International Investment Law

Reconciling Policy and Principle

Surya P Subedi

• Publisher: Hart Publishing
• Year: 2012
• ISBN:
  9781847319876
• Edition: 2
• Topic: Law
• Subtopic: International Trade Law
• Index: Law

This book offers an up-to-date, scholarly overview of the law of foreign investment, incorporating a thorough and succinct analysis of the principles and standards of treatment available to foreign investors in international law. It is authoritative and multi-layered, offering an analysis of the key issues and an insightful assessment of recent trends in the case-law, from both developed and developing country perspectives. A major feature of the book is that it deals with the tension between the law of foreign investment and other competing principles of international law. In doing so, it proposes ways of achieving a balance between these principles and the need to protect the legitimate rights and expectations of foreign investors on the one hand, and the need not to unduly restrict the right of host governments to implement their public policy, including the protection of the environment and human rights, and the promotion of social and economic justice within the host country, on the other. Since the first edition was published a number of landmark decisions have been produced by various international investment tribunals, calling for an update in what is a fast growing and rapidly changing investment environment. In addition, scholars and other actors, both non-governmental and inter-governmental, have responded to the agenda set by the first edition of this book; thus the second edition also reflects on the work of some of these major actors in the field. This is perhaps the first book of its type authored by an international lawyer who has taught, researched and advised in both the developed and developing world over the past 25 years. The wealth of experience he brings to the task enables him to develop unique insights into the interplay between the law, economics and politics of foreign investment, making this book essential reading for students, scholars, practitioners and diplomats interested in the contemporary law of foreign investment.

1

Evolution of Foreign Investment Law

INTRODUCTION

The aim of this chapter is to provide an understanding as to how foreign investment law has evolved in response to the changing economic and political situation of the world. In doing so, it will also look at the impact the traditional developed—developing country tension has had on the evolution of international foreign investment law.

THE EARLY YEARS

Since time immemorial people have gone abroad to invest and to engage in business. When European traders started to go to Asia, Africa and Latin America to trade with local communities, it was held that the local law could not be applied to them since they were already subject to the law of their home country. Early scholars such as Grotius¹ and Vattel² lent their support to such a position. This argument was based on the assumption that these businessmen carried the law of the country of their nationality with them wherever they went and were thus not subject to local law. Foreigners coming from European countries sought special and superior treatment from the local population in much of Asia, Africa and Latin America. The implication of this idea was that their assets could not be expropriated or nationalised through legislation enacted by the local population. Since the local law was inferior, it could not apply to the foreigners, who were subject to the superior body of law of their home country.

As noted by Sutton, many treaties concluded by European powers with Asian and African states provided that the Europeans remained under the jurisdiction of their home states and their consuls exercised jurisdiction over their fellow nationals.³ For instance, the treaty concluded between the Sheikhdom of Bahrain and the British Government in 1861 stated in Article 4 that the British subjects and dependants in Bahrain shall receive the treatment and consideration of the most favoured people.

All offences which they may commit or which may be committed against them, shall be reserved for the decision of the British Resident, provided the British agent of Bahrain shall fail to adjust them satisfactorily.⁴

Thus, in the early years of the development of foreign investment law it was understood that no state could expropriate or nationalise foreign assets. States could not invoke national laws as a reason for avoiding their international obligations arising from the notion of an international minimum standard. It was only in the next phase of development when the number of independent states grew that it came to be accepted that states could expropriate the assets of foreigners under narrowly defined conditions and against the payment of compensation.

Foreign investment law has its origins in the international law concerning the protection of aliens—a legal regime based both on international human rights law and the public international law principles of fairness, equity, justice and non-discrimination.

NATIONAL TREATMENT VERSUS INTERNATIONAL MINIMUM STANDARD

When colonial territories began to gain independence they started to challenge the concept that foreigners residing and doing business in those countries could not be governed by the law enacted by the local population. Relying on the doctrine of sovereignty and sovereign equality, they asserted that every sovereign state had the right to expropriate or nationalise foreign assets provided that the foreign investor was provided with compensation. The very notion of sovereignty meant that foreigners residing within the national borders of the country were subject to the law of the land. For instance, Article 9 of the Convention on the Rights and Duties of States, one of the first international instruments to support the idea of national treatment, signed at the Seventh Pan-American Conference, provided that

The jurisdiction of States within the limits of national territory applies to all the inhabitants. Nationals and foreigners are under the same protection of the law and the national authorities and the foreigners may not claim rights other or more extensive than those of the nationals.⁵

The Latin American countries were the first group of states to gain independence from their colonial rulers. These newly independent states began to assert that foreign investors were not entitled to any greater protection than those accorded to the nationals of the country under the law of the land. If the host states treated foreign investors on a par with the nationals of the country, the host states were acting within the norms of international law. Consequently, the right to expropriate the assets of foreign companies with compensation was accepted as an appropriate corollary to state sovereignty.

However, it was submitted that if the local law were considered inferior, not well developed or failed to meet the standards of justice and equity, the international minimum standard rather than national law would apply to foreign investors. The assertion was that international law provided for the international minimum standard and all states had to accept the international minimum standard by bringing their national laws up to this standard. Consequently, the focus was on interpreting what constituted the international minimum standard.⁶

One of the advocates of the application of an international minimum standard to the question of the treatment of aliens, including foreign investors, was Elihu Root, a leading American international lawyer, who argued in 1910 that there was a standard of justice which formed a part of international law. Any national law dealing with the treatment of aliens had to conform to this general international standard:

If any country’s system of law does not conform to that standard, although the people of the country may be content or compelled to live under it, no other country can be compelled to accept it as furnishing a satisfactory measure of treatment to its citizens.⁷

Schwarzenberger added his voice in support of this argument in the following words:

[T]he national standard cannot be used as a means of evading international obligations under the minimum standard of international law. Even if the standard of national treatment is laid down in a treaty, the presumption is that it has been the intention of the parties to secure to their nationals in this manner additional advantages, but not to deprive them of such rights as, in any case, they would be entitled to enjoy under international customary law or the general principles of law recognised by civilised nations.⁸

Those scholars who articulated the notion of an international minimum standard drew on the doctrine of state responsibility, which provided protection against injury to aliens and alien property.⁹ States were not legally bound to admit aliens into their territory but once admitted they had to be accorded a certain standard of decent treatment. The concept of national treatment would entitle foreign investors to the same rights and privileges as those enjoyed by the nationals of a country, but it would not provide adequate protection to foreign investors if the nationals and foreign investors were treated equally badly. As stated by Asante, according to the doctrine of state responsibility,

host States are enjoined by international law to observe an international minimum standard in the treatment of aliens and alien property. The duty to observe this standard—objective international standard—is not necessarily discharged by according to aliens and alien property the same treatment available to nationals. Where international standards fall below the international minimum standard, the latter prevails. Breach of the minimum standard engages the responsibility of the host State, and provides a legitimate basis for the exercise by the home State of the right of diplomatic protection of the alien, a right predicated on the inherent right to protect nationals abroad.

. . .

The development of the law of State responsibility was inspired by Western laissez-faire ideas and liberal concepts of property. From the juristic standpoint, one of the underlying principles is the duty of the host State to display fair and equitable treatment or good faith in its conduct towards aliens.

The Law of State Responsibility, which was originally conceived for the purpose of pro tecting individual aliens, was subsequently extended to foreign companies and other foreign business concerns.¹⁰

In the Barcelona Traction Case, the ICJ stated that

When a State admits into its territory foreign investments of foreign nationals, whether natural or juristic persons, it is bound to extend to them the protection of the law and assumes obligations concerning the treatment to be afforded them.¹¹

In the Roberts claim, the General Claims Commission held that

Facts with respect to equality of treatment of aliens and nationals may be important in determining the merits of a complaint of mistreatment of an alien. But such equality is not the ultimate test of the propriety of the acts of authorities in the light of international law. That test is, broadly speaking, whether aliens are treated in accordance with ordinary standards of civilization.¹²

However, since there was no internationally negotiated treaty outlining the terms and conditions of protection of foreign investment, one had to look at other sources of international law, mainly customary international law, in order to ascertain what constituted international law on the subject matter or the international minimum standard. Thus, normally, the practice of investor countries had to be relied upon to determine what constituted customary international law. The same is true of the general principles of law or of the subsidiary sources of international law because whatever writing existed on international law or whatever case-law existed on the subject matter was based on the law hitherto in existence and the practice of investor countries. Furthermore, the law hitherto in existence was the law made by the investor countries designed to protect foreign investment abroad. Therefore, once it was agreed that international law or an international minimum standard would apply to foreign investment this meant, for all practical purposes, applying the law of investor countries. This is one reason why the classic doctrinal tension that existed with regard to foreign investment law was the tension between those who preferred to apply national law to regulate foreign investment and those who preferred to apply international law, meaning customary international law made by investor countries.

When it was submitted that the international minimum standard¹³ rather than national law was applicable to foreign investment, an attempt was made to define the international minimum standard not only in light of the general principles of justice and equity and the practice of states on the treatment of foreign investment, but also in light of the existing rules of both the conventional and customary international law of human rights. In other words, human rights principles, including the right to property, were also invoked to define what constituted the international minimum standard. Under the evolving principles of international human rights law, every individual, both physical and juridical and whether national or alien, residing within any country, was entitled to their basic human rights, including property rights, protected by law. Consequently, when it came to defining what constituted the international minimum standard not only foreign investment law, but also human rights law, including the property rights of the individuals, whether national or alien, had to be taken into account. Thus, in effect, the international human rights agenda, which supplemented and complemented foreign investment law, would extend the application of the national property law of investor countries to foreign investors doing business abroad. This meant that individual property belonging to either nationals or aliens could not be expropriated or nationalised by a state without compensation.¹⁴

Accordingly, the right of states to regulate foreign investment under their national law in exercise of their sovereign rights had to be balanced with the principles of international human rights law. Consequently, one of the benefits seen by many states in the promotion of the human rights agenda and in supporting the universality of human rights was the protection of the investment made by their nationals abroad. Thus, the cumulative effect of all customary and conventional rules of international law was that foreign investors were entitled to the protection accorded under the notion of international minimum standard which was based on both foreign investment law and international human rights law. Accordingly, one of the requirements of this international minimum standard was that the taking of private property by a state had to be non-discriminatory, for a public purpose, against the payment of appropriate compensation and in accordance with the due process of law. For instance, a provision in the Central American Free Trade Agreement (CAFTA) states that the provisions concerning expropriation and compensation in Article 10.7 are ‘intended to reflect customary international law concerning the obligation of States with respect to expropriation’.¹⁵

THE ERA OF GUNBOAT DIPLOMACY

Prior to the introduction of diplomatic protection, particularly in the nineteenth century, influential individuals and corporations would persuade their governments to send a small contingent of warships to moor off the coast of the host states until reparation was forthcoming. This was practised frequently by the major trading nations of Europe. For instance, in 1902 the governments of Great Britain, Germany and Italy sent warships to the Venezuelan coast to demand reparation for the losses incurred by their nationals by Venezuela defaulting on its sovereign debt.¹⁶ However, the provision for the settlement of international disputes between states by peaceful means by the Second International Peace Conference of The Hague in 1907, which adopted the Convention on the Peaceful Resolution of International Disputes, ope...