International Investment Law Textbook

I
History, Sources, and Nature of International

Investment Law
From: Principles of International Investment Law (2nd Edition)
Rudolf Dolzer, Christoph Schreuer
Content type: Book Content
Published in print: 15 November 2012
Product: Oxford Scholarly Authorities on

International Law [OSAIL]
ISBN: 9780199651795
Subject(s):
International economic law Specialized treaty frameworks International minimum standard
Investor Law of treaties BITs (Bilateral Investment Treaties) History of international law Since
World War II Sources, foundations and principles of international law
From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:
Chinese University of Hong Kong; date: 06 January 2016
(p. 1) I History, Sources, and Nature of International

Investment Law
1. The history of international investment law
(a) Early developments
As early as 1796, John Adams, after having negotiated for the United States the first Treaty on
Friendship, Commerce and Navigation with France, emphatically highlighted the protection of alien
property by the rules of international law:
There is no principle of the law of nations more firmly established than that which entitles
the property of strangers within the jurisdiction of another country in friendship with their
own to the protection of its sovereign by all efforts in his power.1
Until the Communist Revolution in Russia in 1917 neither state practice nor the commentators of
international law had reason to pay special attention to rules protecting foreign investment. Treaty
practice in the nineteenth century protected alien property not on the basis of an autonomous
standard, but by reference to the domestic laws of the host state. An illustration is found in Article
2(3) of the Treaty between Switzerland and the United States of 1850:
In case of expropriation for purposes of public utility, the citizens of one of the two
countries, residing or established in the other, shall be placed on an equal footing with the
citizens of the country in which they reside in respect to indemnities for damages they may
have sustained.2
The implicit assumption was that each state would in its national laws protect private property and
that the extension of the domestic scheme of protection would lead to sufficient guarantees for the
alien investor.
In a famous study first published in 1868, the Argentine jurist Carlos Calvo for the first time
presented a new perspective of this paradigm and asserted that the international rule should in
effect be understood as allowing the host state to reduce protection of alien property whilst also
reducing the guarantees for property held by nationals.3 Calvos view would have left room for all
the vagaries of domestic law,
References
(p. 2) allowing both strong guarantees, but also a complete lack of protection. In addition, the Calvo
doctrine is based on the view that foreigners must assert their rights before domestic courts and
that they have no right of diplomatic protection by their home state or access to international
tribunals. Calvos theory was conceived against the background of gunboat diplomacy by capitalexporting countries and other practices through which these countries imposed their view of
international law on foreign governments. In 1907, the Drago-Porter Convention was adopted to
prevent the use of force for the collection of debt, and Calvos radical attack on the protection of
foreign citizens lost some of its justification.
On the international level, the Calvo doctrine remained at the margins of the debate, and the
dominant position was that a state was bound by rules of international law, separate from national
law. Elihu Root stated the prevalent position in 1910:
There is a standard of justice, very simple, very fundamental, and of such general
acceptance by all civilized countries as to form a part of the international law of the world.
The condition upon which any country is entitled to measure the justice due from it to an
alien by the justice which it accords to its own citizens is that its system of law and
administration shall conform to this general standard. If any countrys system of law and
administration 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.4
Nevertheless, the conceptual reorientation proposed by Calvo was revived on a practical level in a
dramatic fashion after the Russian Revolution in 1917: the Soviet Union expropriated national
enterprises without compensation and justified its uncompensated expropriation of alien property
by relying on the national treatment standard. The ensuing dispute led, inter alia, to the Lena
Goldfields Arbitration of 1930 in which case the tribunal required the Soviet Union to pay
compensation to the alien claimant, based upon the concept of unjust enrichment.5
In subsequent decades, a further attack upon the traditional standard of international law was
mounted in 1938 by Mexico after the nationalization of US interests in the Mexican agrarian and oil
business. This dispute led to a frank diplomatic exchange in which US Secretary of State Cordell
Hull wrote a famous letter to his Mexican counterpart. In this letter he spelled out that the rules of
international law allowed expropriation of foreign property, but required prompt, adequate and
effective compensation.6 The Mexican position echoed the Calvo doctrine and also foreshadowed
harsh disputes between industrialized and developing countries in later decades of postdecolonization.
References
(p. 3) (b) The emergence of an international minimum standard

The Calvo doctrine, the Russian Revolution, and the Mexican position notwithstanding, what had
emerged from the various international disputes about the status of aliens in general (not just in
regard to foreign investment) was a widespread sense that the alien is protected against
unacceptable measures of the host state by rules of international law which are independent of
those of the host state. The sum of these rules eventually came to be known as the international
minimum standard.7 The fundamental reasons that prompted the evolution and recognition of these
rules are reflected in general terms in a relatively modern decision of the European Court of Human
Rights:
Especially as regards a taking of property effected in the context of a social reform, there
may well be good grounds for drawing a distinction between nationals and non-nationals as
far as compensation is concerned. To begin with, non-nationals are more vulnerable to
domestic legislation: unlike nationals, they will generally have played no part in the election
or designation of its authors nor have been consulted on its adoption. Secondly, although a
taking of property must always be effected in the public interest, different considerations
may apply to nationals and non-nationals and there may well be legitimate reason for
requiring nationals to bear a greater burden in the public interest than non-nationals.8
The minimum standard as it emerged historically concerned the status of the alien in general,
applying to such diverse areas as procedural rights in criminal law, rights before tribunals in
general, rights in matters of civil law, and rights in regard to private property held by the foreigner.
An early leading case on the subject matter, Neer v Mexico decided in 1926, was concerned with
the duty of the host state Mexico to investigate appropriately the circumstances of the
unaccounted death of a US national.9 When the claim of the widow of the US national for
compensation for failure to do so was brought before a Mixed Claims Commission, the following
statement was issued by the Commission in regard to the circumstances under which a host state
would be liable for a violation of the minimum standard:
the treatment of an alien, in order to constitute an international delinquency, should amount

to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental
action so far short of international standards that every reasonable and impartial man
would readily recognize its insufficiency.10
This statement of the standard did not relate to matters of property of the alien, and was issued
when matters of foreign investment and related issues such as economic growth, development,
good governance, and an investment-friendly climate were
References
(p. 4) not yet high on the international agenda. Yet this case has resurfaced in decisions of
investment tribunals in the past decade.11
(c) Developments after the Second World War

The period between 1945 and 1990 saw major confrontations between the growing number of
newly independent developing countries, on the one hand, and capital-exporting states, on the
other, about the status of customary law governing foreign investment. These were often prompted
by ideological positions, by an insistence on strict notions of sovereignty (Permanent Sovereignty
over Natural Resources),12 and by the call for economic decolonization, supported by an
economic doctrine calling for independence from centres of colonialism. The new battleground
chosen by developing states was now the United Nations General Assembly where they soon held
and still hold the majority of votes. In 1962, half a century ago, an early confrontation ended with a
compromise: GA Resolution 1803 stated that in the case of expropriation, appropriate
compensation would have to be paid, thus explicitly confirming neither the Hull rule nor the Calvo
doctrine. Remarkably, a consensus existed then that foreign investment agreements concluded by
a government must be observed in good faith.13
The developing states decided to take the battle further and brought it to a culmination in 1974,
again in the United Nations General Assembly. Encouraged by the success of the oil-producing
countries in boycotting Western states and sharp oil price increases, as well as by the then
prevailing spirit of economic independence in Latin America, several resolutions were passed
which called for a New International Economic Order. One of its cornerstones was the apparent
abolition of rules of international law governing the expropriation of alien property and their
replacement by domestic rules as determined by national authorities:
Each State has the right: (c) To nationalize, expropriate or transfer ownership of foreign
property, in which case appropriate compensation should be paid by the State adopting
such measures, taking into account its relevant laws and regulations and all circumstances
that the State considers pertinent. In any case where the question of compensation gives
rise to a controversy, it shall be settled under the domestic law of the nationalizing State
and by its tribunals, unless it is freely and mutually agreed by all States concerned that
other peaceful means be sought on the basis of the sovereign equality of States and in
accordance with the principle of free choice of means.14
References
(p. 5) Of course, this period of confrontation led to insecurity about the customary international
rules governing foreign investment.15 This phase lasted essentially until around 1990. At that time it
became clear that, together with the end of the Soviet Union, the Socialist view of property had
collapsed and that the call for economic independence had brought a major financial crisis, rather
than more welfare upon the people of Latin America. From that time onwards, Latin American states
started to conclude bilateral investment treaties the spirit of which was at odds with the Calvo
doctrine, and the annual calls for permanent sovereignty in the UN General Assembly came to an
end.16
At the same time, international financial institutions revised their position on the role of private
investment. The so-called Washington Consensus,17 with its new emphasis on the private sector in
the process of development, summarized the now dominant approach to development and its
concomitant positive view of private foreign investment. In 1992, the new approach crystallized in
the Preamble of the World Banks Guidelines on the Treatment of Foreign Direct Investment. It
recognizes:
that a greater flow of foreign direct investment brings substantial benefits to bear on the
world economy and on the economies of developing countries in particular, in terms of
improving the long term efficiency of the host country through greater competition, transfer
of capital, technology and managerial skills and enhancement of market access and in
terms of the expansion of international trade.18
Within this new climate of international economic relations, the fight of previous decades against
customary rules protecting foreign investment had abruptly become anachronistic and obsolete.
The tide had turned, and the new theme for capital-importing states was not to oppose classical
customary law, but instead to attract additional foreign investment by granting more protection to
foreign investment than required by traditional customary law, now on the basis of treaties. Five
decades after it was formulated, the Hull rule became a standard element of hundreds of new
bilateral investment treaties (BITs) as well as multilateral agreements, such as the Energy Charter
Treaty (ECT) adopted in 1994 or the North American Free Trade Agreement (NAFTA) in which
Mexico decided to join the United States and Canada, also in 1994. Developing countries started to
conclude investment treaties among themselves, and the characteristics of these treaties did not
significantly deviate from those concluded with developed states.19
References
(p. 6) Ever since the early 1990s, the focus in practice has shifted to the negotiation of new treaties
on foreign investment, to their understanding and interpretation. The elucidation of the state of
customary law is no longer a central concern of academic commentators. However, the relevant
issues have certainly not disappeared. For instance, in the context of NAFTA, the three states
parties decided that the standards of fair and equitable treatment and of full protection and
security must be understood to require host states to observe customary law and not more
demanding autonomous treaty-based standards.20 In consequence, nearly forgotten arbitral
decisionsmainly the Neer case of 1926were now unearthed. The importance of this award for
the current state of customary law governing foreign investment has led to a debate on whether an
old arbitral ruling addressing the duty to prosecute nationals suspected of a crime against a
foreigner is the appropriate vantage point from which contemporary rules governing foreign
investment should be developed.
(d) The evolution of investment protection treaties

The roots of modern treaty rules on foreign investment can be traced back to 1778 when the
United States and France concluded their first commercial treaty, followed in the nineteenth century
by treaties between the United States and their European allies and subsequently the new Latin
American states.21 These early treaties mainly addressed trade issues, but also contained rules
requiring compensation in case of expropriation. After 1919, the United States negotiated a series
of agreements on friendship, commerce, and navigation (FCN), followed by another series of
treaties between 1945 and 1966.22
Rules on investment were never prominent or distinct in these FCN treaties, even though the pre1945 treaties contained not just compensation clauses, but also provisions on the right to establish
certain types of business in the partner state. After 1945, trade matters were regulated in separate
treaties, and FCN treaties contained more detail on foreign investment.23
The era of modern investment treaties began in 1959 when Germany and Pakistan adopted a
bilateral agreement which entered into force in 1962. Germany had decided to launch a
programme for a series of bilateral treaties to protect its companies foreign investments made in
accordance with the laws of the host state. Soon after Germany had launched its programme and
successfully negotiated its
References
(p. 7) first treaties, other European states followed suit: Switzerland concluded its first such treaty
in 1961,24 France in 1972.25
As to dispute settlement, the early treaties did not provide for direct investor-state dispute
settlement procedures, but for the submission of disputes to the International Court of Justice or ad
hoc state-to-state arbitration.26 Starting with the treaty between Chad and Italy of 1969, BITs began
offering arbitration between host states and foreign investors.
In 1977, the US State Department launched an initiative for the United States to join the European
practice of the past two decades and to conclude agreements which were meant to address issues
of foreign investment only, mainly to protect investments of nationals abroad.27 Following a short
period of political hesitation in view of the issue of exporting jobs by way of promoting foreign
investment, and a shift of responsibility from the State Department to the United States Trade
Representative during that period, the United States, between 1982 and 2011, concluded 47
bilateral treaties, mainly with developing states.28
A similarly significant trend was the evolution of BIT practice by Asian states. China concluded 130
treaties between 1982 and 2011.29 India concluded its first BIT in 1994, had entered into 26 BITs by
1999, and in 2011 was a party to 83 such treaties. Japan has also decided to join the practice of
other Organisation for Economic Co-operation and Development (OECD) countries and in 2011 had
concluded 16 investment agreements.
At the same time, more and more developing states have negotiated BITs among themselves,
altogether more than 770. In the period between 2003 and 2006, these treaties outnumbered those
between developed and developing states.30
References
(p. 8) One way to explain this trend is that countries with emerging markets increasingly see
themselves as potential exporters of investments and wish to protect their nationals through
investment agreements. While this explanation is correct, these treaties do illustrate the broader
point that home states of investors are generally inclined to conclude treaties with guarantees and
mechanisms going beyond the rules of customary law and that the underlying concern is not
peculiar to traditional Western liberal states with outgoing foreign investment. The general point
seems to be that home states of investors, whatever their historical background, consider specially
negotiated rules desirable. A comparison of treaties concluded between developing countries does
not reveal significant differences to agreements concluded with developed states.
(e) The quest for a multilateral framework

In 1957, Hermann Josef Abs, a prominent German banker, called for a Magna Charta for the
Protection of Foreign Property31 in the form of a global treaty. Such a treaty was meant to establish
not just specific standards of protection, but also a permanent arbitral tribunal charged with the
application of the treaty and with the power to lay down economic sanctions against violating
states, including non-signatories. When it soon became apparent that the time was not ripe for
32
such a grand approach, Abs opted for a more modest multilateral initiative,32 together with Sir
Hartley Shawcross. These efforts finally culminated in the Abs-Shawcross Draft, which, together
with other contributions such as a Swiss draft,33 in 1962 led in turn to the first effort of the OECD,
the forum of the capital-exporting countries, to prepare a multilateral treaty.34 A second such draft
was presented in 1967. However, these first efforts to create a multilateral framework remained
unsuccessful, mainly due to the fact that the Convention was intended to be applicable not only to
OECD member states but to all countries, and that the OECD efforts fell into a period of great
divisions between capital-importing and capitalexporting countries concerning the content of
recognized principles of foreign investment law.35 Eventually, the OECD contented itself with
merely recommending the draft as a model for the conclusion of bilateral investment
References
(p. 9) treaties by its member states.36 This laid the groundwork for the future investment regime
characterized by the lack of a universal treaty and the dominance of bilateral treaties.
In 1961, two years after the era of bilateral treaties had begun, the World Bank took the lead to
address the emerging international legal framework of foreign investment, pointing to its mandate
and to the link between economic development, international cooperation, and the role of private
international investment. The debates then underway in the OECD, in preparation of the 1962 Draft
Convention on the Protection of Foreign Property and also in the United Nations on the rules on
foreign investment generally, indicated that the state of opinion regarding customary law was
deeply divided and that the prospect of reaching a global consensus on the substance of
investment rules was minimal.
In the World Bank, it was the then General Counsel, Aron Broches, who initiated and drove the
debates on the possible scope of international consensus. Given the controversies within the
United Nations, Broches properly concluded that for the time being the best contribution the Bank
could make was to develop effective procedures for the impartial settlement of disputes, without
attempting to seek agreement on substantive standards. This approach seemed artificial since logic
would dictate that any system of dispute settlement would have to be based on a set of substantive
rules which could be applied. But Broches argued that, from a pragmatic point of view, such an
axiomatic approach was neither necessary nor productive.
At first sight, the Broches concept (procedure before substance) seemed to be a limited and
modest one. However, he designed what was to become, in 1965, the Convention on the Settlement
of Investment Disputes between States and Nationals of Other States (ICSID Convention)
establishing the International Centre for Settlement of Investment Disputes (ICSID). In retrospect, it is
clear that the creation of ICSID amounted to the boldest innovative step in the modern history of
international cooperation concerning the role and protection of foreign investment.
The success of this concept became apparent when the ICSID Convention quickly entered into
force in 1966 and especially when in subsequent decades more and more investment treaties,
bilateral and multilateral, referred to ICSID as a forum for dispute settlement. From the point of view
of member states, one major advantage of the system was that investment disputes would become
depoliticized in the sense that they avoided confrontation between home state and host state.37
For two decades ICSIDs caseload remained quite modest. However, by the 1990s ICSID had
become the main forum for the settlement of investment disputes, and Broches vision had become
a reality.
References
(p. 10) Following its earlier efforts in the 1960s towards the creation of a multilateral investment
treaty,38 the OECD in 1995 decided to launch a new initiative in this direction. These negotiations
took place from 1995 to 1998 and built, to a considerable extent, on the substance of existing
bilateral treaties. The last draft for a Multilateral Agreement on Investment (MAI) dated 22 April
199839 indicates major areas of consensus and some points of disagreement. Although the draft
shows that the negotiations had indeed progressed to a considerable extent, the discussions were
halted in 1998. Several unrelated reasons had led to the breakdown.40 The United States had
never stood fully behind the initiative: domestic political support necessary for ratification seemed
uncertain; in addition, the level of protection for foreign investment appeared unsatisfactory due to
a number of compromises. In Europe, France decided in the latter stage of the negotiations that an
agreement might not be compatible with its desire to protect French culture (exception culturelle).
NGOs argued that the debates within the OECD had been held without sufficient public information
and input. Also, from the beginning, there was a debate as to whether the OECD, representing
mainly capital-exporting countries, was the proper forum to negotiate a treaty meant to serve as a
global instrument. In the end, these different aspects converged to undermine and halt support for
the negotiations within the OECD.
In a partially overlapping effort, the World Trade Organization (WTO) had already placed the issue
of a multilateral investment treaty on its agenda during a meeting in Singapore in 1996, in the
middle of the OECD negotiations. The WTO Agreement of 1994 had embodied a first step of the
trade organization into the field of foreign investment: the so-called TRIMS Agreement41 was to
regulate those aspects of foreign investment which led to direct negative consequences for a
liberalized trade regime. In particular, this Agreement regulates issues of so-called performance
requirements imposed by the host state upon foreign investors and aims at reducing or eliminating
laws which require that local products are used in the production process by foreign investors
(local content requirements). The further development of the emerging investment agenda of the
WTO was addressed but not decided in 1996. In 2004, six years after the end of the OECD
initiative, the efforts within the WTO to include investment issues generally into the Organizations
mandate also came to a halt.42
References
(p. 11) Even though developing countries had negotiated more than a thousand treaties, they were
not prepared to accept a WTO-based multilateral investment treaty, arguing that such a multilateral
scheme might unduly narrow their regulatory space and that the effect of such a treaty would need
to be studied in greater detail. Brazil and India in particular took this position. The support of the
United States for a multilateral treaty was again limited, for reasons similar to those in 1998 within
the OECD.
At present, a comprehensive multilateral solution to investment issues is not in sight. It remains to
be seen whether the international community will continue to develop its patchwork approach to
foreign investment or whether the advantages of more global homogeneity will eventually be
accepted.
(f) Recent developments

Until the early 1990s international investment law had not produced any significant case law.43 In
the meantime this situation has changed dramatically. Both in the framework of the ICSID
Convention and beyond there is a veritable flood of cases that has produced and continues to
produce an ever-growing case law in the field. To a large extent this dramatic increase of activity
before arbitral tribunals was the direct consequence of the availability of investor-state arbitration
on the basis of a rapidly growing number of BITs. Inevitably, the large number of decisions
produced by differently composed tribunals has led to concerns about consistency and
coherence.44
The success of the system of investment arbitration has also led to weariness and criticism in some
quarters. Some countries have found themselves in the role of respondents more often than others
and perceive the need to defend themselves repeatedly against claims by foreign investors as a
serious burden. At the same time there is criticism that investment law in general and investment
arbitration in particular restricts the freedom of states to take regulatory action. Therefore,
enthusiasm for the current system is by no means undivided.
Under the Treaty of Lisbon, in 2009 the European Union assumed exclusive competence for foreign
direct investment. This has far-reaching potential consequences for the BITs to which member
states of the EU are parties. Since roughly half of all BITs worldwide have at least one EU member
state as a party, the future policy of the EU on investment is likely to have global repercussions.
Both BITs
References
(p. 12) between EU member states (intra-EU BITs) and BITs of EU members with non-EU members
(extra-EU BITs) will be affected.
With regard to intra-EU BITs, the European Commission wants all of these terminated. Some member
states are strictly opposed to these plans while others have started terminating BITs with other EU
members.
With regard to BITs with non-EU member states, the Commission wishes gradually to replace these
by new treaties to be negotiated by the Commission on behalf of the EU. At the time of writing,
negotiations are underway between the Commission and Canada, India, and Singapore.
2. The sources of international investment law

Foreign investment law consists of general international law, of standards more specific to
international economic law, and of distinct rules peculiar to the protection of investment. In addition,
the law of the host state plays an important role. Depending upon the circumstances of an
individual case, the interplay between relevant domestic rules of the host state and applicable rules
of international law may become central to the analysis of a case.45 The domestic rules on
nationality may determine jurisdiction in a particular case. Other areas of domestic law that may
become relevant in a particular case include property law, commercial law, labour law, zoning law,
and tax law to name just a few.
Not only is the distinction between international law and domestic law becoming blurred by the
modern regime of foreign investment law,46 but also the classical separation between public and
private law, as emphasized especially in continental European legal orders, cannot be
accommodated in neat categories in this field. The broader question whether international
economic law allows for a useful distinction between private law and public law is particularly acute
in foreign investment law. The rules governing contracts between an investor and a host state draw
on both private and public law. In fact, these rules establish a link between domestic law and public
international law. To a certain extent, the rules of domestic law are being confronted and
superseded by rules of public international law, and in relevant international cases, the decision of
arbitrators will turn on their understanding of domestic law, possibly accompanied by a process of
review of domestic law under the international standards contained in treaties and in general
international law.
What follows is a general survey of the most important sources of international investment law.
More detailed discussion of the issues arising from these sources can be found in the relevant
chapters of this book.
(p. 13) (a) The ICSID Convention

The Convention on the Settlement of Investment Dispute between States and Nationals of other
States is a multilateral treaty. It provides a procedural framework for dispute settlement between
host states and foreign investors through conciliation or arbitration.47 The Convention does not
contain substantive standards of protection for investments. Also, participation in the ICSID
Convention does not amount to consent to arbitration. The process whereby consent to arbitration
under the ICSID Convention is given by the host state and by the investor is described at pp
254264.
(b) Bilateral investment treaties

BITs are the most important source of contemporary international investment law. Some countries,
such as Germany, Switzerland, and China, have concluded well over 100 BITs with other countries;
and it is estimated that close to 3,000 BITs are in existence worldwide.
BITs provide guarantees for the investments of investors from one of the contracting states in the
other contracting state. Traditionally, BITs are relatively short with no more than 12 to 14 articles.
They typically consist of three parts.
The first part offers definitions, especially of the concepts of investment and investor.48
The second part consists of substantive standards for the protection of investments and investors.
Typically these contain: a provision on admission of investments; a guarantee of fair and equitable
treatment (FET); a guarantee of full protection and security; a guarantee against arbitrary and
discriminatory treatment; a guarantee of national treatment and a guarantee of most-favourednation treatment (MFN clause); guarantees in case of expropriation; and guarantees concerning
the free transfer of payments. These various standards and guarantees are described in some
detail in Chapters V, VI, and VII. The third part deals with dispute settlement. Most BITs contain two
separate provisions on dispute settlement. One provides for arbitration in the event of disputes
between the host state and foreign investors (investor-state arbitration). Most BITs contain advance
consent of the two states to international arbitration with investors from the other state party either
before an ICSID tribunal or through some other form of arbitration. The other provision on dispute
settlement in BITs provides for arbitration between the two states parties to the treaty (state-state
arbitration). Whereas investor-state arbitration under BITs is very common, state-state arbitration
has remained rare. The role of BITs in dispute settlement is described at pp 257259.
The classical BIT of the past decades has addressed only issues of foreign investment. More
recently there is a trend to negotiate provisions on foreign
References
(p. 14) investment in the context of wider agreements, called free trade agreements (FTAs). As the
name indicates, these FTAs also address trade issues. This trend seems to have started with the
agreement between Canada and the United States in 1989, which formed the basis for the NAFTA
concluded in 1994 between these two states and Mexico. With the recent tendency to conclude
bilateral or regional trade agreements in addition to the global rules of the WTO, states have been
inclined to conclude broad agreements on economic cooperation regionally or bilaterally, instead
of agreements specifically aimed at matters of trade or foreign investment. The number of these
FTAs also covering rules on foreign investment has increased in recent years.49 The European
Commission is negotiating FTAs with third countries, containing provisions on trade as well as on
investment.
At times, it has been argued that some BITs are negotiated in haste and without detailed
consideration of their implications. Typically, capital-exporting states have formulated a model
treaty for their own purpose,50 and have presented this informal document to capital-importing
states at the beginning of negotiations as a basis for the subsequent negotiations. However,
developing states have gradually developed their own preferences for a certain scheme of
treaties, sometimes with their own model draft. Also, treaties have been negotiated between
developing countries.
As more and more treaties have been concluded, and as the international discussion on the nature
and the details of these treaties has progressed, including the contours and substance of individual
clauses, any argument to the effect that host states have de facto accepted investment obligations
without proper knowledge of their scope and significance will become less convincing. Investment
treaties are today seen as admission tickets to international investment markets.51 Their limiting
impact on the sovereignty of the host state, controversial as it may be in the individual case, is in
this sense a necessary corollary to the objective of creating an investment-friendly climate.52
References
(p. 15) (c) Sectoral and regional treaties: the Energy Charter Treaty
and NAFTA
The first multilateral treaty containing substantive rules on foreign investment is of a sectoral nature
and not meant for universal membership. The ECT of 199453 essentially grew out of the desire of
European states to cooperate closely with Russia and the new states in Eastern Europe and Central
Asia in exploring and developing the energy sector, which is of crucial political, economic, and
financial importance for both sides. Membership was open to all states committed to the
establishment of closer cooperation and an appropriate international legal framework in the energy
sector.
The scope of the ECT is not limited to investments but covers a wide range of issues such as trade,
transit, energy efficiency, and dispute settlement. The chapter on investment is mostly patterned
along the lines of bilateral investment treaties concluded by the member states of the European
Union. Its substantive standards are similar to those contained in BITs.54 However, the Treaty also
contains some innovative features, such as special provisions concerning state entities and subnational authorities,55 and a best-efforts clause concerning non-discrimination in the preestablishment phase,56 coupled with an expression of intent to transform it into a legally binding
obligation in the future.57
The Treaty entered into force in 1998. So far, 51 states and the European Union have ratified the
Treaty. Russia has signed, but currently does not intend to become a party.58 Under the Treaty,
investors have the right to bring a suit before ICSID, before an arbitral tribunal established under
the UNCITRAL arbitration rules, before the Arbitration Institute of the Stockholm Chamber of
Commerce, or before the courts or administrative tribunals of the respondent state.59 Thirty
investment disputes were initiated between 2001 and 2011 under the framework of the ECT.
The NAFTA between Canada, Mexico, and the United States (1994)60 addresses matters of both
trade and investment. The Treaty aims at the free movement and liberalization of goods, services,
people, and investment. Chapter Eleven of the NAFTA specifically addresses the treatment of
investments.
References
(p. 16) The objective enunciated in Article 102 is to increase substantially investment opportunities
in the territories of the parties.61
The trade provisions in the NAFTA are largely built on the rules of the WTO, of which all three
NAFTA countries are members. Chapter Eleven on investment amounted to a bold and innovative
scheme inasmuch as it tied Mexico as a developing country to its two northern developed
neighbours against a history replete with conflict, especially in investment matters.62 In substance,
Chapter Eleven builds upon the treaty practice of the United States, including the treaty with
Canada concluded in 1989.
The tripartite structure of Chapter Eleven contains substantive obligations in Section A (Arts 1101 to
1114), rules on dispute settlement in Section B (Arts 1115 to 1138), and a number of definitions in
Section C (Art 1139).

The substantive obligations cover traditional issues such as national treatment, MFN treatment,
performance requirements, the selection of senior management and board of directors, transfers,
and possible denial of benefits to investors owned or controlled by investors of non-NAFTA states.
In practice, the rules on expropriation (Art 1110) and on the Minimum Standard of Treatment (Art
1105) have received most attention and have led to a number of legal disputes and public
controversies.
Dispute settlement is governed by Section B of Chapter Eleven. Under Article 1120 an investor may
bring a suit against the host state under the ICSID Convention. But this provision is operative only if
both the home state and the host state have ratified the ICSID Convention. In fact, only the United
Statesand not Canada or Mexicois party to the ICSID Convention. A second choice is to submit
the dispute to arbitration under the ICSID Additional Facility Rules of 1978 which do not require that
both states are ICSID partiesonly that one of the two states is a party. Therefore, the Additional
Facility is available if the United States is either the respondent or the claimants home state. The
Additional Facility follows rules different from ICSID regarding the applicable law (no reference to
the law of the host state), annulment (no annulment under ICSID rules, but review by
References
(p. 17) domestic courts), and enforcement (no enforcement under ICSID rules). The third possibility
open to the investor is to have the arbitration governed by the UNCITRAL Arbitration Rules.
The right of the investor to file a suit against the host state under Section B is limited to breaches of
the rules contained in Section A. The governing law is limited to the NAFTA itself and to applicable
rules of international law (Art 1131(1)).
As regards rules in other parts of the Agreement, such as those on transparency, only the member
states may bring them before an arbitral tribunal (Chapter 20, Art 2004). The member states also
have the right to make a submission on a question of interpretation if they are not a party to a
dispute (Art 1128).
From a broader perspective of international economic law, the most remarkable feature of the
dispute resolution scheme contained in the NAFTA lies in the fact that while it addresses matters of
both trade and investment, it contains separate rules on dispute resolution and, in accordance with
the practice of previous decades, recognizes the right to bring a suit for an investor but not for a
trader. This dualism now seems to be entrenched in state practice, some divergences and
concerns notwithstanding.
(d) Customary international law

Although international investment law is dominated by treaties, customary international law still
plays an important role. The treaty-based rules have to be understood and interpreted, like all
treaties, in the context of the general rules of international law. Article 31(3)(c) of the Vienna
Convention on the Law of Treaties provides that together with the Treatys context any relevant
rules of international law applicable in the relations between the parties shall be taken into
account.
Customary international law remains highly relevant for the practice of investment arbitration. Rules
on attribution and other areas of state responsibility as well as rules on damages illustrate the point.
Other relevant areas of customary international law are the rules on expropriation, on denial of
justice, and on the nationality of investors.
In fact, the growing case law in the area of foreign investment has led to a situation in which some
general rules of international law find their major practical expression in foreign investment law. The
consequence is that a full contemporary understanding of these rules requires knowledge of their
interpretation and application in foreign investment law cases.

A basic doctrinal issue that has arisen pertains to the impact of the large number of bilateral
investment treaties on the evolution of customary law.63 This linkage between customary law and
treaty law has been at the forefront of comments which have addressed the state of customary law
regarding expropriation and compensation of foreign property.64
References
(p. 18) (e) General principles of law

General principles of law in the sense of Article 38(1)(c) of the Statute of the International Court of
Justice have received increasing attention in recent practice.65 General principles of law will
acquire importance in the context of investment rules especially in the case of lacunae in the text
of treaties and in the interpretation of individual terms and phrases.
Examples of general principles relied upon by tribunals include good faith,66 nemo auditur
propriam turpitudinem allegans,67 estoppel,68 onus probandi,69 and the right to be heard.70
(f) Unilateral statements

The legal effect of unilateral statements and the conditions under which these may be considered
binding have played a prominent role in some cases, especially in the context of the guarantee of
fair and equitable treatment (FET). Here, the principle of good faith is closely tied to the operation of
the principle of estoppel. The International Court of Justice and its predecessor have recognized
that unilateral declarations will be binding if the circumstances and the wording of the statement are
such that the addressees are entitled to rely on them.71 The International Law Commission has
adopted Guiding Principles applicable to unilateral declarations of states capable of creating legal
obligations.72
This situation may also arise in the relationship between the host state and the foreign investor.73
Arbitral tribunals have so held on the basis of the principle of good faith.74 In Waste Management v
Mexico, the Tribunal found that in applying the FET standard, it is relevant that the treatment is in
breach of representations made by the host State which were reasonably relied on by the
claimant.75
In Total v Argentina76 the Tribunal said:
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(p. 19) Under international law, unilateral acts, statements and conduct by States may be
the source of legal obligations which the intended beneficiaries or addressees, or possibly
any member of the international community, can invoke. The legal basis of that binding
character appears to be only in part related to the concept of legitimate expectations
being rather akin to the principle of estoppel. Both concepts may lead to the same result,
namely, that of rendering the content of a unilateral declaration binding on the State that is
issuing it.77
(g) Case law

As explained below,78 tribunals are not bound by previous cases, but do examine and refer to
them, frequently.
3. The nature of international investment law
(a) Investment law and trade law

Over time, the principles governing foreign investment have developed their own distinct features
within the broader realm of international economic law. Today, it remains a matter of semantics
whether it is appropriate to speak of the existence of a separate category of principles of foreign
investment law, given their strong links to international economic law in general. But there is no
doubt that the international law of foreign investment has become a specialized area of the legal
profession and that special courses are offered on the subject in universities worldwide. The
common usage and parlance in the terminology of international law has always been to single out
and to designate distinct fields, such as the laws of war, or the law of the sea, whenever the
body of rules in any one area has become extensive and dense enough to justify special attention
and study.
The nature of investments makes it inevitable that the nature, structure, and purpose of foreign
investment law stands out as structurally distinct in the broader realm of international law,
especially in comparison to trade. In terms of legal methodology, the difference between the two
fields calls for caution in assuming commonalities between foreign investment law and trade law.
Whenever an analogy is proposed, or a solution is transferred from one area to the other, it must
be examined in detail whether their different nature is amenable to an assumption of commonality.
Often, a concept which appears to be in common turns out to have different shades and
characteristics upon more detailed analysis, taking into account the peculiar business nature of
long-term foreign investment projects.79
(p. 20) (b) Balancing duties and benefits

There have been speculations relating to the reciprocity of obligations in investment treaties, to the
quid pro quo underlying these treaties, and to the mutual benefits arising from them. All these
concerns relate to a common underlying theme which suggests that treaties on foreign investment
in their traditional and current version place obligations solely on the host state without equal
commitments on the part of the foreign investor.
Such concerns reflect the assumption that all types of treaties are necessarily based upon a similar
structure and upon a pattern of reciprocity and mutuality which must be reflected in the terms of
the treaty itself. However, the very nature of the law of aliens, being at the origin of foreign
investment law, indicates that the raison dtre of this field of law does not reflect the traditional
themes of reciprocity and mutuality, but instead sets accepted standards for the unilateral conduct
of the host state. The context and nature of a foreign investment reveals a structural setting which
does not correspond to a transaction or to an agreement in which privileges are exchanged on a
mutual basis by two parties. Notions of mutuality and reciprocity are not absent from the regime of
an investment treaty, but they do not operate in the same manner as in a classical agreement.
Instead, they are focused on the mutual benefits of host state and investor and on the
complementarity of interests flowing from the long-term commitment of resources by the foreign
investor under the territorial sovereignty of the host state.
In an investment treaty, the host state deliberately renounces an element of its sovereignty in
return for a new opportunity: the chance better to attract new foreign investments which it would
not have acquired in the absence of a treaty. It is true that this quid pro quo underlying the choice
on the part of the host state is based on a policy judgement the nature of which escapes precise
evaluation. It is based upon assumptions about the effect of the treaty which are uncertain.80 As
with every treaty,81 the acceptance of an investment treaty by a state and the determination of the
desirable type and extent of obligations contained in it represent an exercise of the sovereign
power to be made freely by each state in light of its circumstances and preferences.
Once the sovereign has committed itself to a treaty, the balancing of interests and aspirations is no
longer subject to a unilateral decision. After the investment treaty is concluded, the investor is
entitled to rely on the scheme accepted in the treaty by the host state as long as the treaty remains
in force.
References
(p. 21) Investment treaties do not pit the interests and benefits of the host state against those of the
investor. Instead, the motivation underlying such treaties assumes that the parties share a joint
purpose. In this sense, it would be alien to the nature of an investment treaty to contrast the
interests of the host state and of the foreign investor as opposed to each other. The mode and
spirit of investment treaties is to understand the two interests as mutually compatible and
reinforcing, held together by the joint purpose of implementing investments consistent with the
business plan of the investor and the legal order of the host state.
(c) The investors perspective: a long-term risk

Making a foreign investment is different in nature from engaging in a trade transaction. Whereas a
trade deal typically consists of a one-time exchange of goods and money, the decision to invest in
a foreign country initiates a long-term relationship between the investor and the host country.
Often, the business plan of the investor is to sink substantial resources into the project at the outset
of the investment, with the expectation of recouping this amount plus an acceptable rate of return
during the subsequent period of investment, sometimes running up to 30 years or more.
A key feature in the design of such a foreign investment is to lay out in advance the risks inherent
in such a long-term relationship, both from a business perspective and from the legal point of view.
This involves identifying a business concept and a legal structure which is suitable to the
implementation of the project in general, and minimizes risks which may arise during the period of
the investment. In many cases, this task is essential for the investor as the money sunk into the
project at the outset typically cannot be used subsequently at another location, because the
machinery and installations of the project are specifically designed and tied to the particularities of
the project and its location.
The dynamics in the relationship between the host state and the investor differ in nature before and
after the investment has been made. Larger projects are typically not made under the general laws
of the host country; instead, the host state and the foreign investor negotiate a dealan
investment agreementwhich may adapt the general legal regime of the host country to the
project-specific needs and preferences of both sides. During these negotiations, the investor will
try to seek legal and other guarantees necessary in view of the nature and the length of the
project. Considerations will include bilateral or multilateral treaties concluded by the host state
which will provide guarantees on the level of international law. Depending on the project, the
investor may be in the drivers seat during these negotiations if the host state is keen to attract the
investor.
The investor will normally bear the commercial risks inherent in possible changes in the market of
the project, for example new competitors, price volatilities, exchange rates, or changes affecting
the financial setting. In certain transactions, provisions will be made for adaptation or renegotiation
in the event of a change in the economic and financial context of the project. The political risks,
that is, the risks inherent in a future intervention of the host state in the legal design of the (p. 22)
project, will typically be addressed during these initial negotiations. Unless these risks are
appropriately addressed in an applicable investment treaty, the investor may ask for protection on
a number of points, such as the applicable law, the tax regime, provisions dealing with inflation, a
duty of the host state to buy a certain volume of the product (especially in the field of energy
production), the future pricing of the investors product, or customs regulation for materials needed
for the product, and, especially, an agreement on future dispute settlement. Such rights may be
included in an investment contract between the investor and the host state.
Once these negotiations are concluded and the investors resources are sunk into the project, the
dynamics of influence and power tend to shift in favour of the host state. The central political risk
which henceforth arises for the foreign investor lies in a change of position of the host government
that would alter the balance of burdens, risks, and benefits which the two sides laid down when
they negotiated the deal and which formed the basis of the investors business plan and the
legitimate expectations embodied in this plan. Such a change of position on the part of the host
country becomes more likely with every subsequent change of government in the host state during
the period of the investment.
(d) The host states perspective: attracting foreign investment

It is reasonable to assume that the object and purpose of investment treaties is closely tied to the
desirability of foreign investments, to the benefits for the host state and for the investor, to the
conditions necessary for the promotion of foreign investment, and to the removal of obstacles
which may stand in the way of allowing and channelling more foreign investment into the host
states. Thus, the purpose of investment treaties is to address the typical risks of a long-term
investment project, and thereby to provide stability and predictability in the sense of an investmentfriendly climate.
Under the rules of customary international law, no state is under an obligation to admit foreign
investment in its territory, generally or in any particular segment of its economy. While the right to
exclude and to regulate foreign investment is an expression of state sovereignty, the power to
conclude treaties with other states will also be seen as flowing from the same concept.
Once it has admitted a foreign investment, a host state is subject to a minimum standard of
customary international law.82 Modern treaties on foreign investment go beyond this minimum
standard in the scope of obligations a host state owes towards a foreign investor. Whether such
treaties in general, or any particular version of them, are beneficial to the host state, remains a
matter for each state to decide. In particular, each state will weigh, or at least has the power to
weigh, the economic and financial benefits of a treaty-based promotion of foreign investments
against the consequences of being bound to the standards of protection laid down in the treaty.
None of these benefits and consequences is open to a qualitatively or (p. 23) quantitatively
objective assessment. Each state will exercise its sovereign prerogative in determining its
preferences and priorities when it decides whether to conclude an investment treaty.
There is an ongoing debate over the impact foreign investment treaties have on the promotion of
foreign investment and its geographic distribution. Empirical evidence pointing to an increase in
foreign investment in a state which has been directly caused by the conclusion of new treaties
remains scant, even though recent studies suggest that a positive effect will flow from such a
treaty.83 Legal security in a host country for an investment project is one of several factors that will
influence an investment decision, but the driving parameters are determined not by legal but by
economic considerations. Therefore, an argument that the international legal dimension will in itself
prompt an increased flow of foreign investment would be unrealistic. On the other hand,
globalization has led to relatively accurate real-time information about economic and legal matters
around the globe, and the lack of legal stability surrounding a potential investment in a particular
country may prevent a positive decision on the part of the investor. The perception of a sufficient
degree of legal stability for a project, and for the investment climate in a state generally, will be one
of several factors in making a decision about new foreign investment, but will not by itself serve as
the decisive incentive for potential foreign investors.84 Moreover, the perceived risk of investing in
a particular country will determine the profit margin required by the investor. High-risk investments
may well be undertaken but will require a higher rate of return for the investor.
Another major advantage of treaties for the protection of investments, and of investment arbitration
in particular, is that investment disputes become depoliticized. This means that they distance the
dispute from the home state of the investor and thus avoid confrontation, at least directly, between
home state and host state.85 In other words, the dispute is removed from the political inter-state
arena and moved into the judicial arena of investment arbitration. From the perspective of a host
state, facing an investor before an international tribunal may
References
(p. 24) be the lesser evil compared to being exposed to the pressure of a powerful state or the
European Commission.
(e) International investment law and sovereign regulation

Conceptually, one may ask today whether the operation of the international law of foreign
investment amounts to a body of international rules of administrative law governing the relationship
of the foreign investor and the host state.86 It is evident that the rules on foreign investment may
reach far into segments of domestic law which would traditionally have belonged to the domaine
reserv of each host country. This evolving characteristic feature of foreign investment law has
led to concerns not just about the preservation of national sovereignty, but also about the
democratic legitimacy of the process by which foreign investment law is developed and applied.
Indeed, these concerns have not only been voiced by developing countries as recipients of foreign
investments; with equal force, this linkage has been observed and criticized by segments of civil
society in developed countries and in the United States after it had become a member of NAFTA
and a respondent in a number of NAFTA cases.
A traditional understanding of the concept of sovereignty detached from current international
economic realities may lead to the view that the international rules on foreign investment reach or
even cross the lines of what is considered acceptable.87 The rules on foreign investment touch
upon domestic regulations as diverse as labour law, the organization of the judiciary, administrative
principles, environmental law, health law, and, of course, rules governing property.
Rules of modern trade law also affect domestic matters, but the impact on domestic law and, thus,
potential concern for national sovereignty, is more severe when rules of investment law are
applied. At the same time, economic literature has emphasized that openness of an economic
system to foreign competition is among the factors that contribute to economic growth and to good
governance in general. Thus, investment law embodies and represents the nature and the effects
of economic globalization, with the potential advantage of economic efficiency and of higher living
standards coupled with a reduced legal power of the national authorities to regulate such areas
which have an impact upon foreign investment.88
(f) International investment law and good governance

The concept of good governance has increasingly influenced the international development
agenda.89 Earlier periods of development practice after 1945 had
References
(p. 25) focused first on the significance of important individual projects and then on the role of
macroeconomic policies. The new thinking, along with empirical studies, highlights the fact that all
projects and policies depend in their implementation and, indeed, in their conception and
formulation, on a functioning state, in particular on functioning institutions.
As a consequence, the concept of good governance has moved to the centre of international aid
and poverty-reduction policies. The first coherent formulation of the concept seems to be
contained in a World Bank report written on the development challenges for sub-Saharan Africa in
1989.90 No single definition has subsequently been adopted, but the core elements have been
expressed in working documents by the World Bank91 and the International Monetary Fund.92 In
the treaty between the European Community and African, Caribbean, and Pacific States as adopted
in 2000, the so-called Cotonou Agreement, the wording is as follows:

In the context of a political and institutional environment that upholds human rights,
democratic principles and the rule of law, good governance is the transparent and
accountable management of human, natural, economic and financial resources for the
purposes of equitable and sustainable development. It entails clear decision-making
procedures at the level of public authorities, transparent and accountable institutions, the
primacy of law in the management and distribution of resources and capacity building for
elaborating and implementing measures aiming in particular at preventing and combating
corruption.93
The origin of the concept of good governance falls into the same period as the formulation of the
Washington Consensus94 and the beginning of the wave of investment treaties of the 1990s. The
common core of the policies embodied in investment treaties, in the Washington Consensus, and in
the principle of good governance lies in the recognition that institutional effectiveness, the rule of
law, and an appropriate degree of stability and predictability of policies form the governmental
framework for domestic economic growth and also for the willingness of foreign investors to enter
the domestic market. Thus, investment treaties provide for external constraints and disciplines
which foster and reinforce values similar to the principle of good governance with its emphasis on
domestic institutions and policies.
(g) Obligations for investors

BITs give guarantees to investors but do not normally address obligations of investors, although
some BITs provide that investments, in order to be protected, must be in accordance with host
state law.
References
(p. 26) On various levels, discussion has turned to the coverage by investment treaties of certain
claims, including counterclaims, of the host state or obligations of the foreign investor to observe
certain human rights or environmental or labour standards. Such innovations to BIT practice have
indeed been proposed.95 They would be in line with the objectives of earlier ideas pursued in the
United Nations for a Code of Conduct for Transnational Corporations as well as with the more recent
concepts and resolutions on corporate responsibility, as they are also in part implied in the OECD
Guidelines for Multinational Enterprises adopted in 1976 and last updated in 2011, together with
other efforts to promote voluntary initiatives for standards of corporate social responsibility.96
Within the UN these efforts to agree on non-binding rules broke down together with the failure to
negotiate a multilateral treaty on foreign investment. An attempt to draw up a code of conduct on
transnational corporations was made between 1977 and 1992, but was then abandoned.97
The OECD Guidelines, which are part of the broader OECD Declaration on International Investment
and Multinational Enterprises, constitute non-binding recommendations to multinational enterprises
in areas such as employment, human rights, environment, fighting bribery, science and
technology, competition, taxation, information disclosure, and consumer interests. Within the
administration of the adhering governments, so-called National Contact Points are charged with
promotion of the Guidelines and handling inquiries about their application. All OECD member
countries as well as nine non-member states have so far adhered to the OECD Guidelines.
In 2003, a group of international banks launched an initiative for a framework addressing
environmental and social risks in project financing.98 The so-called Equator Principles are
intended to apply to all project financings with total project capital costs over US$10 million and
require, inter alia, social and environmental assessment procedures and consultation, disclosure,
and monitoring mechanisms. For the applicable standards, the principles refer to various World
Bank and IFC guidelines. Over 76 financial institutions have so far adopted the Equator Principles.
An effort to approach investment issues from the vantage point of human rights was made in the UN
after 2000; the aim was to find a consensus on norms
References
(p. 27) addressing responsibilities of transnational corporations,99 and the UN named a Special
Representative for human rights and transnational corporations and other business entities in 2005,
tasked with identifying and clarifying standards of corporate responsibility and accountability with
regard to human rights. In 2011, the Special Representative prepared a Report on Guiding
Principles on Business and Human Rights: Implementing the UN Protect, Respect and Remedy
Framework.
Whether or not the object and purpose of investment treatiesthe increased flow of foreign
investmentwould be promoted or hindered by an extension of the subject matters of the treaties,
and a corresponding new design of their nature, will have to be a necessary part of the future
discussion on the usefulness of BITs in their traditional scope.
Footnotes:
1 Cited in J B Moore, A Digest of International Law, vol 4 (1906) 5.
2
Cited in R Wilson, United States Commercial Treaties and International Law (1960) 111.
See Carlos Calvo, Derecho Internacional Terico y Prctico de Europa y Amrica (1868) ;
Charles Calvo, Le droit internationalthorie et pratique, vol 3 (1896) 138.
4
E Root, The Basis of Protection to Citizens Residing Abroad (1910) 4 AJIL 517, 528.
5 For an analysis of the Lena Golfields Arbitration (1930), see, inter alia, V V Veeder, The Lena
Goldfields Arbitration: The Historical Roots of Three Ideas (1998) 47 ICLQ 747 ; the text of the
award is published as an appendix to A Nussbaum, The Arbitration between the Lena Goldfields,
Ltd and the Soviet Government (195051) 31 ICLQ 42.
6
See for the correspondence G Hackworth, Digest of International Law, vol 3 (1942) , vol 5
(1943) .
7 See H Roth, The Minimum Standard of International Law Applied to Aliens (1949) ; E Borchard,
The Diplomatic Protection of Citizens Abroad (1915).

8 See ECtHR, James & others v UK, Judgment, 21 February 1986, para 63; see also Lemire v
Ukraine, Award, 28 March 2011, para 57.

9 L F H Neer & Pauline Neer v United Mexican States, IV RIAA 60 (1951).
10 At pp 612.
11 See pp 6, 13941.
12
See R Dolzer, Permanent Sovereignty over Natural Resources and Economic Decolonization
(1986) 7 Human Rights LJ 217 ; K Gess, Permanent Sovereignty over Natural Resources: An
Analytical Review of the United Nations Declaration and its Genesis (1964) 13 ICLQ 398 ; S M
Schwebel, The Story of the UNs Declaration on Permanent Sovereignty over Natural Resources
(1963) 49 American Bar Association Journal 463 ; C Brower and J Tepe, The Charter of Economic
Rights and Duties of States: A Reflection or Rejection of International Law? (1975) 9 Intl Lawyer
295.
13 Foreign investment agreements freely entered into by or between sovereign States shall be
observed in good faith; see UN GA Res 1803 (14 December 1962) para 8.
14
UN GA Res 3281 (12 December 1974) (Charter of Economic Rights and Duties of States).
15
15
See INA Corp v Iran, 8 IranUS CTR 373, 386 (1985).
16
See T Wlde, A Requiem for the New International Economic OrderThe Rise and Fall of
Paradigms in International Economic Law and a Post-Mortem with Timeless Significance in G Hafner,
G Loibl, A Rest, L Sucharipa-Behrmann, and K Zemanek (eds), Liber Amicorum Professor Ignaz
Seidl-Hohenveldern (1998) 771.
17
See p 87.
18
World Bank Group, Guidelines on the Treatment of Foreign Direct Investment, Legal
Framework for the Treatment of Foreign Investment: Volume II: Guidelines (1992) 3544 .
19
See UNCTAD, Bilateral Investment Treaties 19952006: Trends in Investment Rulemaking

(2007).
20 See pp 136 et seq.
21
See R Wilson, United States Commercial Treaties and International Law (1960) 2.
22 See K J Vandevelde, The Bilateral Investment Program of the United States (1988) 21 Cornell
Intl LJ 201, 2078.

23
J W Salacuse, Towards a Global Treaty on Foreign Investment: The Search for a Grand Bargain
in N Horn (ed), Arbitrating Foreign Investment Disputes (2004) 51, 56 ; K J Vandevelde, The
Bilateral Investment Program of the United States (1988) 21 Cornell Intl LJ 203.
24 Treaty between Switzerland and Tunisia of 2 December 1961; see N Huu-tru, Le rseau suisse
daccords bilatraux dencouragement et de protection des investissements (1988) 92 Rvue

Gnrale de Droit International Public 577.
25 Treaty between France and Tunisia of 30 June 1972; see P Juillard, Le rseau francais des
conventions bilatrales dinvestissement: la recherche dun droit perdu? (1987) 13 Droit et

Pratique du Commerce International 9.
26 See eg Art 11 of the Bilateral Investment Treaty concluded between Germany and Pakistan on
25 November 1959, UNTS (1963) 24.

27 For an historical appraisal of the US BIT Program, see K J Vandevelde, The BIT Program: A
Fifteen-Year Appraisal, ASIL Proceedings (1992) 532.

28 The authors wish to thank the Secretariat of UNCTAD for the most recent statistics for BITs.
As to BIT practice of the United States, see K J Vandevelde, United States Investment Treaties:
Policy and Practice (1992) ; K J Vandevelde, A Brief History of International Investment
Agreements (2005) University of California Davis J Intl L & Poly 157 ; S M Schwebel, The United
States 2004 Model Bilateral Investment Treaty: An Exercise in the Regressive Development of
International Law in G Aksen, K H Bckstiegel, M J Mustill, P M Patocchi, and A M Whitesell (eds),
Liber Amicorum in Honour of Robert BrinerGlobal Reflections on International Law, Commerce
and Dispute Resolution (2005) 815 ; K Gugdeon, United States Bilateral Investment Treaties (1986)
4 Intl Tax and Business Law 105 ; W Dodge, Investor-State Dispute Settlement Between
Developed Countries: Reflections on the AustraliaUnited States Free Trade Agreement (2006) 39
Vanderbilt J Intl L 1.
29
On the evolution of Chinas attitude towards foreign investment, see D Chow, The Legal System
of the Peoples Republic of China in a Nutshell (2003) 374 et seq.
30
See UNCTAD, Bilateral Investment Treaties 19952006: Trends in Investment Rulemaking

(2007) 18. Foreign investment of multinational companies based in emerging markets flowing to
developed states has risen sharply in the past decade, but the volumes flowing to other developing
states have reached a higher level; see J Santiso, The Emergence of Latin Multinationals,
Deutsche Bank Research, 7 March 2007.
31
Speech given at the International Industrial Development Conference (San Francisco, 15

October 1957), reprinted in Recht der Internationalen Wirtschaft (1957) 229.
32
32 Drafts of a Convention on Investments Abroad, reprinted in Recht der Internationalen
Wirtschaft (1959) 1501.

33 Partly reprinted in Recht der Internationalen Wirtschaft (1959) 151.
34 See G A van Hecke, Le projet de convention de lOCDE sur la protection des biens trangers
(1964) 68 Revue gnrale de droit international public 641.

35 Indeed, the Resolution of the Council of the OECD on the Draft Convention states that [the
Convention] embodies recognized principles relating to the protection of foreign property combined
with rules to render more effective the application of these principles. For the divide between
developed and developing countries in the context of the discussion on a New International
Economic Order, see p 4.
36 See R Dolzer and M Stevens, Bilateral Investment Treaties (1995) 2.
37
See also I Shihata, Towards a Greater Depoliticization of Investment Disputes: the Roles of
ICSID and MIGA in The World Bank in a Changing World (1991) 309.
38 See p 8.
39
Available at <http://www1.oecd.org/daf/mai>.
40 See generally the different contributions to (1998) 31(3) Cornell Intl LJ (symposium edition).
See also Socit franaise de droit international (ed), Un accord multilatral sur linvestissement:
dun forum de ngociation lautre? (1999) ; UNCTAD, Lessons from the MAIUNCTAD Series on
Issues in International Investment Agreements (1999) ; E C Nieuwenhuys and M M T A Brus (eds),
Multilateral Regulation of Investment (2001).
41 Agreement on Trade Related Investment Measures (TRIMS). See generally T Brewer and S
Young, Investment Issues at the WTO: The Architecture of Rules and the Settlement of Disputes
(1998) 1 J Intl Economic L 457 ; M Koulen, Foreign Investment in the WTO in E C Nieuwenhuys
and M M T A Brus (eds), Multilateral Regulation of Investment (2001) 181203.
42
See Decision of the WTO General Council of 1 August 2004 on the Doha Agenda Work Program
(available at <http://www.wto.org>).
43
In 1970, the International Court of Justice had drawn attention to the slow evolution of
investment law, discussing relevant rules on diplomatic protection:
Considering the important developments of the last half-century, the growth of foreign
investments and the expansion of international activities of corporations, in particular of
holding companies, which are often multinational, and considering the way in which the
economic interests of states have proliferated, it may at first sight appear surprising that
the evolution of the law has not gone further and that no generally accepted rules in the
matter have crystallized on the international plane. (ICJ, Case Concerning the Barcelona
Traction, Light and Power Company, Ltd, Judgment of 5 February 1970, ICJ Reports (1970)
3, 47)
44
See R Dolzer, Perspectives for Investment Arbitration: Consistency as a Policy Goal? (2012) 3
Transnational Dispute Management .
45 For more detail See pp 2883.
46
See F Orrego Vicua, Of Contracts and Treaties in the Global Market (2004) 8 Max Planck
Yearbook of United Nations Law 341.
47 For details See pp 238 et seq.
48
See p 47 et seq and pp 62 et seq.
49 See generally UNCTAD, World Investment Report (2010) 82.

50 Most capital-exporting countries have drawn up their own model investment agreements. Also,
the Asian-African Legal Consultative Committee produced a model treaty for its members in 1984,
with two variants. See Asian-African Legal Consultative Committee: Models for Bilateral Agreements
on Promotion and Protection of Investments, reprinted in 23 ILM 237 (1984). Meanwhile, some
developing countries have adopted their own national versions. From time to time, model treaties
are revised to reflect the changing circumstances and priorities. The United States, for instance,
presented a new model treaty in 2012. The first US Model Treaty was adopted in 1981. See K J
Vandevelde, The BIT Program: A Fifteen-Year Appraisal, ASIL Proceedings (1992) 532, 536.
Obviously, model treaties have no binding force in themselves. Under certain circumstances, their
content may become relevant for the interpretation of treaties. Eg, a state may be unable to rely on
a certain traditional interpretation of a clause in a treaty if that clause departs from the model treaty
and if the interpretation of the treaty preferred by the state is the one also offered in the model
treaty. However, the point resists generalization, particularly because the negotiating history of
BITs is not usually available to tribunals.
51
See pp 20, 22.
52
R Dolzer, The Impact of International Investment Treaties on Domestic Administrative Law

(2005) 37 NYU J Intl L & Pol 953.
53
The text of the ECT can be found at 34 ILM 360 (1995). See generally C Ribeiro (ed),
Investment Arbitration and the Energy Charter Treaty (2006) ; T Wlde, Investment Arbitration
under the Energy Charter Treaty: An Overview of Selected Key Issues based on Recent Litigation
Experience in N Horn (ed), Arbitrating Foreign Investment Disputes (2004) 193 ; R Happ, Dispute
Settlement under the Energy Charter Treaty (2002) 45 German Yearbook of Intl L 331 ; T Waelde,
International Energy Law: An Introduction to Modern Concepts, Context, Policy and Players in J P
Schneider and C Theobald, Handbuch zum Recht der Energiewirtschaft (2003) 1129.
54
ECT, Art 10(1) and (3).
55 ECT, Arts 22 and 23.

56 ECT, Art 10(2).
57
ECT, Art 10(4).
58
On 20 August 2009 Russia officially informed the Depository of the ECT that it did not intend to
become a party.
59
ECT, Art 26.
60 The text of the NAFTA can be found at 32 ILM 605 (1993).

61 See M Kinnear, A Bjorklund, and J Hannaford, Investment Disputes under NAFTA (2006) ; T
Weiler (ed), NAFTA Investment Law and Arbitration: Past Issues, Current Practice, Future
Prospects (2004) ; C Brower, NAFTAs Investment Chapter: Initial Thoughts about SecondGeneration Rights (2003) 36 Vanderbilt J Transnl L 1533 ; C Brower, Structure, Legitimacy and
NAFTAs Investment Chapter (2003) 36 Vanderbilt J Transnl L 37 ; G Aguilar Alvarez and W Park,
The New Face of Investment Arbitration: NAFTA Chapter 11 (2003) 28 Yale JIL 365 ; B Legum, The
Innovation of Investor-State Arbitration under NAFTA (2002) 43 Harvard Intl LJ 531 ; D A Gantz,
Potential Conflicts between Investor Rights and Environmental Regulation under NAFTAs Chapter
11 (2001) 33 George Washington International Law Review 651 ; C Brower, Investor-State
Disputes under NAFTA: The Empire Strikes Back (2001) 40 Columbia J Transnl L 43 ; H C Alvarez,
Arbitration under the North American Free Trade Agreement (2000) 16 Arbitration International
393 ; F Ortino, NAFTAFifteen Years Later (2009) 3 Transnational Dispute Management. P
Dumberry, The Minimum Standard and Fair and Equitable Treatment under International Law:
Examining 15 Years of NAFTA Chapter 11 (2012) ; A Ingelson, L Mitchell, and C Viney, NAFTA
Takings Update (2012) 5 J World Energy L & Bus 1.
62 With regard to Mexico and NAFTA, see J Preston and S Dillon, Opening Mexico: The Making of
Democracy (2005).
63
See also pp 1349
64
64
See eg S Schwebel, The Reshaping of the International Law of Foreign Investment by

Concordant Bilateral Investment Treaties in S Charnovitz, D P Steger, and P van den Bossche
(eds), Law in the Service of Human DignityEssays in Honour of Florentino Feliciano (2005) 241.
65 Generally see Merrill & Ring v Canada, Award, 31 March 2010, para 187.
66 Sempra v Argentina, Award, 28 September 2007, paras 2909 (annulled on other grounds);
Phoenix v Czech Republic, Award, 15 April 2009, para 142; Cementownia v Turkey, Award, 17
September 2009, paras 13848. See also p 156.
67
Rumeli v Kazakhstan, Award, 29 July 2008, paras 310, 323.
68
Chevron v Ecuador, Partial Award, 30 March 2010, paras 334 et seq; Grynberg v Grenada,
Award, 10 December 2010, paras 7.1.1 et seq.
69
Alpha v Ukraine, Award, 8 November 2010, paras 236, 237.
70 Fraport v Philippines, Decision on Annulment, 23 December 2010, paras 197208, 21847.

71 See Legal Status of Eastern Greenland (Denmark v Norway), 5 April 1933, PCIJ, Series A/B, No
53, 22, 69; ICJ, Nuclear Tests Cases (Australia/New Zealand v France), 20 December 1974, ICJ
Reports (1974) 253, 268.
72 A/CN.4/L.703.
73
See W M Reisman and M H Arsanjani, The Question of Unilateral Governmental Statements as

Applicable Law in Investment Disputes (2004) 19 ICSID Review-FILJ 328.
74 Revere Copper v OPIC, Award, 24 August 1978, 56 ILR (1980) 258, 271.
75
Waste Management v Mexico, Final Award, 30 April 2004, para 98; see also CMS v Argentina,
Decision on Jurisdiction, 17 July 2003, paras 27, 33; LG&E v Argentina, Award, 3 October 2006,
para 133; Mobil v Venezuela, Decision on Jurisdiction, 10 June 2010, paras 86141; Cemex v
Venezuela, Decision on Jurisdiction, 30 December 2010, paras 80139.
76 Total v Argentina, Decision on Liability, 27 December 2010.
77
At para 131. Footnote omitted.
78 pp 3334.
79 See pp 2046.
80
See p 22.
8 1 See the statement made by the Permanent Court of International Justice in the Wimbledon case:
The Court declines to see in the conclusion of any Treaty by which a State undertakes to
perform or refrain from performing a particular act an abandonment of its sovereignty. No
doubt any convention creating an obligation of this kind places a restriction upon the
exercise of the sovereign rights of the State, in the sense that it requires them to be
exercised in a certain way. But the right of entering into international engagements is an
attribute of State sovereignty. (Wimbledon (France v Germany), 17 August 1923, PCIJ,
Series A, No 1, 25)
8 2 See E Root, The Basis of Protection to Citizens Residing Abroad (1910) 4 AJIL 517 , 528see
pp 1348.
83
See eg E Neumayer and L Spess, Do Bilateral Investment Treaties Increase Foreign Direct
Investment to Developing Countries? (2005) 33 World Development 1567 ; Z Elkins, A Guzman,
and B Smmons, Competing for Capital: The Diffusion of Bilateral Investment Treaties, 19602000,
Berkeley Program in Law and Economics, Annual Papers (2006); M Hallward-Driemeyer, Do
Bilateral Investment Treaties Attract Foreign Investment?, World Bank Policy Research Working
Paper No 3121; K Sauvant and L Sachs (eds), The Effect of Treaties on Foreign Direct Investment
(2009).
84
84
In 2006, the OECD adopted a Policy Framework for Investment, with a focus on ten policy areas
which will determine the degree to which a country is investment friendly (investment policy,
investment promotion and facilitation, trade policy, competition policy, tax policy, corporate
governance, policies for promoting responsible business conduct, human resource development,
infrastructure and financial services development, public governance). See OECD, Policy
Framework for Investment, available at <http://www.oecd.org/dataoecd/1/31/36671400.pdf>. This
Framework is also designed to promote the goals of the Millennium Declaration of the United Nations
(see Preamble p 7).
8 5 See C Schreuer, Investment Protection and International Relations in A Reinisch and U
Kriebaum (eds), The Law of International RelationsLiber Amicorum Hanspeter Neuhold (2007)
345.
8 6 See S Schill, International Investment Law and Comparative Public Law (2010).
87
In response to these concerns the United States has decided to opt for a treaty that spells out
definitions in great detail, so as to render arbitral decisions more predictable and to reduce the
power of arbitrators.
8 8 On the power of the host state to control multinational enterprises in general, see C Wallace,
The Multinational Enterprise and Legal ControlHost State Sovereignty in an Era of Economic
Globalization (2002).
8 9 See generally R Dolzer, M Herdegen, and B Vogel, Good Governance (2007).
90 World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth (1989).
91 See World Bank, Governance: The World Banks Experience (1994) 12 ; compare also S
Killinger, The World Banks Non-Political Mandate (2003).

92 See IMF, Good GovernanceThe IMFs Role (1997).
93 Article 9(3); the substantive paragraph remained unchanged during the 2005 revision. See also
P Hilpold, EU Development Cooperation at a Crossroad: The Cotonou Agreement of 23 June 2000

and the Principle of Good Governance (2002) 7 European Foreign Affairs Review 53 .
94
See pp 5, 87.
95 See eg H Mann, K von Moltke, A Cosbey, and L E Peterson, IISD Model International Agreement
on Investment for Sustainable Development (2005) available at <http://www.iisd.org> ; U Kriebaum,

Privatizing Human Rights: The Interface between International Investment Protection and Human
Rights in A Reinisch and U Kriebaum (eds), The Law of International RelationsLiber Amicorum
Hanspeter Neuhold (2007) 165.
96 For a survey, see UNCTAD, World Investment Report (2011) 111. See also A Heinemann,
Business Enterprises in Public International Law in U Fastenrath et al (eds), From Bilateralism to

Community Interest: Essays in Honour of Judge Bruno Simma (2011) 718.
97 See Draft UN Code of Conduct on Transnational Corporation, reprinted in 23 ILM 626 (1984).
98
See S Kass and J McCarroll, The Revised Equator Principles (2006) New York LJ , 1 September;
A Hardenbrook, The Equator Principles: The Private Financial Sectors Attempt at Environmental
Responsibility (2007) 40 Vanderbilt J Transnl L 197.
99
See D Weissbrodt and M Kruger, Norms on the Responsibilities of Transnational Corporations

and Other Business. Enterprises with Regard to Human Rights (2003) 97 AJIL 901.

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I

History, Sources, and Nature of International

Product: Oxford Scholarly Authorities on

(p. 1) I History, Sources, and Nature of International

(p. 3) (b) The emergence of an international minimum standard

the treatment of an alien, in order to constitute an international delinquency, should amount

(c) Developments after the Second World War

(d) The evolution of investment protection treaties

(e) The quest for a multilateral framework

(f) Recent developments

2. The sources of international investment law

(p. 13) (a) The ICSID Convention

(b) Bilateral investment treaties

Section C (Art 1139).

(d) Customary international law

interpretation and application in foreign investment law cases.

(p. 18) (e) General principles of law

(f) Unilateral statements

(g) Case law

3. The nature of international investment law

(a) Investment law and trade law

(p. 20) (b) Balancing duties and benefits

(c) The investors perspective: a long-term risk

(d) The host states perspective: attracting foreign investment

state, facing an investor before an international tribunal may

(e) International investment law and sovereign regulation

(f) International investment law and good governance

in 2000, the so-called Cotonou Agreement, the wording is as follows:

(g) Obligations for investors

The Diplomatic Protection of Citizens Abroad (1915).

Ukraine, Award, 28 March 2011, para 57.

See INA Corp v Iran, 8 IranUS CTR 373, 386 (1985).

See UNCTAD, Bilateral Investment Treaties 19952006: Trends in Investment Rulemaking

Intl LJ 201, 2078.

daccords bilatraux dencouragement et de protection des investissements (1988) 92 Rvue

conventions bilatrales dinvestissement: la recherche dun droit perdu? (1987) 13 Droit et

25 November 1959, UNTS (1963) 24.

Fifteen-Year Appraisal, ASIL Proceedings (1992) 532.

See UNCTAD, Bilateral Investment Treaties 19952006: Trends in Investment Rulemaking

Speech given at the International Industrial Development Conference (San Francisco, 15

32 Drafts of a Convention on Investments Abroad, reprinted in Recht der Internationalen

Wirtschaft (1959) 1501.

(1964) 68 Revue gnrale de droit international public 641.

See p 47 et seq and pp 62 et seq.

49 See generally UNCTAD, World Investment Report (2010) 82.

See pp 20, 22.

R Dolzer, The Impact of International Investment Treaties on Domestic Administrative Law

ECT, Art 10(1) and (3).

55 ECT, Arts 22 and 23.

ECT, Art 10(4).

ECT, Art 26.

60 The text of the NAFTA can be found at 32 ILM 605 (1993).

See also pp 1349

See eg S Schwebel, The Reshaping of the International Law of Foreign Investment by

Rumeli v Kazakhstan, Award, 29 July 2008, paras 310, 323.

Alpha v Ukraine, Award, 8 November 2010, paras 236, 237.

70 Fraport v Philippines, Decision on Annulment, 23 December 2010, paras 197208, 21847.

See W M Reisman and M H Arsanjani, The Question of Unilateral Governmental Statements as

At para 131. Footnote omitted.