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1 Foreign investments and public policies
1. Introduction
Picture the following scenario ā¦
State X and State Y have concluded a bilateral investment treaty (BIT) with the aim of promoting and protecting foreign investments. According to the BIT, the states commit to compensate investors for expropriations or interferences tantamount to expropriation. The BIT reciprocally allows investors of the other state to submit a dispute over the investment to international arbitration.
A corporate investor from State X with worldwide profitable investments in the natural resource industry sets up an iron mine in State Y through a local subsidiary with an initial pre-production capital investment of more than $2 billion. The investment mainly covers the building of the mine, infrastructure and the building of a cargo airport nearby. The mine is expected to be operational for at least 30 years. According to the taxation scheme laid down in the exclusive exploitation licence granted to the local subsidiary, the government take is 37% in company taxes. After three years of exploitation the government of State Y decides to change the tax scheme by imposing 2% production royalties to the benefit of the local community. Is the investment expropriated? No, the government does not interfere with the ownership of the company. Is there a loss of expected profits? Yes. Should the investor then be compensated? Yes, that is highly likely.
Would the legal response to this question be different if the same company is not subject to tax regulation but to labour regulation, since it employs workers at an hourly salary 50% lower than what a new law imposed on State Y concerning sustainable business practices requires? Or what if new environmental regulation imposes CO2 quotas or obliges the company to change its production process due to a ban on the use of a chemical that recent tests show is likely to cause cancer? What if the same mining company had been granted a licence to exploit uranium and technical analyses later revealed that it was harmful to the local environment and public health? Or what if a newly elected government wants to impose a zero-tolerance policy towards uranium mining? Does it make a difference if the company has voluntarily committed to report annually on their social responsibility?
What weight should be given to the purpose of the regulatory measure, if any? Does the type of regulation imposed have an impact on whether investors should be compensated or not? Or to what extent?
This research seeks to assist in developing a methodology that on the one hand protects large-scale investments from the will of governmental haphazardness, while at the same time ensuring that states can exercise their legislative function to enhance development and social welfare or at least ensure that foreign investment is not detrimental to these aims.
International investment law is a branch of international law governing the rules protecting foreign investments in a global context. This introductory part seeks to explain the rationale behind this research concerning international investment law and statesā right to regulate.
2. Background and methodological considerations
This research transpires from a basic thought of collision of two legal regimes of international law, the international investment law regime and the human rights regime encompassing a collision of norms, policies and values. The overall objective of this research is to examine the right to regulate in international investment law, focusing on the determination of the nature and scope of the right to regulate. Whereas the nature of the right to regulate focuses on what states can do under this right, the scope of the right to regulate is largely concerned with the practical applicability of the right. The human rights perspective basically underlines that this is a study of the human rights implications on the international investment law regime.
This study of the right to regulate in international investment law is based on a perception of international law as a system, where the principle of coherence serves as the overall guideline. Coherence is attached to the idea that a system should āmake sense as a wholeā.1 Making sense as a whole is a precondition of intelligibility, which in turn is considered an essential characteristic of law. When considering international law as a system, coherence plays an important role providing normative order. This is because that what is coherent forms a well-organized structure. In the contrary, international law would appear with disorder and inconsistent normative statements. Though the idea of a coherent international legal order is a theoretical ideal, which in practice faces many obstacles, this research ā nevertheless ā approaches international law from the perspective of creating international legal order.
International law is not only subject to deliberate change (e.g. through legislation and administrative orders). Also, the law changes pursuant to developments in morals and values in society.2 Norms are not domestically fixed but may transcend the national sphere becoming international norms or concepts. Said norms, due to their established role in society and morals, are becoming absorbed by the law. Perceiving international law as an open process ensures the ability to maintain a perspective of law as an authoritative process displaying and reinforcing policies and fundamental societal values. This approach is in contrast to a more traditional perspective on legal analysis as a construction of norms determined by reference to formal sources of international law. This is not to say, however, that the following represents a revolutionary theory about international law. The perception of international law as a dynamic body of law is neither new nor controversial. In essence, law reflects the ideologies of its place and time. At the same time, integrity of law is linked with a political obligation on law-appliers to make their decisions cohere with the expectations of the community whose law they administer.3
All in all, the task of legal reasoning is to establish the systemic relationships between law and policy. The role of the legal researcher is therefore twofold. On the one hand, the researcher must determine what the law is by rationally reconstructing the norms in the most coherent and convincing way possible. On the other hand, the researcher must seek to develop the law so as to serve as a means for social justice. The method employed thus consists of two steps by both analysing the law as it is, as well as the law as it should be when taken into account its particular policy context.
From an overall perspective, law is perceived as being closely linked with justice. Some of the earliest thinking about justice is found in Aristotle, who distinguished between ācorrective justiceā and ādistributive justiceā. This research employs a method that comprises aspects of both law and policy to enhance distributive justice, i.e. the appropriate distribution of goods.4 The purpose of law is here considered to be both practical (āsolving problemsā) and ideal (ārealising our potential as a societyā). At the practical level, we could treat justice as the outcome of decisions by courts and arbitral tribunals. At the ideal level, law can be the means to social justice. Justice must be done and be seen to be done through the use of legal means. Law has therefore to seek and demonstrate justice at all times.5 It may be said that states, which seek to promote public policies in an attempt to serve broader community interests, are pursuing justice. Serving a higher goal of justice thereby becomes the link between public policies and the formation of the law.
The interaction between law and policy is under scrutiny in this research. As to methodology, the research relies largely on a classical dogmatic legal analysis of the law as it is (de lege lata), since it describes, systematizes and interprets existing rules relating to the protection of foreign investments and the right for states to regulate. In addition hereto, this research includes suggestions for improvements to enhance the unification of international investment law (de lege ferenda). For this purpose, the research draws on methods from political science, such as policy analysis and the use of statistical data in order to determine which rules should be employed to achieve an outcome in the application of the law, which corresponds to the policy goals endeavoured. In the main this research embarks on a prospective approach to the law through the analysis of trends and developments in contrast to adopting a retrospective approach, which historically explains how the law has developed until now. The reason for this is the ambition to make a qualified contribution to the development of international investment law. As it appears, merely depicting the dysfunction of the international investment law regime from the human rights perspective is a demanding task.
The ambition of this research is to provide a theoretical foundation, which can be useful for both policy makers, negotiators of International Investment Agreements (IIAs) as well as practitioners advising foreign investors and arbitrators tasked with the settlement of investment disputes.
The data of this research comes from a variety of sources, whereas the collection of BITs and model BITs, the review of practice from arbitral tribunals and courts as well as the literature review account for the main sources. These sources are greatly supported by supplementary sources in the form of statements and reports by key policy makers, informal interviews with scholars, negotiators, arbitrators as well as researchers at the United Nations Conference on Trade and Development (UNCTAD).
While examining statesā right to regulate, the object of examination is limited in three ways:
- 1) to an examination of BITs, which makes up the major group of IIAs;
- 2) to an examination of arbitral practice in investorāstate disputes, mainly focusing on disputes initiated at the International Centre for Settlement of Investment Disputes (ICSID);
- 3) to an examination of expropriation claims.
The BITs examined are selected so as to cover a geographical representative extract, which allows for consideration to various cultural and regional interests, economy as well as level of development. BITs examined thus cover NorthāSouth BITs (between countries traditionally perceived as developed and developing countries), SouthāSouth BITs (between countries traditionally perceived as developing countries) and BITs between the BRIC countries and European states as well as BITs between BRIC countries and developing countries. The scope is further limited to BITs drafted in English, German, French or Spanish. In total, a sample of 293 BITs and 13 model BITs have been examined. BITs examined can be found at the webpage of the UNCTAD.6 Model BITs can be found either at the webpage of Investment Treaty Arbitration7 or in the book C. Brown (ed.) Commentaries on Selected Model Investment Treaties (Oxford: Oxford Unive...
