Compensation for nationalisation of foreign investment is a topic steeped in controversy. Opinions expressed as to the need for compensation have ranged from the payment of full compensation, a concept which includes consideration of future profits the investment would make, to the payment of no compensation at all.1 The issue of compensation was contentious in the immediate post-colonial period when there were wholesale nationalisations in the newly independent states. A division came about as to the amount of compensation that needed to be paid. The two camps of states, the home states and host states, took different positions. The topic remains of great interest, despite the fact that there have been few spectacular nationalisations in recent times. The scope for wholesale nationalisation, outside the context of a revolutionary political change, does not exist. Given this context, states will not seek to spoil their record of stability by engaging in any spectacular nationalisations. But, bouts of nationalism will occur in cyclical patterns in the history of nations. When the present philosophy of investment-led growth gives way to some other philosophy inimical to continued dependence on foreign investment, there will once more be hostility to foreign investment.

Few areas of international law excite as much controversy as the law relating to foreign investment.1 A spate of arbitration awards resulting from investment treaties has added much to the debates in recent times. These have been followed by massive literature analysing the law resulting from the treaties and the arbitration awards. Since the awards often conflict, the confusion has been exacerbated. Though the conflict in the awards is often attributed to the inconsistencies in the language in the treaties each tribunal had to interpret, the more probable explanation is that there are philosophical, economic and political attitudes that underlie the conflict which in turn reflect the underlying causes for the controversies that have existed in the area for a long time.2 The legitimacy of the system has been contested. The result of this lack of legitimacy has been for some states to withdraw altogether from the system and for other states to bring about newer types of treaties that provide a balance between investment protection and the state’s right to regulate in the public interest. Public protests against the system appeared when decisions of states involving public interests came to be decided by investment arbitration tribunals sitting far away from the states and in a manner that was seen as biased towards foreign investment. These disputes involved the supply of water,3 matters relating to health,4 the control of environmental hazards,5 and measures necessary to control economic crises.6

The area of international law on foreign investment is the result of an intense clash of different interests at play. Elucidation of the nature of the conflicts in the different areas of this field of law will help in understanding the issues involved.1 The historical factors which shaped the law were set out briefly in Chapter 1. This introductory chapter also indicated the changes that have taken place in the framework within which foreign investments are made. The present chapter elaborates further the legal context in which foreign investment operates.

As the number of arbitrations under the investment treaties increases and the perception of their legitimacy decreases with conflicting decisions, the adoption of expansionary techniques of interpretation increasing the jurisdiction of the tribunals, the creation of new substantive principles of liability and the award of huge sums as damages, states have responded in three principal ways.1 The first has been one of withdrawal from the system of investment arbitration.2 Some states have announced that they will consider not extending the life of their investment treaties after they expire.3 This response is a calculated decision based on the belief that the costs of arbitration and disputes outweigh the benefits that investment treaties bring to a state. Withdrawal and termination are matters of sovereign prerogative, but such a withdrawal has to be effected through the manner prescribed in the treaty.4 The effectiveness of withdrawal depends on its timing. Such withdrawal is not possible as to existing disputes or disputes that arose while the treaties were pending. The termination provisions in the treaties are relevant in determining such issues.5 Treaties could be terminated by agreement between the parties at any time.

What constitutes an act of taking of foreign property in international law was once clear but is now befuddled with difficulty due to the progressive expansion of the concept of taking. The reaction to this by states has been to curtail the expansionary trends through the revival of the rule on non-compensable regulatory takings. The response of the expansionists has been to restrict the rule through the introduction of a hitherto unused rule that requires proportionality between the object of the regulatory taking and the harm to the investor. In the past, the law was discussed in the context of outright takings of the property of the alien. There was no difficulty in characterising the act of physical dispossession and transfer of ownership as a taking.1 After colonialism came to an end, there was a spate of nationalisations intended to regain control of the economy from the companies of the erstwhile colonial powers. These involved the taking of property from the foreign multinational corporations of the former imperial power and vesting ownership of it in the state or a state-owned company.

The first bilateral investment treaty, the treaty between Pakistan and Germany, was made in 1959. The reason for the treaty was that two states, knowing that the international law on the protection of foreign investment was uncertain, made the rules certain as between themselves. Treaty activity between 1957 and 1990 was slow. There was a massive proliferation of bilateral investment treaties in the 1990s. A World Bank study stated that in 1994 there were over 700 such treaties.1 By the end of the millennium, the figure had moved towards 2,600 treaties.2 It exceeded that mark, reaching around 3,300.3 There has been a decrease in numbers since then, due to termination of treaties by many states. UNCTAD states that the number of treaties now is around 2,896.4 There are 390 free trade agreements and other treaties with investment provisions. There are now mega-treaties like the Trans Pacific Partnership (TPP),5 which contain chapters on investment. The Regional Comprehensive Economic Partnership was negotiated in 2020, though it has not been ratified. It includes the ten ASEAN states and China, India, Australia, New Zealand, Japan and Korea.

Consent of the parties is the basis of all arbitration. In contract-based arbitration, the consent is specific to disputes arising from the contract. It is usually expressed in the arbitration clause. In treaty-based arbitration, the consent of the state is said to be given to all present and potential investors who satisfy nationality criteria and whose investment is protected by the treaty in advance of the dispute. The rule can be so simply put. However, much dispute has arisen as to the jurisdictional criteria that have to be satisfied before an arbitral tribunal can proceed to the merits of a case. In virtually every treaty-based dispute that has arisen, the jurisdiction of the tribunal has been queried. So, it is necessary to examine the jurisdictional criteria that need to be established. Since most treaty-based arbitrations take place before ICSID tribunals,1 the rules are best stated on the basis of ICSID arbitration, which is likely to provide the standard for other types of treaty-based arbitration.

The usual cause of action in investment disputes has hitherto been the taking of property. Though, as was claimed, customary international law recognised an international minimum standard of treatment of a foreign investor, the violation of this standard outside the context of the taking of property was seldom discussed.1 The growth of such a customary law was dealt with in Chapter 3. It forms a prelude to the discussion here. That chapter dealt with the manner in which the creation of an international standard was effected and the conflicts which attended it. But, investment treaties have sought to iron out such conflicts and provide recognition of certain standards of treatment of investments as between the parties to such treaties. It is only with the spelling out of the different standards of treatment in the investment treaties that the breach of treatment standards has become a head of liability distinct from the taking of property. In more recent disputes, the failure to provide treatment according to standards prescribed in investment treaties has become important, especially in the context of Chapter 11 of the North American Free Trade Agreement (NAFTA).

It is one of the paradoxes of international law that the multinational corporations which conquered states, ruled over people, engaged in extensive international trade, founded colonies, pillaged vast riches from other peoples, committed many genocides and controlled armed forces was never subjected to international law. It is a phenomenon that international lawyers must explain. The explanation that international law was law between states and that therefore multinational corporations did not have personality to be made subject to international law, though still repeated, is a shibboleth that hardly hides the fact that this fiction enabled the hiding of colossal misconduct on the part of the powerful classes that ruled the states of Europe. There is agreement in the recent studies made of the British East India Company that it was indistinct from the ruling class of the United Kingdom. The same could be said of the Dutch East India Company, whose employee, Hugo Grotius, is celebrated as the founder of international law. Theories created by international lawyers ensured that the identities of those who profited from the misfeasances of these early multinational corporations were never revealed.

Contracts are the legal bases for the making of foreign investments. They will routinely contain arbitration clauses. Prior to ICSID, the dedicated arbitral institution for foreign investment disputes, arbitration was the frequent method of dispute settlement. Prior to 1991, ICSID dealt only with contract-based disputes. It was only after 1991, when arbitration was recognised as being possible on the basis of the dispute settlement provisions of investment treaties, that the number of treaty-based cases really increased. Still, there were contract-based cases. In some disputes, there were parallel proceedings, under the contract for breaches, and under treaties for violation of the treaty provisions. There continue to be disputes brought only on the basis of contracts