being challenged by non-Western states.

a. The Soviet Union and the First Wave of Expropriation[edit | edit source]

Subsequent to the October Revolution in Russia, the Decree on Peace that was written by Vladimir Lenin, the head of government of Soviet Russia, was passed on 26th of October 1917 by the Second All-Russian Congress of Soviets, resulting in the abolition of private land and a wave of expropriation of foreign property without compensation.[6] Western governments reacted indignantly to the measures taken by the new Soviet government, insisting on a well-established principle among civilized states that prescribes compensation to be paid for any forceful expropriation and nationalization.[7] In 1920, due to internal economic hardship, the Soviet Union passed the New Economic Policy with the intend of receiving economic assistance from the international community. It simultaneously opened up to the idea of compensating previously confiscated foreign property, nevertheless insisting that no customary state duty exists that would obligate a state to compensate foreign nationals in cases where property had been expropriated.[6] In return for the Soviet Union's concessions, counterclaims were being asserted on behalf of the latter for military intervention it endured in response to the October Revolution. Years of negotiations followed, initiated by states such as the United Kingdom and the United States, which did, however, not lead to the anticipated outcome of successful settling all claims. The Soviet Union rather upheld its opposition to the customary minimum standard being asserted by the West.

b. The Calvo Doctrine[edit | edit source]

Likewise, Latin American states resisted the assertion of a customary international minimum standard. It was particularly the investment relations between the United States and Latin American states that triggered an international debate on the exact scope of foreign investment protection. Latin American states argued for 'national treatment' of foreign investors, meaning that they should not be treated better that local investors under the laws of the host state. This standard in treatment effectively restricted foreign investment protection to the standard accorded by domestic law. The conception became known as the so-called Calvo Doctrine that was developed by the Argentinian diplomat and legal scholar Carlos Calvo (1822 – 1906). The doctrine was first articulated in Calvo's Derecho internacional teórico y práctico de Europa y América (International law: Theory and practice in Europe and America), which was published in 1868. To give emphasis to the doctrine, Latin American states such as Peru and Bolivia went on to incorporate the Calvo Doctrine into their national constitutions or otherwise into their national legal frameworks, or entered into commercial agreements with foreign investors based on the Calvo Doctrine.[6] Western states responded by challenging the legality of domestically regulating foreign investments under international law's doctrine of diplomatic protection.

c. The Hull Formula[edit | edit source]

Conversely, capital-exporting states such as the United States maintained the existence of an international (minimum standard) of treatment applicable to foreign investments must be a standard that exists independently of local laws. The so-called Hull Formula formula was coined in 1938 by former U.S. Secretary of State and co-founder of the United Nations Cordell Hull (1871 – 1955). According to it, compensation must be 'prompt, adequate and effective.' Prompt in that regard refers to compensation in close temporal connection with the expropriation, especially if otherwise an inflationary loss would have to be accepted, adequate refers to appropriate, usually full compensation for value (market value), and effective means payment without foreign exchange restrictions and in a convertible currency.

d. The Era of Decolonization and the Second Wave of Expropriation[edit | edit source]

With the end of World War II and the subsequent decolonization of the Global South, newly independent states increasingly challenged the customary rules on foreign investments. They argued that the emergence of such rules had largely excluded the perspectives and participation of formerly colonized states. They, further, argued that the asserted international law on foreign investments was central to the underdevelopment of newly independent state as they primarily upheld existing power structures and served economic interests of predominantly Western states.

It was for this reason that a global regime for investment emerged through the negotiation of international investment agreements (IIAs), negotiated primarily on the basis of bilateral relations. These agreements form part of international law and are intended to protect and promote foreign investments in the respective territories of contracting states. One of the main features in IIAs is the guaranteed protection of foreign investment against expropriation and nationalization without compensation. Today virtually all BITs entail a substantive provision protecting foreign property against expropriation. This is partly due to the numerous cases of expropriation that arose in the 1960s, when newly independent states moved to nationalize foreign property. Many former colonies regarded nationalizations as an integral part of their decolonization process.[1]

e. Towards a New International Economic Order (NIEO)[edit | edit source]

In the several resolutions were passed within the United Nations General Assembly, calling for the establishment of a New International Economic Order (NIEO). One cornerstone of the demand was the replacement of international laws governing the expropriation of aliens with domestic laws of the nationalizing state that would determine appropriate compensation and settle disputes arising from the question of compensation.[8]

4. The 21st Century and International Investment Law's Legitimacy Crisis[edit | edit source]

II. Legal Sources[edit | edit source]

1. Customary Law[edit | edit source]

2. International Investment Agreements[edit | edit source]

3. (Private) Investment Contracts[edit | edit source]

4. Domestic Laws Governing Foreign Investment[edit | edit source]

B. General Structure and Substantial Guarantees of International Investment Agreements[edit | edit source]

I. Overview and Structure of International Investment Agreements[edit | edit source]

IIAs can be defined as international agreements between two or more states that governs investments made by a national of one state party to the treaty in the territory of the other state party treaty.[6] IIAs generally show slight variations in language, with some restricting host state actions more severely than others. This is largely depends on and is often due to the differences in bargaining of negotiating states. Nevertheless, virtually all IIAs share significant similarities regarding their general structure and substantive provisions on the standard of treatment of foreign investors and their investments.[6] At the beginning of May 2022, the total number of IIAs was 3219, of which 2794 were Bilateral Investment Treaties (BITs).[9]

II. The General Scope of Application of International Investment Agreements[edit | edit source]

While IIAs generally aim at protecting 'foreign investment' and establish a standard of treatment, shielding foreign assets against host state intervention, a natural or legal person can only claim protection under the respective agreement, in cases where the person also falls under the treaty's scope of application. Each IIA therefore offers a definition of what constitutes an investment under the IIA and who benefits from its protection. In negotiating IIAs, states usually aim at allocating the maximum possible protection to its own citizens, companies and corporations, while making sure, no nationals from other states are excluded of benefitting from the IIAs protection.

1. Principal Actors[edit | edit source]

International Investment Law typically involves a tripartite set of actors: the capital-exporting home state, the capital-importing host state and the foreign investor. Traditionally, only States were considered principal subjects of international law, which led to the customary doctrine of diplomatic protection being the only remedy available to the foreign investor in question that wished to challenge host state measures affecting his or her property rights abroad. Diplomatic protection, however, constituted a genuine right of the home state, not the foreign investor, and accordingly largely depended on the home state's political willingness to challenge host state actions against its national by way of initiating an international claim for compensation.[10] Diplomatic protection thereby depended on the exhaustion of domestic remedies as well as the foreign national's nationality that would amount to a genuine link between national and home state. The development of a separate international treaty-based substantive and procedural law thus also served to depoliticize the investment relationship.

2. Foreign Investors[edit | edit source]

Most IIAs distinguish between and provide a definition for foreign investors that are natural persons and legal entities and offer different definitions for the two categories. But there are also IIA that just offer one definition that is equally applicable to natural and legal persons. The foreign investor, either a natural or legal person, does thereby not acquire international legal personality, but is, by way of an international agreement between the two states in question, empowered to resort to treaty-based dispute resolution using international platforms and procedures.[10] These developments are similar to those in other areas of international law, namely human rights law, which comparatively give individuals a treaty-based right of action against a state. Foreign investors can be divided into several sub-categories, the most important being non-state actors, meaning private investors as well as state investors.[11] But also a number of international institutions and organizations play a crucial role abroad, such as the the World Bank and its affiliates. Development institutions typically invest both state and private capital to curb economic development in host states but simultaneously earn a return on invested funds.[12] Sometimes investors are finally found in mixed form, for example, when a private company decides to enter into a joint venture with a state-owned company and invest jointly abroad.[12]

a. Private Investors[edit | edit source]

Private investors are either a natural or legal person that are not affiliates of any government or state.

i. Natural Persons as 'investor'[edit | edit source]

In principle any natural person fall under the scope of an IIA, if that natural person has the citizenship or nationality of the host state. Occasionally, the home state extends the scope of application also to natural persons that permanently reside in in the home state. Many IIAs thereby shift the scope of application to the domestic sphere, by establishing that domestic law as the denominator for the necessary link to the home state. Natural persons with dual citizenship accordingly pose a challenge to the establishment of the link, as IIAs are not intended to, for instance, leverage one nationality against the other.

ii. Companies or legal entities as 'investors'[edit | edit source]

The typical form of private investors are regularly companies and corporations that are owned or controlled by private individuals. Companies and corporations are usually created under domestic law of the respective home state, and can thus vary in form and structure. Nevertheless, companies and corporations share some characteristics irrespective of their place of origin and seat, for instance being entities with 'limited liability' and allowing for centralized control and management, even if subsidiaries are located in different home states. Firstly, they exist as separate legal entity that is separate and distinct from the legal personality of their owners or shareholders. They can, secondly, sue and be sued both in their domestic jurisdiction and abroad. And, finally, they can enter into legal and contractual relationships that allows them, for instance, to acquire and transfer property. In that way, they are comparable to natural persons who engage in similar legal relationships.

Companies and corporations can take complex forms, particularly if they enter into joint-ventures with other companies and create subsidies in receiving states. They can also appear as so-called 'multinational corporations', for example, if different companies are linked to one another by contract or by way of share ownership. This has enabled private entities in the past to choose between different investment dispute forums offered by BITs, depending on which standard of protection and access to ajudication is regarded more favorable. This phenomenon has been referred to as 'forum shopping'. Forum shopping strategies can be described as the systematic utilization or exploitation of co-existing jurisdictions for the sake of certain legal or factual advantages and accordingly raise numerous legitimacy and fairness issues that have been addressed in international academia and by various NGOs.

b. State Investors[edit | edit source]

State investors usually refer to state-owned enterprises, government corporations or entities that are at least controlled by the state.[13] State affiliated investors thereby raise a couple of geopolitical concerns, for instance regarding a home state's influence and a host state's security interests. This is because a state-owned or state controlled entity owning assets in another state allows for political power of that entity, and thus, the state of origin. States hiding behind a state-owned or state-controlled corporation that owns assets in another state may thereby exercise political power over the home state in question. State investors may also warrant concerns over national security, economic dependency and sovereignty, depending on how the receiving state conceptualizes its economic ideology.It is therefore crucial that home states assess potential risks and regulate accordingly those sectors that are not open to foreign investment by a state investor. This has been done by many capital-importing states, as state-affiliated corporations remain important investors both domestically and globally.[14]

2. Forms of International Investments[edit | edit source]

a. Foreign Direct Investments[edit | edit source]
b. Portfolio Investments[edit | edit source]

III. Standard of Treatment[edit | edit source]

1. Principles of Non-Discrimination[edit | edit source]

a. National Treatment[edit | edit source]
b. Most Favoured Nation[edit | edit source]

2. Fair and Equitable Treatment[edit | edit source]

3. Other Standards[edit | edit source]

a. Full Protection and Security[edit | edit source]
b. Money Transfer Provisions[edit | edit source]

4. Guarantees Against Expropriation and Dispossession[edit | edit source]

The IIA terminology utilized in the respective provisions on expropriation are not uniform. Terms such as expropriation, taking, nationalization, dispossession, and deprivation are often used interchangeably, and their use usually depends on legal tradition and translation.[1] While host state measures may target and seize foreign property directly, the prohibition usually extends to state measures short of physical taking. Such indirect measures may likewise impact the economic value of the foreign property in question or prevent foreign investor from its proper usage, management or control in a meaningful way.[1] Host state measures that impact foreign property indirectly can, thus, be categorized as indirect expropriation and are sometimes explicitly referenced as prohibited host state measure. A third category of deprivation can arise in cases of host state regulation in the public interest that may affect foreign property in a similar manner such as in the cases of direct and indirect expropriation. The legality of such regulatory measures largely depend on the preservation of regulatory space in a state's IIA regime and will be further addressed below when discussing the right to regulate.

5. Non-Precluded Measures: Essential Security, Economic Stability and the Defence of Necessity[edit | edit source]

6. Dispute Settlement[edit | edit source]

a. The International Centre for Settlement of Investment Disputes (ICSID)[edit | edit source]
b. The United Nations Commission on International Trade Law (UNCITRAL)[edit | edit source]

C. Public Policy Issues: Environmental Protection, Human Rights and Sustainable Development[edit | edit source]

I. Fragmentation in International Law[edit | edit source]

II. The Right to Regulate[edit | edit source]

III. Legitimacy and Postcoloniality[edit | edit source]

D. Investor-State Dispute Settlement and Legitimacy Concerns[edit | edit source]

Further Readings[edit | edit source]

  • Source I
  • Source II

Conclusion[edit | edit source]

  • Summary I
  • Summary II

Table of Contents[edit source]

Back to home page

Part I - History, Theory, and Methods

Part II - General International Law

Part III - Specialized Fields

Footnotes[edit source]

  1. a b c d UNCTAD, Expropriation, (New York and Geneva 2012) 6.
  2. a b c Sornarajah, M., The International Law on Foreign Investment (Cambridge University Press 5th ed. 2021) 27.
  3. van Ittersum, M. (2006). Profit and Principle: Hugo Grotius, Natural Rights Theories and the Rise of Dutch Power in the East Indies (1595-1615). Brill Academic Publishers.
  4. Roy, T. East India Company: The World's Most Powerful Corporation (2012).
  5. a b Hanneman, Stacie. Moving Beyond the “Unequal Treaties”. Frontiers of History in China 7.3 (2012), pp. 344-375, pp. 345, 351.
  6. a b c d e SALACUSE, Jeswald, The Law of Investment Treaties (Oxford University Press 2021 3rd ed) 168.
  7. See Resolution adopted at the Brussels Conference of 1921.
  8. DOLZER, Rudolf and SCHREUER, Christoph, Principles of International Investment Law (2nd edn, Oxford University Press 2012) 4.
  9. UNCTAD, IIA Navigator
  10. a b MUCHLINSKI, Peter, Policy Issues in: Muchlinski, Peter, Ortino, Frederico, and Schreuer, Christoph (eds.), The Oxford Handbook of International Investment Law (Oxford University Press 2008) 6.
  11. SALACUSE, Jeswald, The Law of Investment Treaties (Oxford University Press 2021 3rd ed) 37.
  12. a b SALACUSE, Jeswald, The Law of Investment Treaties (Oxford University Press 2021 3rd ed) 40.
  13. SALACUSE, Jeswald, The Law of Investment Treaties (Oxford University Press 2021 3rd ed) 38.
  14. SALACUSE, Jeswald, The Law of Investment Treaties (Oxford University Press 2021 3rd ed) 39.