Find case material here
Before course starts:
- Watch video lecture on Canvas
- Read pp 1-57 in Principles of International Investment Law
Introduction – video lecture
Investment treaty regime
Foreign direct investment has increased over the recent years.
Basic problem = the commitment problem. State has sovereignty and can thus decide when to raise taxes within its
jurisdiction etc. For investor this is a problem, if they knew a change like this would happen over the coming years
than the calculation would have been different or chosen not to invest. how can an investor protect itself? This
raises two problems:
- Governing law: if the agreement is subject to DL, then the State is free to change it.
- Dispute settlement: disputes go to the court of host state by default, this raises problems on questions of
whether judiciary is independent or are judges neutral.
How to resolve commitment problem:
- Objectives
o Create stable legal framework
o Neutral dispute settlement
- Possible instruments
o Investor-State contracts
o Domestic law (i.e. in Netherlands domestic law provides sufficient stability and sufficient neutral
dispute settlement)
o Investment insurance
o International law (can subject it to law that a State cannot unilaterally change)
Bilateral Investment Treaties (BITs):
- Binding agreement under international law between two States
- Not only instrument that contain rules on international investment (international investment agreements
i.e.)
Content and structure of BITs/IIAs
- Preamble object and purpose, Parties’ intentions
- Definitions who is protected as an investor, what type of economic activity is protected
- Substantive standards admission, prohibition on expropriation without compensation, FET, MFN,
national treatment, umbrella clause, capital transfer
- Dispute settlement State-to-State and Investor-State dispute settlement
Investment treaty arbitration:
- Investor and State each appoint an arbitrator and agree on chairman or have two arbitrators appoint
- Most frequently brought under the rules of the International Center for Settlement of Investment Disputes
(ICSID) and UNCITRAL Arbitration rules, Stockholm Chamber of Commerce (SCC), London Court of
International Arbitration (LCIA) and International Chamber of Commerce (ICC)
o ICSID is an international organization part of the World Bank group. Has wide membership.
Provides procedures and not substantive rules. Jurisdiction is governed by Art 25(1) ICSID
Convention.
Art 53(1) ICSID Convention, award is binding on the parties and no other remedy can be
sought
Art 54(1) ICSID Convention, each contracting Party shall recognize award as if it were a
final judgment of a court of that State makes it enforceable.
Tribunals as law-makers
- What does fair and equitable treatment mean tribunals build upon how tribunals before them
interpreted the technical terms precedent
,Special features of investment treaty arbitration = (1) direct investor access (2) review of government acts under
international law (3) generalized advanced consent (4) no exhaustion of local remedies (5) damages as remedies (6)
enforceability of awards (5) vague standards.
Legitimacy crisis
Source = type of disputes dealt with.
- Administrative law disputes
- Constitutional law disputes
- Review of public health measures
Challenges of privatization of justice (arbitrators instead of courts)
- Limitation to foreigners differentiates between foreign investors who are entitled to protection
- Inconsistent decisions existence of large number of arbitrators
- Arbitral procedure
- Legitimation and control or arbitrators who ensures that decisions are correct
- Policy space how can we make sure that decisions do not reduce needed policy space
Investment law reform
International organizations such as the UN, WTO and regional organizations are involved in suggesting
improvements of the system.
- UNCTAD focusses on reform IIA in order to harness it for sustainable development
- UNCITRAL reform of ISDS is ‘desirable’ to address concerns of (1) consistency, coherence, predictability,
and correctness of arbitral rulings (2) independence, impartiality of decision-makers (3) costs and duration
of proceedings
- US (reformed) arbitration
- EU investment court system
- India domestic courts first
- Brazil inter-State arbitration
- China ISDS appeals mechanism
Concrete options
- Disengaging from the investment treaty regime
o Back to domestic law and domestic courts
o Strengthening domestic democracy and the domestic rule of law
o Effective solution to the commitment problem?
- Reforming substantive law: the role of policy space (‘chilling effect’)
o Ensuring policy space and the right to regulate
o Decreasing ambiguities
o Enhancing responsible investment (do we not exceptions and special regimes)
o Recalibrate existing standards of treatment
- Reforming dispute settlement: arbitration v further institutionalization
o Reforming procedures (transparency, third-party participation)
o Ensuring independence (conflict of interests)
o Arbitration, appellate mechanism, permanent court
o Legislative counterweight (treaty organs)
Unfinished business
- Investor obligations
- Compliance mechanisms for affected third parties
- Domestic investors
- Dispute prevention
- Non-adversarial dispute resolution
- Financial assistance (SMEs and LDCs)
,Introduction – Principles of International Investment Law (1-53)
The Emergence of an international minimum standard
Widespread belief that alien is protected against unacceptable measures of the host State by rules of international
law which are independent of the host State. Sum of rules = international minimum standard.
Developments after the WWII
Period between 1945 and 1990 confrontation between newly independent developing countries and capital-
exporting States about the status of customary law governing foreign investment.
1962 GA Resolution 1803 in case of expropriation appropriate compensation would have to be paid. Foreign
investment agreements, should be observed in good faith.
1990s Latin American countries started concluding BITs, and international financial institutions revised their
position on the role of private investment. Washington Consensus summarized approach. Crystallized in Preamble
of World Bank’s Guidelines on the Treatment of Foreign Direct Investment. shift from resisting CIL to attracting
foreign investment by granting more protection than required by traditional customary law.
However, some challenges remain, the NAFTA still requires host States to observe customary law.
Evolution of investment treaties
After 1945, trade matters were regulated in separate treaties. Era of modern BITs began in 1959 between Germany
and Pakistan. Germany had decided to pursue program of bilateral treaties to protect its companies’ foreign
investments made in accordance with the laws of the host State, and other European States followed.
Early treaties referred to ICJ or ad hoc State-to-State arbitration, starting in 1969 BITs started offering arbitration
between host State and foreign investor.
Quest for multilateral framework
In 1957 Hermann Josef Abs called for a Magna Charta for the Protection of Foreign Property in the form of
global treaty. Time was not right. Abs-Shawcross Draft in 1962 led to the first attempt of OECD, second draft in
1967, but unsuccessful.
In 1961 World Bank initiative to address emerging framework and pointed to its mandate and link between
economic development, international cooperation, and private international investment. Debates led to realization
that opinion on rules of customary law was divided, and chance of global consensus minimal. General Counsel
Broches of World Bank started the concept ‘procedure before substance’ and that later became in ICSID
Convention establishing the ICSID. Quickly entered into force in 1966. Biggest advantage of the system was that
investment disputes became depoliticized because it avoided confrontation between home State and host State.
Recent developments
- Increase of case law within and outside ICSID framework. also led to concerns about consistency and
coherence.
- Criticism from some States that find themselves more often as respondents and find need to defend
themselves against claims by foreign investors a burden.
- Criticism that investment law and general investment arbitration restricts the freedom of States to take
regulatory action.
UNCITRAL Working Group III reform options: ad hoc tribunals, standing multilateral mechanisms, stand-alone
review or appellate mechanism, first instance and appeal investment court, multilateral advisory center.
In EU: CJEU found in opinion on Free Trade Agreement that EU has exclusive competence for foreign direct
investment, and shared competence for portfolio investment. ISDS is also shared competence. This is likely to
influence the BITs between EU and non-EU States, and EU has called for EU MS to eliminate their intra-EU BITs.
Sources of international investment law
- ICSID Convention: multilateral, provides procedural framework for dispute settlement between host States
and foreign investors through conciliation and arbitration. Participation does not equal consent to
arbitration.
- BITs: provide guarantees for the investments of investors. Typically, three parts, (1) definitions (2)
substantive standards (3) dispute settlement. Recent trend to negotiate provisions in context of wider
agreements, namely free trade agreements (FTA).
- Sectoral and regional treaties: first one of Energy Charter Treaty (ECT) of 1994 and covers wide range of
issues besides investment. NAFTA is more frequently invoked regional treaty.
, - Customary international law: remains relevant for interpretation and arbitration. Art 31(3)(c) VCLT
provides that any relevant rules of IL applicable between relations between parties should be taken into
account.
- General principles of law: important for lacunae and interpretation of individual terms and phrases. In
Merrill & Ring v Canada the Tribunal said that general principles of law also play a role in discussion, and
tribunal cannot ignore basic obligations of IL that came forth from general principles. Such as good faith,
pacta sunt servanda.
- Unilateral statements: ICJ has recognized that unilateral declarations are binding if circumstances and
wording of statements of a representative of the State are such that the addressees can rely on them
(Eastern Greenland, Nuclear Tests Cases). Unilateral promises may also exist between host State and
foreign investor (Total v Argentina, decision on liability).
- Case law: tribunals are not bound by previous cases but examine them and refer to them frequently.
Nature of international investment law
- Investment law and trade law
o Nature, structure, propose of IIL make it stand out structurally in broader realm of IL.
Differences see sections below
- Balancing duties and benefits
o Concerns arise from fact that treaties on foreign investment places duties on host State but not
on foreign investor. In contrast to the usual reciprocity and mutuality principles of IL. IIL does not
take place in a setting where privileges are exchanged on mutual basis by two parties. In
investment treaty, the host State renounces an element of sovereignty in turn for a new
opportunity. But two interests involved are complementary.
- Investor’s perspective: long-term risk
o Trade deal is a one-time exchange, investment involves long-term relationship. Key feature design
foreign investment is addresses risks in such a long-term relationship from both business and
legal perspective. Larger projects typically are navigated through a separate investment
agreement, which may adapt the legal regime of the host-State to project-specific needs. During
negotiations, investor will seek legal guarantees, and this includes the BITs or MITs.
- Host State’s perspective: attracting foreign investment
o Purpose of investment treaties is to address the typical risks of a long-term investment project,
and thereby provide stability and predictability. Research shows that economic considerations
still outweigh legal ones. Another advantage is that investment arbitration is depoliticized.
- International investment law and sovereign regulation
o Rules on foreign investment can reach into segments of domestic law that traditionally belong to
the domaine reserve. Led to concerns about sovereignty on areas such as labor law, organization
of the judiciary, administrative principles, environmental law, rules governing property, etc.
Modern trade law impacts domestic matters less severely.
- International investment law and good governance
o Concept has moved to center of international aid and poverty reduction policies. No single
definition of good governance, but core elements are expressed in working documents of the
World Bank and IMF. In context of Washington consensus, it lies in recognition that institutional
effectiveness, rule of law, appropriate degree of stability and predictability of policies form the
governmental framework for domestic economic growth and willingness of foreign investors to
enter domestic market. Therefore, investment treaties provide for external constraints which
foster values similar to good governance.
- Obligations for investors
o BITs normally do not include obligations of investors, which has led to a debate on inclusion of
obligations for investor to observe certain human rights, environmental, or labor standards, and
for the host State to be able to pursue counter claims. Efforts to agree on such non-binding rules
broke down at the UN. OECD Guidelines for Multinational Enterprises constitute non-binding
recommendations in similar areas. In 2003 a group of international banks launched Equator
Principles, addressing environmental and social risks.
