Since the second edition of this book, the international law on foreign investment has witnessed such enormous activity that a new edition is justified within five years. The number of arbitration awards based on investment treaties has increased, resulting in several books written solely on the subject of investment treaty arbitration. New works have appeared on several aspects of the law on foreign investment. This work has held the area of the law together without fragmenting it any further. The carving out of an international law on foreign investment itself may have furthered fragmentation in international law. Yet, the aim was to ensure that the base remained clearly in international law principles. That aim does not appear to have been preserved in many of the later works which sought to carve out further areas as free-standing ones. The original niche of this work remains unaffected. It seeks to establish the foundations of the law clearly in the international law rules on state responsibility and dispute resolution rather than approach it with the central focus on investment treaties and arbitration which seems to have attracted the practitioner more than the scholar.
It also has a focus that is different from that of the other works in the field. It is written from the perspective of development. The claim to neutrality of the works in the field cloaks the fact that they deal with an asymmetrical system of the law created largely to ensure investment protection. The fact that it does not follow this routine does not by itself make it a partial work. As before, the criticisms of this work have been made best by my students who have come from all over the world. I have taught courses based on this book in London, at the Centre for Transnational Legal Studies, in Toronto, at Osgoode Hall Law School, at Dundee at the Centre for Petroleum and Natural Resources Law and at my own home institution, the National University of Singapore, which, through its joint programme with the New York University Law School, attracts a global body of students. All possible criticisms that could be made of its central approach are reflected in the work. No criticism can be more valuable to an academic than those made by young minds coming fresh to the subject.
If states were in agreement as to the norms that constitute the international law of foreign investment, it would have been possible to agree on a multilateral agreement on foreign investment stating the substantive rules which apply in the area. The fact that no such multilateral agreements exist is due to the existence of conflicting approaches to the problem of foreign investment protection and the existence of contending systems relating to the treatment of foreign investment. Several attempts have been made at bringing about a comprehensive code on foreign investment, but they have resulted in failure simply because of the ideological rifts and clashes of interests that attend this branch of international law. Most drafts have been made with the objective of providing as much protection as is possible to foreign investment. These have been rejected by capitalimporting states. The entry into the picture of non-governmental organisations (NGOs) further complicates the picture. They object to multilateral agreements which concentrate on investment protection exclusively without addressing issues relating to environmental degradation or the human rights violations associated with foreign investment. Some of these organisations take the view that the development interests of the poor are not addressed through such instruments, which seek only to protect the rights of rich multinational corporations. The entry of NGOs as major players in the area has further complicated the issue of making such agreements. It is relevant to note that NGOs which supported the rights of foreign investors have been active in the field for a longer period of time. But, voices against confining the drafting of investment treaties to investment protection alone have increased as a result of the growing strength of the environmental and human rights groups entering this sphere. They provide support to developing countries, which do not support multilateral codes which restrict their ability to regulate foreign investment significantly and which deny them the power to negotiate treaties bilaterally. The fear also is that, once a multilateral treaty is created, higher standards could be obtained through bilateral negotiations.
Given that multilateral treaties cannot come about, effort has been made to create regional treaties that are led by a single state. The Trans Pacific Partnership (TPP), which was signed in January 2016 but is yet to be ratified, is a case in point. It contains an investment chapter along with international trade chapters.
What constitutes an act of taking of foreign property in international law was once clear but has now come to be befuddled with difficulty as a result of 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 curtail the rule through the introduction of an 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 as a taking. 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. After the initial rush of nationalisations, there was a movement away from the wholesale takings of industrial sectors to the targeting of specific companies. Developing countries instituted changes regarding the manner of entry of foreign investment. There was greater administrative control over investment. The vehicle of foreign investment was often a mandatory joint-venture company incorporated in the host state. The company became a corporate citizen of the host state and thus more amenable to its control. The process of foreign investment itself came to be enmeshed in a host of regulations which directed it to economic development objectives and environmental protection. In this context, the notion of what constituted a taking had to change. The focus was on the manner of governmental interference with the contracts on the basis of which the original investment was made or on the running of the corporate vehicle through which the investment was made. The system of investment protection would become undone if there was no response to this changing situation.
The controversy has been compounded by the formulations in investment treaties which refer to three types of taking: direct, indirect and anything ‘tantamount to a taking’ or ‘equivalent to a taking’. The newer treaties do not refer to the third type of taking any longer. The area of expropriation is often dealt with in an annex. The concern is with spelling out the extent of indirect expropriation.
The right of a state to control the entry of foreign investment is unlimited, as it is a right that flows from sovereignty. The entry of any foreign investment can be excluded by a state. Entry can also be subjected to conditions as to how a foreign investor should conduct his investment after entry. The process of foreign investment is entirely internal and hence subject to the sovereign control of the host state. But, a sovereign entity can surrender its rights even over a purely internal matter by treaty. Some regional and bilateral treaties now provide for the right of entry and establishment of investments to the nationals of contracting states. Where such pre-establishment rights are created by treaty, the denial of a right of entry to any investor from one of the contracting states would amount to a violation of the treaty, unless it can be shown that his investment is not covered by the treaty. Where the treaty permits both the right of entry and national treatment after entry to nationals of the contracting states, the right of control over the investment on the basis that the investment was made by an alien is lost to each of the contracting states. Where such a treaty applies to the foreign investment, the treaty extinguishes the right of control the state has over the foreign investment, except where the treaty itself provides exceptions to this situation. It may still be the case that, in circumstances of necessity, the treaty rights of the foreign investor could be suspended. So too, in modern law, there are strong arguments made that investment treaties and investment protection may not trump precedent obligations created through ius cogens principles or through strong multilateral treaties. It is increasingly coming to be recognized that measures a state takes in the public interest may defeat obligations relating to investment protection on the ground that there is an inherent power in the state to take such measures despite the existence of an investment treaty. Investment protection as an absolute interest has diminishing favour in the light of these recent views.
Once an alien enters a state, both he and his property are subject to the laws of the host state. This result flows from the fact that the foreign investor has voluntarily subjected himself to the regime of the host state by making entry into it.
Unlike under the old law, there is now an increasing expectation, particularly among developing countries and non-governmental organisations (NGOs), that home states of multinational corporations should exert control over the activities of their corporate nationals operating overseas. This expectation is confirmed by a UN report which affirms a responsibility on the part of states to deter human rights violations by multinational corporations and to offer remedies through their national courts for harm caused to individuals in the host states. There is an obligation to take measures that seek to ensure that multinational corporations do not act to the detriment of host developing states. This chapter concentrates on such measures. The rationale is that developed states owe such a duty of control to the international community and do in fact have the means of legal control over the conduct abroad of their multinational corporations. In moral terms, the activities of multinational corporations eventually benefit the home state's economic prosperity. The argument is that it is therefore incumbent on the home state to ensure that these benefits are not secured through injury to other states or to the international community as a whole. The early law concentrated only on the protection of foreign investment through the diplomatic intervention of the home state. However, there is now an evolution of the notion that the home state has duties as well as rights in matters relating to foreign investment which require the home state to intervene to ensure that its multinational corporations act in accordance with emerging standards that require their accountability.
As a matter of state responsibility, it may be possible to argue that a multinational corporation is constituted an agent of its parent state. It is encouraged to invest abroad. Its profits are taxed by the home state. It is given diplomatic and other protection by the home state. In such circumstances where the host state knowingly permits the activity of a multinational corporation which violates human rights or environmental interests, it bears responsibility for such violations as it can be said to have acted with knowledge of the acts of an agent or carried a duty of preventing such harm. The responsibility of a state for the acts of its agents abroad is well recognised. It is also relevant that a home state that does not interfere assists in the violation of conventions containing international obligations that its agent violates.
The international law on foreign investment has witnessed an explosive growth since the last edition. The decade had witnessed a proliferation of bilateral and regional investment treaties, and a dramatic rise in litigation under such treaties. The attempt to fashion a multilateral instrument on investment within the World Trade Organization has given the debate on issues in the area a wider focus. This edition seeks to capture such developments.
In the course of the decade, I have had the good fortune of being involved actively in many facets of the operation of this area of the law. During such activity, I have acquired many friends who work in the area. My association with UNCTAD has brought me in contact with Karl Sauvant, Anna Joubin-Brett, Victoria Aranda and James Chan. It has also given me the opportunity to work with Arghyrios Fatouros, Peter Muchlinksi and Kenneth Vandevelde, the academic leaders of this field. They have added much to my understanding of the law. The many hours of arguments with them, in various parts of the world, have added to the pleasure of studying this area of the law.
The first edition was written while I was a visiting fellow at the Lauterpacht Centre for International Law, University of Cambridge. The successive Directors of the Centre, Professor Sir Eli Lauterpacht and Professor James Crawford, have continued to encourage my efforts in this and other areas of international law.
My many students in Singapore and Dundee have always challenged me so that I was taught by them to know and remember that there are other ways in which the law could be looked at. To my critics, my answer would be that I am constantly made aware of their criticisms in the classroom. I have accommodated those criticisms in the text.
I thank Finola O'Sullivan, Alison Powell and Martin Gleeson for the care taken over the production of my book.
My research student, Lu Haitian, prepared the bibliography.
Thanga was there, as always. Ahila, Ramanan and Vaishnavi happily are now old enough to let their father alone.
All law involves a resolution of conflicting interests. But, unlike other areas of law, international law lacks a centralised authority which could resolve conflicts of interest. Whereas in a domestic system there are decision-making authorities which can resolve such conflicts, in international law the absence of such an authority means that conflicts will be protracted. This situation will exist until some provision for the settlement of the conflicts is made in the course of time, either through negotiated settlements resulting in treaties, or through practices resulting in custom. The adjustment will embody principles which receive a measure of acceptance by states. All these involve consensual processes. International law embodies a long series of adjustments made in response to conflicts. As the process of adjustment never ends, the law continually remains in a state of flux.
The international law on foreign investment is an example of this process of adjustment. Its lack of clarity in many areas results from the intensity of conflict of divergent interests. Essentially, the conflict relates to the nature of the control that could be exercised over the foreign investment. Host states argue for national control subject to a minimum of external constraints, whereas home states argue for greater constraints on national control in the hope of ensuring the protection of foreign investment. Various other actors such as nongovernmental organisations (NGOs) with a diversity of interests have come onto the scene, thus adding further to the existing uncertainty. Complexity is added to the field as investment treaties use open-ended terms in describing the nature of the protection given to foreign investment. Arbitration tribunals expansively interpret these terms. States react by restricting their meaning, often unsuccessfully. This unfortunate contest has become a characteristic of the area of law. Elucidation of the nature of the conflicts in the different areas of this field of law will help in understanding the issues involved. The historical factors which shaped the law were set out briefly in the introductory chapter, and the changes that have taken place in the framework within which foreign investments are made were also discussed. This chapter elaborates further the legal context in which foreign investment operates.
This book was written while I was on sabbatical leave from the National University of Singapore. I thank the Vice-Chancellor, the Council and Dean of the Faculty of Law for the generous terms on which I was granted the leave.
I spent the sabbatical year as a Visiting Fellow at the Research Centre for International Law of the University of Cambridge. I thank Eli Lauterpacht, the Director of the Centre, for many acts of kindness in making this year a happy and productive one.
I am grateful to Professor James Crawford, Whewell Professor of International Law at Cambridge, who read and commented on an early draft of this work, to Professor Detlev Vagts, Bemis Professor of International Law at Harvard, who enabled me to spend a month of research at the Harvard Law School and to Robin Pirrie, Fellow of Hughes Hall, Cambridge, who was helpful with his advice. I remain responsible for any errors and omissions.
As always, Thanga has been an unfailing source of strength. Ahila, Ramanan and Vaishnavi have given up time that should have been theirs.
The previous chapters have indicated how efforts have been made through diplomatic means and through treaty means to bring about the protection of foreign investment. Diplomatic means are the older of the two. There are definite rules on the basis of which diplomatic intervention to protect the interests of the foreign investor could be made. They are the genesis of what some states regard as customary international law. Where diplomatic intercession fails, the same rules become the basis on which litigation could be brought against the recalcitrant state before an international tribunal or the International Court of Justice. There have been very few cases that have been brought before the International Court of Justice or its predecessor. Where a large number of foreign investment disputes arise from a single incident, states may choose to set up Claims Commissions to deal with them. In these circumstances, an international tribunal is established pursuant to an instrument akin to a treaty with clear means of enforcing the awards it makes.
Investment treaties, as has been seen, have also devised their own methods of dispute settlement. They usually enable the foreign investor to invoke remedies through arbitration at his own instance, the state being taken to have expressed its consent through the treaty provision. In a sense, an attempt has thus been made to create a regime of investment protection. But, in the absence of a multilateral treaty, such a regime will not come about. Investors currently receive protection under a system of bilateral or regional treaties which may apply to them.
But, well before the emergence of the investment treaty system in 1959, there was an earlier system of investment protection which the multinational corporations had virtually devised by themselves for the protection of their investments. This system worked entirely on the basis of contractual structures of protection that were negotiated with the host state at the time of the entry of the investment. Virtually every foreign investment entry is accomplished through a contract, except where entry is made through a merger or acquisition. The contract is negotiated with the host state or its agency at the time of entry.
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. But, 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, 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. ICSID arbitration has been in existence for fifty years. But it is only after the notion of jurisdiction based on investment treaties came to be accepted in AAPL v. Sri Lanka (1991) that ICSID had a large volume of cases. Now, other arbitral institutions are also referred to in investment treaties. They also attract significant number of arbitrations.
As may be realised, with an increase in the number of claims, states have invested much effort in exploring the methods of excluding jurisdiction, and have met with a measure of success. Cases are fought with tenacity, and states are resistant to the use of treaties for the imposition of responsibility. This, again, raises doubts as to the utility of treaties as an investment protection device. For the costs of arbitration are very high both for the foreign investor and the state.
There is no doubt that, in light of the experience accumulated in contesting jurisdiction, states will continue to argue against the assumption of jurisdiction, and will strengthen provisions in the investment treaties negotiated in the future to enable them to better challenge jurisdiction. As multinational corporations explore the outer jurisdictional limits under the treaties, states will react by closing loopholes through which arguments to expand jurisdiction are made.
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. By the end of the millennium, the figure had moved towards 2,600 treaties. It has now exceeded that mark, reaching around 3,000. Investment chapters are also included in free trade agreements. There are now mega-treaties like the Trans Pacific Partnership (TPP) and the projected Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the US, which contain chapters on investment. Obviously, states which participate in the making of these treaties consider them to be necessary for a variety of reasons, the most important being the belief that they promote the flow of foreign investment. The question whether they do in fact promote foreign investment flows has been subjected to considerable doubt in recent literature Yet, the treaties continue to be made, though there is a decline in their numbers in recent times. The forms they take also have begun to vary significantly so that the debate about whether they can contribute to customary international law has become moribund.
In that context, the avowal that there was a ‘BITs revolution’ and that this revolution had contributed to the creation of customary international law has even less merit now than before. Other reasons are advanced for their making. One is their signalling function. The making of such treaties is an indication that a state previously committed to certain ideological stances inimical to foreign investment has changed its policy and is now prepared to accept standards of protection of investment and international arbitration to settle investment disputes. The activity of China and Vietnam, communist states wedded to a concept of public ownership of property, is illustrative of this signalling function. The former East European states, liberated from communist ideology, also signed many such treaties. But, such treaty activity is also explicable on the basis of the need of these countries to enhance their competitive positions. The assumption is that developing countries, competing with each other to attract investment, make investment treaties in order to ensure that they recognise the same standards of protection as other developing states similarly placed. This may provide explanations as to why there are newcomers, like India, on the scene.
Few areas of international law excite as much controversy as the law relating to foreign investment. 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. 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.
The law on the area has been steeped in controversy from its inception. Much controversy has resulted from the law on the subject being the focus of conflict between several forces released at the conclusion of the Second World War. The cyclical nature of the ebbs and flows of the controversy is evident. The ending of colonialism released forces of nationalism. Once freed from the shackles of colonialism, the newly independent states agitated not only for the ending of the economic dominance of the former colonial powers within their states but also for a world order which would permit them more scope for the ordering of their own economies and access to world markets. The Cold War between the then super-powers made the law a battleground for ideological conflicts. The non-aligned movement, which arose in response to this rivalry, exerted pressure to ensure that each newly independent state had complete control over its economy. One avenue for the exertion of such pressure by the non-aligned movement was the formulation of new doctrines through the use of the numerical strength of its members in the General Assembly of the United Nations.
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. The growth of such a customary law was dealt with in Chapter 3 above. 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 distinct 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). The vigour with which disputes have arisen between the two developed-country participants in NAFTA, largely on the basis of treatment standards and novel theories of the taking of property, has opened up new possibilities in the field. Litigation strategies have taken a new turn as creative interpretations have been used to find new arguments in order to impose liability in foreign investment transactions. Whereas previously the targets of arbitration were developing countries, the new battleground opened up by NAFTA makes two developed states the targets of the mechanisms and legal standards of investment protection they themselves used against developing states in the past. Developed states seldom engage in direct takings, but do employ discriminatory and protectionist practices against foreign investors. There will be an increase in arbitrations brought between developed states and by developing countries against developed states. The litigation that has emerged against Canada and the United States has largely focused on the provisions in NAFTA which make arguments possible that such practices are tantamount to takings or violate treatment standards. Both the strategies of litigation that are fashioned as well as the defences that the vaster legal resources of these states employ against them will have an impact on shaping the law in this area.
This edition is published at a time of much controversy in the international law on foreign investment. The need for investment treaties is coming to be questioned by economists. Some of them argue that the original premises of greater flows of foreign investment resulting from such treaties or that they lead to economic development are not provable assumptions. If they are correct, the system has been built on wrong premises. The thrust of neo-liberalism that dominated events in the field and shaped the law is on the wane. The low visibility of the subject is no more, as disputes such as cigarette labelling in Australia and Uruguay, the water dispute in Bolivia or the use of nuclear power in Germany have brought high visibility and public concern with the subject. The old view that a foreign investment dispute concerns only the parties to it is now considered archaic as extraneous factors such as environmental considerations, human rights, labour rights, cultural rights, the rights of indigenous peoples and other factors are considered relevant to such disputes. Increasingly, vocal interest groups espouse these interests. The escapades of arbitral adventurism have created public anxiety. The protests against the Transatlantic Trade and Investment Partnership (TTIP) and the Trans Pacific Partnership (TPP) exclusively in developed countries indicate the extent of this public anxiety.
States have responded to these developments in many ways. Some have withdrawn from the system. Others have toyed with the idea of doing away with treaty-based investment arbitration. Most have come up with the so-called ‘balanced’ treaties based on the reconciliation of the two incompatible ideas of investment protection and regulatory space for the state. How this will be worked out is yet to be seen as there have been no cases on the exceptions to liability in the balanced treaties which essentially cater for the preservation of the regulatory space.
The fact is that investment arbitration is a regime that can mutate into new shapes. This is demonstrated by its capacity to create new rules, such as the legitimate expectations rule, when the door of expropriation closes and to create the proportionality rule when the legitimate expectations rule retreats in the face of criticism. Balanced treaties may not provide a cure to the anxieties that have been expressed.
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