International Investment Law summary
Introduction for people without economic
background.
Investment treaty regime as a mechanism of global governance.
- The commitment problem
When committing to long term investments or projects abroad, state sovereignty can
cause problems for private investors by changing policy during the investment.
The question is how a foreign investor can protect itself from breaches by a state,
considering that a state is sovereign? A state may change its laws as it pleases.
If there are disputes between a private investor and a foreign state, e.g. about taxes,
where should disputes go? By default to the courts of the host states. That raises
problems in itself. Is it fair? Is it effective? Is there a backlog? Are judges neutral?
We can solve the commitment problem by:
- Stable legal framework
- Neutral dispute settlement.
Possible instruments are:
- Investor-state contracts
Here the solutions can be stipulated.
- Domestic Law
There are jurisdictions that do exactly that (Netherlands).
- Investment Insurance
- International law
Investment treaties developed in a bilateral status. There are more than 3300 bilateral
investment treaties. An investment treaty is a binding agreement under international law
between two states. Investment rules that protect investors are also laid down in other
international agreements (free trade and investment agreements).
The substantive law is very fragmented into largely bilateral treaties. There are regional
treaties but it’s exceptional. However, the treaties follow the same structure and have similar
contents:
- Preamble
Object and purpose, parties’ intentions
- Definition
Investor, investment
- Substantive Standards
Admission, Expropriation and compensation, FET (fair and equitable treatment), FPS
(full protection and security standard), MFN (most favoured nation non-discrimination),
National Treatment, Umbrella Clause, Capital transfer.
- Dispute settlement
State-to-state, investor-state.
Devil is in the detail: you must look at a treaty to know its content. They are similar but not
identical.
,CETA (Comprehensive Economic Trade Agreement, Canada and EU) - Art. 8.10 (FET):
formulates Fair and equitable treatment and enumerates several ways it can be breached.
Disputes are settled by arbitration. Both parties choose an arbitrator and either agree on a
chairman or let the arbitors decide on a chairman/president of an arbitral tribunal.
Investment treaty arbitration are usually brought under the rules of INternational Centre for
Settlement of Investment Disputes can be brought under different rules.
Fora:
- ICSID
- UNCITRAL Arbitration
- SCC
- LCIA
- ICC
Most are brought under ICSID.
It is an international organization part of World Bank Group. Wide membership.
International organization that provides procedure rules for dispute settlement.
Jurisdiction:
Art. 25 ICSID Convention: Any legal dispute arising directly out of an investment between a
contracting state and another contracting state or its nationals.
It also provides remedies and enforcement.
53 ICSID Convention:
Award is binding on the parties and shall not be subject to any appeal or any other remedy
except provided in Convention.
Domestic courts are out of the question in reviewing ICSID awards:
Art. 54 ICSID Convention - Contracting states must recognize an award as if it were a final
judgment of a court in that state.
ICSID is not a court itself, it’s only an institution for arbitration. The parties choose their
decision makers. Leads to a highly fragmented dispute settlement system.
There is a set group of arbitrators that are frequently picked.
As conventions use typically the same formulation, there is to some degree a system of
precedent in the arbitration proceedings. e.g. FEP = arbitrary, grossly unfair, unjust, or
idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or
involves a lack of due process leading to an outcome which offences judicial proprietorship
Special Features of investment treaty arbitration:
- direct investor access
- review of government acts under international law
- generalized advanced consent (not consent undertaken in specific contract, but
consent as open invitation to all those that qualify as investor under certain treaties)
- No exhaustion of local remedies
- damages as remedies
- enforceability of awards
- vague standards
The legitimacy crisis of investment law as a constitutional challenge.
,The system of investment arbitration is perceived as unjust.
It’s the type of disputes that are dealt with that cause the legitimacy crisis.
Often they involve matters that would, under domestic law, as administrative law or
constitutional law, or review of public health measures.
The problem is that these issues are settled by arbitors chosen by the parties and treated
like commercial disputes, and not by a judicial process with judges.
“privatization of justice” → putting decision in the hands of arbitrators instead of judges.
This raises problems for constitutional law:
- Limited to foreign investors
- Inconsistent decisions because of larger amount of arbitrators.
- Arbitral procedure → Procedure is actually meant for private parties, based on
confidentiality, based on private law disputes, but here in investment law, the issues
are of a public law nature. Not suited for arbitrations?
- Legitimation and control of arbitrators: who decides whether they are correct? How
would activistic decisions be controlled?
- Policy space: how do we ensure that arbitrators interpret the treaties to reduce
needed policy space for nations?
Investment law reform: current debates and policy options.
Because of the tension with constitutional laws, there is now a debate.
Main actors in the reform:
- International organizations (UNCTAD, UNCITRAL, WTO, OECD)
- Regional organizations (UNASUR, ASEAN, EU)
- Important state actors (USA, China, Brazil, India)
UNCTAD UN Conference on Trade And Development
is focussing in its policy principally on reform of substantive international investment
procedures. They have a framework in order to harness it for sustainable developments.
They have identified areas where it can be reformed and the levels at which it could be
reformed.
UNCITRAL UN commission for international trade law
wants to reform the dispute settlement. states have agreed that ISDS reform is desirable.
because of:
- constistency, predictability of the rulings
- independence etc decision makers
- costs and duration of proceedings.
There is debate on what the structure of ISDS should look like in the future.
Some want to reform the existing system and just make some alterations (USA)
Some want a more institutionalized system (permanent investment court system) (EU)
Some want a return to domestic courts, so exhaustion of local remedies but principal place is
domestic courts (INDIA)
Inter-state Arbitration, and no ISDS (Brazil)
ISDS Appeals Mechanism (China)
Reform options:
, Disengaging from the investment treaty regime
would mean we would go back to resorting to domestic law and domestic courts.
reforming substantive law
How do we ensure policy space and decrease ambiguity in the governing law (like FEP)?
How can we enhance responsible investment?
Carve-outs, exceptions, special regimes?
how can we recalibrate the standards of treatment? so how do we balance policy space and
public interests on one hand and private interests and investor protection on the other hand?
reforming dispute settlement?
procedural reform (transparency, decreasing costs)
ensuring independence and preventing conflicts of interests.
Dolzer-Schreuer (pp 1-43)
A) Early developments
Until the Communist Revolution in Russia in 1917, there was no reason to pay special
attention to rules protecting foreign investment. Treaty practice related to property was done
in reference to domestic law of the host state, assuming there was protection in domestic
law. (National treatment standard: treat alien property by the same standards as property
from nationals). Calvo doctrine: Carlos Calvo asserted that this could mean strong
guarantees, no protection at all, or anything in between, as long as national and foreign
property were equal. In the Russian Revolution, the state expropriated alien property without
compensation and relied on the national treatment standard. This led to the Lena Goldfields
Arbitration of 1930, where the Soviet Union was to pay compensation to the alien claimant
based on the concept of unjust enrichment. A dispute on nationalization of a sector between
Mexico and US led to a famous letter from the US Secretary of State, stating that
international law allowed expropriation of foreign property but required ‘prompt, adequate,
and effective compensation’ (Hull rule).
B) The emergence of an international minimum standard
The various international disputes led to the conviction that the alien is protected against
unacceptable measures of the host state by rules of international law.
The sum of these rules is the international minimum standard. The justification:
non-nationals should have more protection because they are more vulnerable to domestic
law. They have no part in elections, are not consulted in adoption of domestic law, they do
not benefit from the public interest that justifies certain burdens.
C) Developments after the Second World War
Between 1945 and 1990 there were major confrontations between newly independent
developing countries and capital-exporting states about the status of customary law
governing foreign investment. GA Resolution 1903 (1962): expropriation requires
appropriate compensation. At some point around 1974 there was an apparent abolition of
rules of IL governing expropriation and a replacement of domestic law. (compensation, in
case of controversy, was to be regulated by domestic law unless otherwise agreed).
