International Investment Regime: Balancing Investment Protection and Public Interest

THE INTERNATIONAL INVESTMENT REGIME:
DOES INVESTMENT PROTECTION TRUMP THE RIGHT TO

REGULATE IN PUBLIC INTEREST?
by Julia C. Elser
A Final Dissertation Submitted for the

LL.M in International Trade Law, Contracts, Dispute Resolution
at ITC-ILO / University of Turin
Munich, November 26, 2014

Table of Contents
ABSTRACT III
LIST OF FIGURES IV
LIST OF TABLES IV
LIST OF ABBREVIATIONS V
I. INTRODUCTION 1
1. INVESTMENT ARBITRATION IN TIMES OF GREEN ECONOMY 1
2. OUTLINE 3
II. THE INVESTMENT PROTECTION REGIME 4

1. THE LANDSCAPE OF INVESTMENT PROTECTION TREATIES 4
A. THE PROLIFERATION OF IIAS 4
B. THE RATIONALE OF IIAS 8
aa) Treaties instead of Mere Customary Law 8
bb) Reasons for Treaty Making 9
2. ARBITRATION AS THE DISPUTE RESOLUTION MECHANISM 12
A. THE FUNCTIONING OF INVESTMENT ARBITRATION AND ENFORCEMENT 12
B. INSTITUTIONS AND CASE LOAD 14
C. REASONS FOR ISDS VIA ARBITRATION 16
3. INTERIM CONCLUSION 17
III. STANDARDS OF SUBSTANTIVE INVESTMENT PROTECTION 18

1. SUBSTANTIVE PROTECTION STANDARDS 18
A. AMBIT OF INVESTMENT PROTECTION 18
B. INDIRECT AND REGULATORY EXPROPRIATION 20
aa) Suggestions in Draft Conventions 21
bb) Attempts of Clarification in IIAs 22
C. MOST-‐FAVORED NATION AND NATIONAL TREATMENT 23
aa) “Like Circumstances” 24
bb) Carve outs: Narrowing the Scope of Application 25
D. STANDARD OF TREATMENT AND PROTECTION 27
aa) Customary International Law: The Minimum Standard 28
bb) Autonomous or Variable Standard? 29
cc) Introducing Higher Standards in IIAs 30
E. THE UMBRELLA CLAUSE 32
F. INTERIM CONCLUSION 34
IV. THE IMPACT OF INTERNATIONAL INVESTMENT PROTECTION ON STATES’

REGULATORY FREEDOM 36
1. THE MAIN POINTS OF CRITICISM 36
A. ISDS FAVORS INVESTORS 36
B. ISDS LACKS PREDICTABILITY 37
C. INVESTMENT ARBITRATION HAMPERS PUBLIC-‐INTEREST REGULATION 37
2. HOW DO TRIBUNALS STRIKE THE BALANCE BETWEEN INVESTMENT PROTECTION AND
REGULATORY DISCRETION? 38
A. THE SOLE-‐EFFECT DOCTRINE 38
I
B. PUBLIC INTEREST REGULATION AS GENERAL EXCEPTION 40
C. PROPORTIONALITY TEST AND LEGITIMATE EXPECTATIONS 43
3. CONCLUDING REMARKS 46
V. CONCLUSION 48
BIBLIOGRAPHY 51
II
Abstract
This paper analyzes the international regime of investment protection. It examines how
international investment treaties and the enforcement of the rights conferred on private
investors impact the states’ ability to regulate in public interest towards a sustainable
future.
Using data collected by UNCTAD, this article depicts the foundations, dynamics and
trends of the international investment regime. It explains the reasons for the replacement
of customary international law by treaties and the enforcement mechanism. This shows
the basic rationale of the system, which is the protection of private business interests,
but not a balance between them and public interest. It also demonstrates a shift in role
allocation: while formerly developed countries used investment treaties to safeguard
their nationals’ outbound FDI, recently they conclude treaties among themselves.
Facing exposure to investment arbitration, developed countries’ governments seek to
protect public interests especially regarding the adoption and implementation of
environmental policies.
A scrutiny of model treaties of the 21st century shows that investment treaties generally
contain the same protection standards, but states differ significantly in how they express
them. The analysis reveals that some states are more cautious than others and do not
bank on arbitrators to interpret investment treaties in a regulation-friendly manner.
Instead, some states follow the recent trend to incorporate wording aimed at preserving
regulatory space.
The paper also deals with the criticism of investment arbitration. By reviewing arbitral
jurisprudence, I come to the conclusion that tribunals adopt different approaches to
reconcile regulatory and private interest but do consider states’ right to regulate by
majority. I argue that in the end investment arbitrators are not the right ones to blame
for restrictions on regulatory freedom. Instead, investment treaties have been invented
for the purpose to restrict regulatory freedom. The experience that the reciprocity of
investment agreements can backlash on developed states has changed policymakers
approach to negotiating treaties. Governments, not arbitrators are the ones in charge of
striking the balance between investment protection and public interest. They have the
prerogative power of both negotiating and interpreting treaties.
Governments should thus use this power for integrating some scope for the pursuit of
sustainability concerns into the international investment regime. While withdrawing
from the international system of investment protection would mean throwing the baby
out with the bathwater, governments should take clear and specific treaty wording as to
regulatory needs for sustainability as a precondition for the conclusion of new treaties.
Additionally, they should make an effort to achieve broad international consensus on
the interpretation of typical standards of protection.
III
List of Figures
Figure II.1: Trends in IIAs, 1983-2013 ............................................................................. 5
Figure II.2: Most active IIA negotiators ........................................................................... 5
Figure II.3: Share of North-North BITs in Global BITs, by the end of 2013 (in percent) 9
Figure II.4: Known Investment Disputes, 1983-2013..................................................... 15
Figure II.5: Respondent States by Region and within the EU, Total by the End of 2013
(in percent) .............................................................................................................. 16
List of Tables
Table 1: Mega-Regional Agreements under Negotiation ................................................. 6
IV
List of Abbreviations
BIT Bilateral Investment Agreement
ECT Energy Charter Treaty
EFTA European Free Trade Association
FDI Foreign Direct Investment
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
ICC International Chamber of Commerce
ICSID International Center for Settlement of Investment Disputes
IISD International Institute for Sustainable Development
ISDS Investor-State Dispute Settlement
IIA International Investment Agreement
LCIA London Court of International Arbitration
MFN Most Favored Nation
NAFTA North American Free Trade Agreement
REIO Regional Economic Integration Organization
SCC Arbitration Institute of the Stockholm Chamber of Commerce
UNCITRAL United Nations Commission on International Trade Law
UNCTAD United Nations Conference on Trade and Development
WTO World Trade Organization
V
I. Introduction
1. Investment Arbitration in Times of Green Economy

According to widely recognized economic theory, foreign direct investment (FDI) has
positive effects on the host countries’ economy: more FDI increases productivity,
boosts the export industry and enables the national economy to increment imports. In
the aggregate, countries with a lot of FDI tend to prosper economically and play a more
prominent role in the world economy.1 For this reason states generally seek to attract
FDI by creating a good investment climate.
In the absence of a multilateral investment regime, bilateral investment treaties (BITs),
plurilateral treaties like the Energy Charter Treaty (ECT), and investment chapters in
broader economic treaties have become the international mechanism for encouraging
and regulating FDI. These agreements establish the terms and conditions for private
investment by nationals and corporations of one country in the jurisdiction of another.
Generally they govern four realms: the access of foreign investors to the host economy,
their treatment, expropriation, and dispute settlement2:
States reciprocally undertake to protect the investments of nationals of the respective
treaty partner by granting a right to “fair and equitable treatment” (FET), pledging non-
discrimination, and setting out the terms and conditions for expropriations and measures
having equivalent effects. At the same time, these commitments entail a self-restriction
on states’ regulatory freedom.
Furthermore, states submit themselves to arbitration in case of a dispute arising out of
the investment treaty. This means that foreign investors do neither depend on their
home state’s diplomatic protection nor do they depend on the judicial system of the host
state to enforce their rights under the investment treaty. Instead, the arbitration clause
allows the investor to bring his claim before an international arbitral tribunal.
Implying a partial waiver of the state’s immunity, this kind of dispute resolution and
enforcement mechanism was revolutionary in the middle of the last century. Judging by
the sheer number of more than 3,000 international investment agreements (IIAs)
nowadays, the system seems to have found wide acceptance since the conclusion of the
first investment treaty in 1959.3
However, recently two divergent trends can be observed: some countries engage in
multi-party treaty negotiations, shorten the intervals between negotiating rounds, and
cover more issues in greater depth. In contrast to this ‘up-scaling’ trend in international
FDI policy, other countries disengage from the system, to some extent due to
developments in investment arbitration.4
In fact, the number of arbitrations filed against states per year increased steadily over
the past decades. Whereas during the 1970ies and 80ies disputes on direct expropriation
by nationalization predominated, today’s dominant issues in international investment
1
R. L. ARCAS, International Trade and Investment Law (2011), p. 166, p. 175.
2
Z. ELKINS, A.T. GUZMAN & B. A. SIMMONS, “Competing for Capital: The Diffusion of Bilateral
Investment Treaties, 1960-2000“, 60 Int’l Organization 811, 812 (2006).
3
The very first one was the Treaty for the Promotion and Protection of Investments between Pakistan
and The Federal Republic of Germany.
4
UNCTAD, WIR 2014, p. xxiii.
1
law are indirect expropriation and denial of fair treatment through regulatory activities.5
To a considerable extent, the reason for the growing number of this kind of investment
disputes is the progressive pursuance of pro-environmental policies. Partly driven by
domestic pressure groups, partly due to efforts on the international level, states have
incrementally raised their environmental standards. Subsequent to the adoption of the
Stockholm Declaration in 1972 6 , many international legal instruments have been
adopted in this field. International environmental law agreements mandate states to take
action for sustainable development 7 , the preservation of biodiversity 8 , and against
climate change9, to name but a few areas. Accordingly, governments arranged their
priorities anew over time and adjusted them to the changed concerns about
sustainability and environment.
Attaching more importance to environmental concerns entails the need to balance it
with other needs. This means: where environmental policies interfere with private
economic rights, politicians and decision makers have to strike a balance. Almost
inevitably, not everybody will agree with the compromise. The growing number of
disputes arising between foreign investors and governments hosting the investment
gives evidence on that.
Nearly a quarter of all known investment arbitrations initiated in 2013 involve

regulatory measures taken by two countries that changed their renewable energy policy.
Investors claiming compensation argue that the reforms undermined the viability of
their investments.10 Two other prominent pending proceedings filed in 2012 relate to
regulation in the field of sustainable development as well, more precisely to health and
energy: One concerns the dispute between Philipp Morris and Australia11 relating to the
strict Australian regulations for cigarettes. The other one is Vattenfall’s suit against the
Federal Republic of Germany 12 because of the German decision to accelerate the
nuclear phase-out.
These examples show that foreign investors are able to claim damages even if states do
not take their property, but merely regulate in a non-discriminatory manner and with a
legitimate aim. Hence, doubts arise whether the international investment regime gives
due consideration to the states’ legitimate regulatory interests.
On the one hand, the said treaties provide for stability; they are concluded to attract
inbound foreign direct investment as well as to afford protection to nationals’ outbound
FDI.
However, the provisions routinely used in investment treaties are concise and leave
significant leeway for arbitrators to interpret the scope of protection. Investors rely on
broad standards, which have been interpreted diversely in different instances. It is hence
often hard to predict whether a certain governmental action violates an international
obligation or not. Assessing the duty to compensate is further complicated because
usually states do not enrich themselves by directly taking possession of the investors’
5
OECD, “’Indirect Expropriation’ and the ‘Right to Regulate’ in International Investment Law”, WP on
International Investment 2004/4, p. 2.
6
Declaration of the United Nations Conference on the Human Environment.
7
The Rio Declaration on Environment and Development of 1992.
8
Convention on Bioligical Diversity entered into force in 1993.
9
The Kyoto Protocol on Global Warming tot he UN Framework Convention on Climate Change was
signed in 1997 and entered into force in 2005.
10
UNCTAD, WIR 2014, p. 125.
11
Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12.
12
Vattenfall AB and others v. Federal Republic of Germany (ICSID Case No. ARB/12/12).
2
property. Thus the investor’s loss does not equal the state’s gain: Impairment of foreign
investors’ expected possibilities to gain profits is a mere side effect of regulation. As
evidenced by the above-mentioned examples, the policy goals are in fact often
legitimate and form part of a development towards a ‘green economy’. States may even
take the measures at issue in pursuance of other international obligations undertaken
with respect to sustainability.
These developments in investor-state dispute settlement (ISDS) raise concerns that the
possible exposures to investment arbitration and the related financial burden on
government budget have discouraging effects on public-interest regulation. As a
consequence, the international investment regime is suspected of posing obstacles to
states’ sustainable development policies.
The questions that arise are whether and under what circumstances states should be
liable for taking steps towards a greener future if these steps violate foreign investor’s
rights granted under international investment agreements, whether the enforcement
mechanism, i.e. private arbitral tribunals, are fit for deciding on these issues, and
whether arbitrators strike the right balance between investment protection, meaning
sanctity of the contract on the one hand, and the states’ right to regulate on the other
hand. This dissertation tries to find an answer to these questions.
2. Outline
The thesis is structured as follows: Chapter II, sets out the investment protection regime.
It is intended to give a background for the subsequent analysis as well as to point out the
aims pursued through the means of investment treaties that possibly conflict with the
states’ interest to maintain a certain level of regulatory discretion. Furthermore, I will
briefly explain the functioning of investor-state dispute settlement (ISDS).
Chapter III deals with the substantive rights investment treaties confer on investors. The
first section analyzes which rights and standards IIAs usually contain. Mainly relying on
model treaties, I scrutinize typical provisions in order to find hints in the wording on
countries’ emphasis on regulatory freedom or on their focus on investment protection.
Chapter IV considers the impact of investment protection on states’ regulatory freedom.
First, I give a brief summary of the main points of criticism regarding investment
arbitration and its alleged bias towards private investors. This is followed by a review of
arbitral awards showing how arbitral tribunals dealt with conflicting private and public
interests when interpreting the treaty provisions.
Finally, I sum up my findings and draw conclusions as to whether investment treaties or
ISDS unduly restrict pubic interest regulation.
3
II. The Investment Protection Regime
This chapter is dedicated to a description of the investment protection regime. In the
first part, I will show the dispersion of investment treaties and trends in international
investment relations as well as the underlying reasons. In the second part of this chapter
I will briefly explain how investor may enforce their rights in investor-state dispute
settlement (ISDS).
1. The Landscape of Investment Protection Treaties

First, I will show the wide dissemination of bilateral investment treaties and similar
international agreements and identify major players in the international investment
regime. I will point out recent developments and dynamics in international investment
policy and explain the rationale of investment treaties and investment protection
chapters in treaties.
a. The proliferation of IIAs

Since the first bilateral investment treaty in 1959, the number of BITs and other
international investment agreements constantly grew with a remarkable upsurge of IIAs
concluded per year in the 1990ies.13 The decrease in the number of annual IIAs in the
new millennium can be ascribed to saturation rather than large-scale turning-away.
Over the last decades, countries in every region of the world have been negotiating new
IIAs. By the end of 2013, the total number of international investment agreements was
3,236 of which 2,902 were BITs and 334 “other IIAs”. These other IIAs are agreements
ranging from full-fledged free trade agreements (FTAs) featuring provisions that are
commonly found in BITs such as substantive standards of investment protection and
dispute settlement clauses to cooperation agreements in investment matters and mere
declarations of intent to negotiate future treaties.14
As shown in Figure II.1 investment agreements are for the most part concluded in the
form of bilateral investment treaties. Only to a lesser extend are the respective
investment provisions contained in other international agreements such as more
comprehensive free trade agreements.
13
See Figure II.1.
14
UNCTAD, WIR 2014, pp. 114 et seq..
4
Figure II.1: Trends in IIAs, 1983-2013
Source: UNCTAD, World Investment Report 2014, p. 114
Some parts of the world are part of a burgeoning dynamism characterized by

intensification of international investment and general economic relations. The number
of issues covered in the agreements and the depth of the arrangements are growing
while the number of treaty partners is increasing simultaneously and more negotiation
rounds are taking place in ever-shorter intervals.
One example is the European Union (EU): more than 20 agreements are currently under
negotiations that are expected to touch investment matters. Other examples for this
trend are Australia, Singapore, Japan, Canada as well as the United States of America.
Figure II.2: Most active IIA negotiators
5
As shown in Table 1, several of the currently negotiated agreements associate a high
number of participating countries with substantial agglomerate economic weight. So-
called mega-regional agreements do not only cover investment matters, but concern a
variety of economic issues. They are expected to influence global investment rule
making and investment patterns substantially. The EU is party to two of these economic
mega-treaties currently under negotiation: the EU-US Transatlantic Trade and
Investment Partnership (TTIP)15 and the Canada-EU Comprehensive Economic and
Trade Agreement (CETA). The United States are also working on the Trans-Pacific
Partnership (TPP) and will thus play a dominant role in shaping the global investment
climate as well.16
Table 1: Mega-Regional Agreements under Negotiation
Additionally, policy-makers introduce new issues into the negotiations: especially the
US push towards greater liberalization commitments in the IIAs. At the same time
states focus more than ever before on their sustainable development agenda when treaty
15
Cf. http://ec.europa.eu/trade/policy/in-focus/ttip/resources/.
16
UNCTAD, WIR 2014, pp. 115, 121, et seq.
6
making and try to preserve some space for maneuvering their economy towards a
sustainable future.17
This trend to attach more importance to the need for regulatory space especially in
terms of sustainable development and to minimize exposure to investment arbitration is
also evidenced by the fact that approximately forty countries and four regional
organizations are at this time or have recently been reviewing their model IIAs.18 Policy
makers and treaty negotiators strive for the reconciliation of two sometimes-conflicting
ends: creating a good investment climate by liberalization efforts and by affording high
protection to FDI on the one hand, and preserving enough space for the host country’s
government to realize its policy agenda and regulate in public interest on the other hand.
Depicting the success story of international investment treaties, the countermovement

must not be neglected: the system of international investment protection is increasingly
attracting public attention and also criticism. States react differently to the rampant
discontent with the IIA regime. While some are content with smaller corrections here
and there or even refrain from taking any measures and wait for multilateral action,
others jeopardize the entire system’s legitimacy and disengage from the global IIA
regime.19
Developing countries in Latin America, Asia, and Africa are backing out of their
investment treaty obligations. In 2013, 148 BITs have been terminated, of which 105
were replaced by a new treaty, twenty-seven were unilaterally terminated, and sixteen
were rescinded by consent. 20 Ecuador e.g. already withdrew from the ICSID
Convention in 2010 and terminated nine IIAs; South Africa gave notice of the
termination of its BIT with Belgium and Luxembourg in 2012 and of its BITs with
Germany, the Netherlands, Spain and Switzerland in 2013. Indonesia backed out of its
BIT with the Netherlands in 2014.21
The reasons for these developments are manifold. They can be summarized as alteration
of prioritization, disappointment and disillusion. First, the conventional international
investment regime is not specifically designed for the pursuit of sustainable
development ends. However, nowadays they play a major role and their integration into
FDI policy and rule making is desirable. Second, doubts about the effects of investment
agreements in terms of FDI encouragement certainly play a role. Do commitments in
IIAs actually contribute to the attraction of FDI?22 Third, states have to answer for their
actions more often in investment arbitrations.23 Reckoned altogether, questions arise
about whether states sacrifice regulatory freedom without getting the desired benefits in
return.
17
UNCTAD, WIR 2014, p. xxiii and pp. 116 et seq.
18
19
UNCTAD, WIR 2014, p. x.
20
UNCTAD, WIR 2014, p. 133 n. 52.
21
22
Some research results suggest that the less common pre-establishment provisions granting investors
market access significantly influence bilateral FDI flows, whereas “ISDS mechanisms appear to play a
minor role.”, A. BERGER, M. BUSSE, P. NUNNEKAMP & M. ROY, “Do Trade and Investment
Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box”, WTO Staff WP
ERSD-2010-13 (2010), p. 18.
23
See Figure II.4.
7
b. The Rationale of IIAs
Why do countries and regional organizations conclude international investment
agreements? Questions arise as to why the international investment regime is codified in
treaties instead of being governed by customary international law (part aa). Apart from
that, one may ask whether the motives of developing countries and those of developed
countries are the same and, more specifically, why developed countries that feature
advanced regulatory and legal systems and generally have open investment policies in
place negotiate investment protection chapters – including provisions on ISDS – in
megaregional agreements (part bb).24
aa) Treaties instead of Mere Customary Law

States seek to create a favorable investment climate because of the widespread belief
that foreign investments are beneficial if not necessary for economic development.25
This view is expressed in the so called ‘Monterrey Consensus’:[…] private international
capital flows, particularly foreign direct investment, along with international financial
stability, are vital complements to national and international development efforts.”26
In addition, states wish to ensure that their respective nationals are compensated for
expropriation and other undue interference with the economic viability of their assets in
other jurisdictions. Thus, the reasons for assuming obligations under the international
investment regime are on the one hand motivated by the desire to attract inbound FDI
and on the other hand to protect nationals’ outbound FDI.
Customary international law27 that is reflected in and later became known as the ‘Hull
Rule’ once prohibited states merely to “expropriate private property, for whatever
purpose, without provision for prompt, adequate, and effective payment therefor”.28
Yet, this standard proved to be insufficient as customary law features three idiosyncratic
attributes: extremity, negativity, and ambiguity.29
In case of the Hull Rule, extremity means that it reflects an international minimum
standard and thus places very few restrictions on the actions that state may take with
respect to aliens. Customary international law accordingly affords investors very little
protections against less extreme measures that fall short of a taking. Yet exactly these
actions trigger the majority of investment disputes.30
Negativity stands for the fact that customary law does not prescribe but proscribe
behavior. Accordingly, the customary international minimum standard does not impose
any obligation of “good governance“ on governments but only forbids behavior far
24
UNCTAD, WIR, p. 123.
25
M. HERDEGEN, Principles of International Economic Law (2013), p. 9; G. K. FOSTER, “Investors,
States, and Stakeholders: Power Asymmetries in International Investment and the Stabilizing Potential of
Investment Treaties”, 17 Lewis & Clark L Rev. 363 et seq (2013).
26
UN, Report of the International Conference on Financing for Development, Monterrey, Mexico (2002),
UN Doc A/CONF.198/11, p. 5.
27
See, e.g. The Factory at Chorzów (Germany v. Poland), 1928 P.C.I..J. (ser. A), No. 17 (Sept. 13)
No. 73; The Norwegian Ship-owners Claims (Norway v. U.S.) 1922 Permanent Court of Arbitration,
p. 28.
28
Cf. exchange of diplomatic notes between the then US-Secretary of State Cordall Hull and the Mexican
Minister of Foreign Affairs at this time at A. T. GUZMAN, “Why LDCs Sign Treaties That Hurt Them:
Explaining the Popularity of Bilateral Investment Treaties“, 38 Va J Int’l L 639, 645 (1998).
29
A. H QURESHI, A. R ZIEGLER, International Economic Law (2007), p. 27.
30
A. T. GUZMAN, “Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral
Investment Treaties“, 38 Va J Int’l L 639, 642 (1998); OECD, “’Indirect Expropriation’ and the ‘Right to
Regulate’ in International Investment Law”, WP on International Investment 2004/4, p. 2.
8
below the expected standards. Ambiguity stands for the vagueness of customary law,
which is at least in part indispensible to ensure consensus. The vagueness resulted in
controversies and uncertainty about the standard of compensation.31
Article 38 of the Statute of the International Court of Justice describes customary law
“as evidence of a general practice accepted as law”. Hence, a binding customary rule
may only be deducted from consistent state practice that is conjoined with the
conviction of a corresponding legal obligation (‘opinio iuris’).32 However, after the
Second World War, the Hull Rule was far from being considered as the legally binding
international standard since developing countries - most of which are net importers of
investment capital - opposed it.
As a result, the Hull Rule vanished33 and consequently, international investments are
predominantly governed by BITs, and to a lesser extend, but in rising number, by
preferential trade agreements and sector-specific treaties containing a chapter governing
investment like the Energy Charter Treaty (ECT).
bb) Reasons for Treaty Making

The vast majority (forty-one percent) of BITs involve one treaty partner from the North
– interested in safeguarding its outbound FDI – and one from the South seeking to
attract inbound FDI. Only a small share (nine percent) of all worldwide BITs have been
concluded between two countries from the northern hemisphere. Additionally, more
than three quarters of these BITs are intra-EU treaties – many of which were concluded
by transition economies before their accession to the EU.34
Figure II.3: Share of North-North BITs in Global BITs, by the end of 2013 (in percent)
What do these figures tell us? They suggest that economically strong countries as
exporters of capital push for treaty-based legal stability, adequate protection and
predictability of state action and the introduction of a credible enforcement mechanism
31
A. SCHACHTER noted that “[a]part from the use of force, no subject of international law seems to
have aroused as much debate – and often strong feelings – as the question of the standard for payment of
compensation when foreign property is expropriated.”, “Compensation for Expropriation”, 78 Am. J. Int’l
L. 121, 121 (1984).
32
R. GOODE, H. KRONKE & E. MCKENDRICK, Transnational Commercial Law (2007), p. 100.
33
Investment Treaties“, 38 Va J Int’l L 639, 641 (1998). However, it should be noted that views strongly
differ as to whether the Hull Rule ever had enough support to constitute customary law, whether and
when it was overthrown and whether treaty practice forms part of consistent state practice in this regard
and the Hull Rule should nowadays be considered as customary international law.
34
9
into the investment relationship. Moreover, we can deduct that developing countries as
net importers of capital take these rules in order to fuel their economic development.35
Indeed, BITs considerably resemble one another and states in which large multinational
corporations have their seats use model BITs.36 The consistency of BIT provisions
shows that host countries do not have the bargaining power to substantially change the
terms offered by model BITs of capital exporting nations.37 To put it straight: The same
group of countries that overthrew the Hull Rule signed BITs with even higher standards
of protection for investors and more restrictions on the host government’s actions.38
How can this observation be explained?
In the absence of a treaty, states cannot credibly pledge themselves as to the treatment
of foreign investors because the host state’s sovereignty allows it to alter its internal
rules according to its own changing ends. As a result, investors cannot rely on the host
state’s legal and judicial system. The only resort would hence be protection via
international law. As set forth in the next section, this is an uncertain and unsatisfactory
remedy. Altogether, the absence of an efficient enforcement mechanism renders any
commitment of states unreliable.39
Certainty and reliability are, however, two crucial factors for investment allocation
decisions. In contrast to the collective interests of developing countries as a group, each
developing country taken individually has strong incentives to remove uncertainty and
establish reliability by entering into an investment treaty. The reason for this is that
countries compete for capital. By concluding IIAs countries seek to signal more
favorable investment conditions to make foreigners choose them as investment
destination.40
However, as in every competitive market, we have to consider the risk of a race to the
bottom: Especially those countries that are in greatest need for FDI might be tempted to
make too great concession and offer too many incentives. In the worst case, the
expected benefits out of the investment like, e.g. positive effects on employment,
technology and skill transfer could be offset by self-restraints regarding environmental
standards and employment regulations and other sustainable development aspects.41
Summing up, sates adopt policies to incentivize investments, one of which is the
conclusion of IIAs. But which are the exact goals behind the wish to attract FDI? Does
economic development really trump social development and environmental protection?
A survey conducted by the United Nations Conference on Trade and Development
(UNCTAD) revealed that job creation is the most important objective of investment
incentives, followed by technology transfer, export promotion, local linkages and
domestic value added, and skills development.
35
36
Among these countries are, e.g. Germany, Switzerland, Italy, the United Kingdom, France, the US,
Canada, and Japan.
37
38
Investment Treaties“, 38 Va J Int’l L 639, 642 (1998) comments: “[T]he simultaneous opposition to the
Hull Rule and embracing of BITs is a paradox.”
39
Investment Treaties“, 38 Va J Int’l L 639, 659 et seq. (1998).
40
41
Investment Treaties“, 38 Va J Int’l L 639, 672 an 682 et seq. (1998).
10
Developing and developed countries defer in their prioritization of investment incentive
aims: locational decisions and international competition turned out to be more important
for developed countries than for developing countries. This might be due to the fact that
developing countries are in greater need of technological development, exports and skill
development and therefore rank them higher.
Although the United Nations are framing a set of sustainable development goals (SDGs)
with precise targets for the period of 2015-2030, the link between sustainable
development concerns and investment policy does not seem to be very strong so far.42
Accordingly, “[o]nly a fraction of the worldwide invested assets of banks, pension
funds, insurers, foundations and endowments, as well as transnational corporations, is in
SDG sectors. Their participation is even lower in developing countries, particularly the
poorest ones.”43
UNCTAD thus suggests promoting and directing private investments in SDGs to satisfy
the global investment needs for basic infrastructure like roads, railroads and ports;
power stations; water and sanitation, food security, climate change mitigation and
adaptation, health, and education. Particularly in least developed countries (LDCs)
public resources cannot cover the investment needs in SDGs.
On the one hand, this situation calls for the removal of any barriers to private
investment and would thus suggest especially weak economies to make as much
concessions in international investment agreements as possible for the sake of attracting
capital. On the other hand, however, the sensitivity of SDG-related sectors must not be
overlooked: many of them are of public service nature and hence require regulation in
public interest.44
Policymakers should thus look at investment treaties as a devise to create sufficiently
attractive conditions for private investors while guaranteeing not only economic but also
sustainable development for the respective host nation.
42
UNCTAD WIR 2014, p. 111.
43
UNCTAD, WIR 2014, p. xi.
44
UNCTAD, WIR 2014, p. xi.
11
2. Arbitration as the Dispute Resolution Mechanism
Most investment treaties contain mandatory provisions on dispute settlement.45 I will
briefly describe how the mechanism works, which arbitration institutions and rules are
available and frequently used in treaties and in case of a dispute. This section will also
give a short explanation why giving investors the right to sue before an international
tribunal became standard treaty practice around the globe.
a. The Functioning of Investment Arbitration and Enforcement

States usually consent to arbitration in investment treaties. A typical provision reads as
follows:
“(1) Disputes concerning investments between a Contracting State and an investor of the other
Contracting State should as far as possible be settled amicably between the parties to the dispute. To help
them reach an amicable settlement, the parties to the dispute also have the option of agreeing to institute
conciliation proceedings under the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States of 18 March 1965 (ICSID).
(2) If the dispute cannot be settled within six months of the date on which it was raised by one of the
parties to the dispute, it shall, at the request of the investor of the other Contracting State, be submitted to
arbitration. The two Contracting States hereby declare that they unreservedly and bindingly consent to the
dispute being submitted to one of the following dispute settlement mechanisms of the investor's
choosing:
1. arbitration under the auspices of the International Centre for Settlement of Investment Disputes
pursuant to the Convention on the Settlement of Investment Disputes between States and
Nationals of Other States of 18 March 1965 (ICSID), provided both Contracting States are
members of this Convention, or
2. arbitration under the auspices of the International Centre for Settlement of Investment Disputes
pursuant to the Convention on the Settlement of Investment Disputes between States and
Nationals of Other States of 18 March 1965 (ICSID) in accordance with the Rules on the
Additional Facility for the Administration of Proceedings by the Secretariat of the Centre,
where the personal or factual preconditions for proceedings pursuant to figure 1 do not apply,
but at least one Contracting State is a member of the Convention referred to therein, or
3. an individual arbitrator or an ad-hoc arbitral tribunal which is established in accordance with the
rules of the United Nations Commission on International Trade Law (UNCITRAL) as in force
at the commencement of the proceedings, or
4. an arbitral tribunal which is established pursuant to the Dispute Resolution Rules of the
International Chamber of Commerce (ICC), the London Court of International Arbitration
(LCIA) or the Arbitration Institute of the Stockholm Chamber of Commerce, or
any other form of dispute settlement agreed by the parties to the dispute.”46
Arbitration is a dispute resolution mechanism based on consent of the parties in which

one or more neutrals (arbitrators) decide on the solution of the matter brought before
them. In order to submit a dispute to arbitration parties have to stipulate that, which they
45
This is especially true for IIAs concluded since the mid-1990ies. Earlier treaties did not contain strong
ISDS provisions, cf. A. BERGER, M. BUSSE, P. NUNNEKAMP & M. ROY, “Do Trade and Investment
Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box”, WTO Staff WP
ERSD-2010-13 (2010), p. 4. An example thereof is the BIT between Germany and Thailand of 1961 (with
State-to-State Dispute Settlement only) and the BIT of 2002, which replaced the former and contains an
ISDS provision in Article 10.
46
Article 10 (1) and (2) of the German Model Treaty concerning the Encouragement and Reciprocal
Protection of Investments (2008).
12
generally do in a contract or in a clause contained in a contract. IIAs are ‘contracts’
concluded between states designed to protect the assets of the other party’s nationals.
The peculiarity of investment arbitration clauses in IIAs is the fact that even though
investors as private persons are not party to the agreement, nationals of one state party
are entitled to claim damages for the other state party’s breach of the treaty.47
Arbitrators are not employed by a supranational institution, but assume their office on a
case-by-case basis. Depending on the arbitration rules, the parties have to agree on one
arbitrator or mandate three arbitrators. In the latter case, each party appoints one
arbitrator. Some arbitration rules stipulate that these two party-appointed arbitrators
select a third one, some rules allow the institution to appoint the third arbitrator in case
the parties are unable to agree on a chairperson. Parties are not only in control of the
constitution of the tribunal, but also exercise significant control over the procedure.
In contrast to court proceedings in many jurisdictions, the arbitral proceedings are
principally not open to the public and the parties may agree on confidentiality of the
claim, all written communications, hearings, and even the result, i.e. the award or
amicable settlement. 48 However, the extent of publicity and transparency largely
depends on the parties’ will and a high number of awards has been published over the
years. Additionally, the criticism of ISDS for a lack of transparency and insufficient
information of the public spawned some reforms. The most remarkable reaction on the
multilateral level is the passing of the UNCTIRAL Rules on Transparency in Treaty-
based Investor-State Arbitration of 2014.
The arbitral award is principally final and binding on the parties. The ICSID
Convention bars any challenge of the award in the national judicial system49 - at least to
the extent it is the case for a final judgment of a court in that State.50 Furthermore, the
Convention obliges all member states to recognize and enforce an award rendered
pursuant to the Convention.51
Awards rendered in other venues than ICSID and according to other arbitration rules,
are final and binding as well. The possibilities for challenging the award or for resisting
enforcement thereof are also quite limited, as in case of non-ICSID awards the New
York Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(‘New York Convention’) applies. 52 Ratified by 150 countries, the New York
Convention mandates its contracting states to recognize and enforce awards rendered in
47
The treaty itself does not constitute an arbitration agreement between the state and the investor; it is
thus (contrary to a widespread view) not an exemption from the principle of privity. The treaty provision
is rather an irrevocable offer to arbitrate which needs to be accepted by the investor, cf. C. DUGAN, D.
WALLACE, N. RUBINS & B. SABAHI, Investor State Arbitration, Oxford University Press (2011) pp.
220 et seq.
48
See, e.g. Article 48 (5) of the ICSID Convention and Article 48 (4) of the ICSID Arbitration Rules:
“The Centre shall not publish the award without the consent of the parties.”
49
Maritime International Nominees Establishment (MINE) v Republic of Guinea, ICSID Case No.
ARB/84/4, Ad Hoc Committee Decision of December 22, 1989, 5 ICSID Rev. FILJ 95 (1990). Article 54
(1) of the ICSID Convention reads as follows: “Each Contracting State shall recognize an award rendered
pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award
within its territories as if it were a final judgment of a court in that State.”
50
See E. BALDWIN, M. KANTOR & M. NOLAN, “Limits to Enforcement of ICSID Awards“, 23 J.
Int’l Arb 1, passim (2006).
51
Article 54 (1) of the ICSID Convention.
52
This applies only to states that did not make a reservation according to Article 1 (3) of the New York
Convention that allows restricting the application of the convention to commercial disputes. For example,
the German Supreme Court decided on the enforcement of an SCC award pursuant to the New York
Convention; see German Supreme Court (Bundesgerichtshof)- VII ZB 8/05, 4 October 2005.
13
other states and provides for only a limited list of exceptions that allow denial. Apart
from that, investors may seek enforcement under other conventions to which the
respective state where enforcement is sought is a signatory, such as, e.g. the
InterAmerican Convention.53
However, when it comes to the crunch, enforcing an award against a state can be very
difficult: The rules of customary public international law grant states immunity, i.e.
sovereign states are in principle not subject to other states’ jurisdiction if they act in a
sovereign capacity (acta iure imperii). Only a state’s commercial or other acts under
private law (acta iure gestionis) are excluded from the right to invoke immunity before
courts in other jurisdictions.54 An arbitration agreement does not automatically imply a
waiver of immunity in execution proceedings. Thus, without the state’s express waiver
of immunity from enforcement, sequestration can only take place regarding assets that
do not serve the state’s sovereign purposes.55
This view is also underpinned by the UN Convention on Jurisdictional Immunities of
States and Their Property, which was adopted by the UN General Assembly in 2004.
Article 19 proscribes post-judgment measures of constraint, such as attachment, arrest
or execution against property of a State, unless the state expressly consented thereto,
allocated specific property for the satisfaction of the claim, or the property concerned
does not serve and is not intended to serve any sovereign purposes. Although the
Convention is meant to merely codify customary international law, only sixteen
countries ratified it. Because of the failure to reach the threshold of thirty ratifications it
never entered into force.
In a nutshell, ISDS usually works by submitting investment disputes to arbitration in the

BIT or other IIA. Independent and impartial arbitrators decide on the claims and render
an award, which is enforceable in most jurisdictions around the world due to the wide
coverage of the IICSID Convention and the New York Convention of 1958. But the
system has one caveat: Even if an investor obtains a favorable award and this
international award is subsequently introduced into the national jurisdiction by a
declaration of recognition and enforcement, the investor still has to overcome some
obstacles to get the awarded compensation.56
b. Institutions and Case Load

The above model provision taken from the German Model-BIT lists the investment
arbitration mechanisms most frequently designated in IIAs: the International Center for
Settlement of Investment Disputes (ICSID) and its Additional Facility under the
umbrella of the World Bank, UNCITRAL and the International Chamber of Commerce
(ICC) as well as the London Court of International Arbitration (LCIA) and the
Arbitration Institute of the Stockholm Chamber of Commerce (SCC). The latter ranks
53
See, e.g. Article 1136 (6) NAFTA.
54
German Supreme Court BGH - III ZB 40/12, 30 January 2013; Preamble to the UN Convention on
Jurisdictional Immunities of States and Their Property of 2004.
55
German Constitutional Court BVerfG − 2 BvR 2984/09, 2 BvR 3057/09, 2 BvR 1842/10, 12 October
2011; German Supreme Court BGH – VII ZB 63/12, 4 July 2013; Swedish Supreme Court – Ö 170-10, 1
July 2011.
56
An illustrative example is the case of Sedelmayer v. Russian Federation. Mr. Sedelmayer obtained an
award in his favor against the Russian Federation before the SCC in 1998. He sought enforcement of this
award and his subsequent litigation costs before various courts in Germany and Sweden and had not been
successful until 2011. (The award and a list of German and Swedish court decisions in the Sedelmayer
case can be retrieved at http://www.italaw.com/cases/982; last retrieval on February 11, 2015).
14
among the most important institutions especially because it is one of the options
provided in the Energy Charter Treaty.
The majority of known disputes is settled under the auspices of the ICSID Convention
and the ICSID Additional Facility Rules (sixty-two percent in 2013), and the
UNCITRAL Rules (twenty-eight percent).57 Other arbitral venues play an inferior role
only. However, preferences seem to vary according to different regions: Although ICC
arbitration is chosen for disputes involving states or state entities in all parts of the
world, eighty percent of all ISDS cases brought before the ICC involve parties from
Sub-Saharan Africa, Central and West Asia, and Central and Eastern Europe.58
Figure II.4: Known Investment Disputes, 1983-2013
Source: : UNCTAD, World Investment Report 2014, p. 124
In 2013, fifty-six newly filed investment arbitrations were registered, bringing the total
number of known ISDS cases to 568. About three quarters of these ISDS cases were
initiated against developing and transition economies and a significant share of the
newly brought actions have been intra-EU disputes (Figure II.5).
Although some countries like Argentina obviously have been respondent in many cases
whereas other states have experienced less exposure to ISDS, ninety-eight countries
have been sued at least once in ISDS. As investors usually come from developed
countries, the vast majority of all ISDS claims are brought by investors from developed
countries. By the end of 2013, three quarters of all ISDS arbitrations were filed by
investors from the EU and the United States.59
57
See Figure II.4.
58
ICC, States, States Entities and ICC Arbitration (2012), p. 2.
59
15
Figure II.5: Respondent States by Region and within the EU, Total by the End of 2013 (in percent)
c. Reasons for ISDS via Arbitration

Why do states consent to arbitration? And why do they expose themselves not only to
state-to-state arbitration regarding the interpretation of the treaty, but also allow foreign
investors to claim damages before an international tribunal?
The reasons are manifold. First, direct investor to state dispute settlement depoliticizes
investment disputes and is therefore beneficial for the states involved. If an investor can
directly pursue his claims without support, approval, or even consent of his home state,
the dispute is less likely to result in a diplomatic affair. As mentioned above, investors
are mostly nationals of capital exporting countries from the northern hemisphere.
Especially if those rich countries exercise diplomatic protection on behalf of the
investor vis-à-vis developing countries, the latter might feel offended and the result
could be a disruption in the international relations of the two states concerned.60
Second, the system of ISDS is advantageous for investors. In the absence of an own
right to sue, an aggrieved investor would depend on diplomatic protection of his
respective home state and hence on the discretion and political will of his government,
because nationals do not have a right to diplomatic protection. In addition, diplomatic
protection is a remedy of last resort only, which means that it is out of question unless
the investor exhausted all remedies available in the host state. It goes without saying
that this can take years and can be extremely cost intensive.
Arbitration commitments in IIAs normally allow to skip the host state’s internally
available remedies and to directly bring an action before an international tribunal. Direct
investor-to-State arbitration was conceived as a “forum that would offer investors a fair
hearing before an independent, neutral and qualified tribunal. It was seen as a
mechanism for rendering final and enforceable decisions through a swift, cheap and
flexible process, over which disputing parties would have considerable control.” 61
Third, proponents of the system also argue that it has positive implications for the host
state. Obviously, ISDS implies a waiver of state immunity and allows arbitrators to
60
C. SHREUER, “Investment Protection and International Relations”, in A. REINISCH & U.
KRIEBAUM (EDS.), The Law of International Relations – Liber Amicorum Hanspeter Neuhold (2007),
pp. 345 et seq.
61
UNCTAD, WIR 2013, pp. 111 et seq.
16
require sovereign states to pay monetary damages if the tribunal establishes a breach of
the treaty. But taking investment disputes out of the domestic sphere of the state, which
is a party to the dispute, renders the treaty commitments considerably more credible.62
A higher probability that a violation of the IIA will be sanctioned and the damages
incurred will be compensated is thus supposed to strengthen the investors’ trust and to
increase the FDI flow accordingly. Furthermore, a higher probability of being ordered
to pay damages is likely to have a deterring effect and to spawn democratic, transparent
governance structures as well as to enhance the rule of law.63
3. Interim Conclusion
This chapter showed that the international investment regime is based on treaty law
rather than on customary international law. Unwritten customary international law had
been investor-friendly only because of the fact that it was authored by colonial powers,
i.e. capital exporting countries. It therefore vanished with the colonies’ emancipation.
However, the resulting vacuum was replaced by an even more investor-friendly regime:
competing for foreign capital, developing countries readily accepted to assume high
obligations regarding the treatment of aliens. Capital exporting countries had strong
incentives to secure their nationals’ investments abroad. Consequentially, for many
decades IIAs have been devised in a one sided manner favoring investors’ interests over
public regulatory interests.
IIAs involving industrialized countries only and so-called megaregional agreements are
more recent phenomena. Having learnt from some experience with investment
arbitration, the newer agreements shift the focus to a greater concern for public interest
regulation. The primary goal of IIAs however, did not change: it still is investment
protection. Even though states around the globe are in need of private contributions to
cover the investment needs and to achieve sustainable development goals, FDI policy is
not specifically designed to attract FDI in SDG relevant sectors. Accordingly, IIAs are
not crafted to promote sustainable development.
Capital exporting and capital importing countries have a common interest in protecting
investments: the former to safeguard the nationals’ investments abroad without having
to intervene in case of a dispute, the latter to attract FDI to boost the domestic economy.
The overlapping interest is thus investment protection; sustainable development goals
are subordinated. Especially industrialized countries nowadays indeed seek to integrate
the right to adopt environmental and other sustainability seeking measure as a sub-item
into their IIAs. In the context of IIAs, sustainability and similar public interests are
nevertheless merely circumstantial.
62
A. BERGER, M. BUSSE, P. NUNNEKAMP & M. ROY, “Do Trade and Investment Agreements Lead
to More FDI? Accounting for Key Provisions Inside the Black Box”, WTO Staff WP ERSD-2010-13
(2010), pp. 3 et seq.; Z. ELKINS, A.T. GUZMAN & B. A. SIMMONS, “Competing for Capital: The
Diffusion of Bilateral Investment Treaties, 1960-2000“, 60 Int’l Organization 811, 824 (2006).
63
M. HERDEGEN, Principles of International Economic Law (2013), p. 10 and 55; J. HUECKEL,
“Rebalancing Legitimacy and Sovereignty in International Investment Agreements”, 61 Emory LJ 601,
604 (2012); S. D. FRANCK, “Development and Outcomes of Investment Treaty Arbitration”, 50 Harv.
Int’l L.J. 435, 435 (2009).
17
III. Standards of Substantive Investment Protection
This chapter deals with the substantive investment protection afforded by IIAs. First, I
will describe the substantive provisions frequently contained in treaties. By analyzing
the model BITs of Canada (2004), Colombia (2007), France (2006), Germany (2008),
India (2003), Italy (2003), Norway (2007), the United States (2012), and the Model
International Agreement on Investment for Sustainable Development published in 2005
by the International Institute for Sustainable Development (IISD) I will identify typical
provisions nuances in wording and their relevancy on public interest regulation.
1. Substantive Protection Standards

Although negotiated between their signatories, investment treaties tend to use quite
similar provisions. These provisions reflect standards and are therefore often not rule-
like, but rather generic clauses. However, there are minor differences in the exact
phrasing. These seemingly small differences can make a great difference when
determining whether a state violated its duties under the treaty or not, and consequently,
in determining the limits of the state’s regulatory discretion. The specific stipulation
also has a high impact on the power that is given to the arbitrators: The vaguer the
standard of protection is formulated the more interpretative power is given to the
tribunal.
a. Ambit of Investment Protection

The decisive question to be answered first by policymakers and later by arbitrators is
what an investment in the ambit of the respective treaty actually is. Does the treaty
afford protection to FDI in the sense of tangible, physical assets only or does it also
cover intangible property such as portfolio investment and debt instruments of a State?
Whatever the exact definition of “investment” with regard to a certain IIAs is, the first
and the latter should conceive it the same way.
Principally, an “investment” is every kind of economic asset owned or controlled,

directly or indirectly, by an investor of a Party that has been invested in the territory of
the other Contracting Party in accordance with the law of the latter. Some BITs
expressly set out the three minimum characteristics of an investment: the commitment
of capital or other resources, the expectation of gain or profit, and the assumption of risk
for the investor .64
Hence, both tangible and intangible assets, including contractual and intellectual
property rights are covered and can be subject to expropriation. The Permanent Court of
Arbitration already held in 1922 that “these [construction] contracts were the property,
or created it, and […] “physical property” is only one of the elements or aspects of the
“property” under the Municipal law of the United States, as well as under the law of
Norway and other States.“65 A few years later, the Permanent Court of International
Justice reaffirmed that view by ordering compensation not only for the taking of a plant
but also for the expropriation of the associated patents and contracts of the management
company.66 The Iran-US Claims Tribunal endorsed the “precedents in international law
64
See. e.g. the Model BITs of Norway, the US and Colombia.
65
The Norwegian Ship-owners Claims (Norway v. U.S.) 1922 Permanent Court of Arbitration, p. 28.
66
German Interest in Polish Upper Silesia (Germany v. Poland), (1926) P.C. I. J. (ser. A) No. 7 (May
1925), No. 136.
18
in which case measures of expropriation or takings, primarily aimed at physical
property, have been deemed to comprise also rights of a contractual nature closely
related to the physical property” and accordingly construed the term of protected
property in a broad sense comprising shareholder and contractual rights.67
IIAs usually define the term investment quite in detail and list assets particularly
embraced by the term. This is especially useful with regards to certain intangible
property rights or interests: The Permanent Court of International Justice, e.g., refused
to recognize a market position or goodwill as “anything in the nature of a genuine
vested right.”68 However, there seems to be no common view on whether goodwill
should or does qualify as an asset capable of being expropriated. Thus, the Columbian,
French, Italian and German Model BITs make explicit reference to it in their definition
of investment.
In contrast to broadening the ambit, many states seek to narrow the scope of protection
in the attempt to avoid overexposure to ISDS or because of a focus on the attraction of
such investments that are conducive to development.69 In this sense, some IIAs exclude
portfolio investment outright. This is the solution recommended by the IISD Model
International Agreement on Investment for Sustainable Development.70 Quite a lot of
IIAs exclude claims of money deriving solely from commercial contracts for the sale of
goods and services to or from the territory of a party to the territory of another country
from the ambit of the treaty.
As investment policymakers learned from the experiences states have made with
sovereign debt obligations, many IIAs also exclude such bonds issued in a foreign
currency, and additionally exempt debt securities issued by as well as loans to state
parties and state enterprises. This is not only the case for Latin American countries, but
also, e.g. for Canada.
Yet, other states obviously attach more importance to the protection of their nationals
holding foreign sovereign bonds than to avoidance of ISDS. One example is Italy: its
Model BIT expressly states that “Government and public securities in general” come
under the scope of protected investments.71
Reckoned together, there seems to be a trend towards narrowing the definition or at

least to clarify the term of “investment” to avoid any results in investment arbitration
that have not been foreseen at the time of negotiating the treaty.72 Yet, the push towards
67
Starret Housing Corp. v. Islamic Republic of Iran, 4, Iran-US Cl. Trib. Rep. 122, 156- 57 (1983),
Amoco International Finance Corporation v. Iran, Award No 310-56-3 (14 July 1987), 15 Iran-US
C.T.R. 189-289.
68
Oscar Chinn (U.K. v. Belgium), 1934 P.C.I.J. (ser. A/B) No. 63 (Dec. 12), No. 99.
69
See, e.g. the Colombian and Canadian Model BITs as well as the following IIAs concluded in 2013:
Benin-Canada BIT, the Canada-Honduras FTA, Canada-United Republic of Tanzania BIT, Colombia-
Costa Rica FTA , Colombia Israel FTA, Colombia-Panama FTA, Colombia- Republic of Korea FTA,
Colombia-Singapore FTA, Morocco-Serbia BIT, New Zealand-Taiwan FTA, Serbia-United Arab
Emirates BIT..
70
H. MANN, K. v. MOLTKE, L.E. PETERSON & A. COSBEY, Model International Agreement on
Investment for Sustainable Development (2005).
71
This is not surprising as 60,000 Italian bondholders are suing Argentina before an ICISD tribunal for
refusing to honor its sovereign debt obligations (Abaclat and Others v. The Argentine Republic, ICSID
Case No. ARB/07/5).
72
A. PELLET talks about “an unfortunate jurisprudential mess […] with regard to the definition of the
term ‘investment’”, in “The Case Law of the ICJ in Investment Arbitration”, 28 ICSID Review 223, 224
(2013).
19
less exposure to ISDS needs to be balanced with the wish to protect the nationals’ assets
abroad.
b. Indirect and Regulatory Expropriation

“Expropriation” can take many forms in the context of international investments: it does
not only mean direct expropriation in the sense of taking of title, nationalization or
physical seizure, but also encompasses other forms of “wealth deprivation”.73 Among
these other forms are state measures interfering with the use of the property or the
enjoyment of its benefits without seizure of the property or affecting the legal title. The
terms used for this kind of measures “tantamount” to expropriation are indirect,
regulatory, creeping or de facto expropriation.74
Virtually all IIAs contain a provision on indirect expropriation. NAFTA, e.g., requires
compensation for direct or indirect expropriation of investors as well as for taking „a
measure tantamount to nationalization or expropriation of such an investment“.75 The
ECT prohibits expropriation and any measures having equivalent effect without
abidance by the rules of customary international law, which require the measure to be
taken (1) with due process of law, (2) for a public purpose, (3) in a non-discriminatory
manner, and (4) accompanied by the payment of prompt, adequate and effective
compensation.76
Similar provisions are found in other legal texts. But, like the ECT, most of them omit
to clarify which measures affecting the viability of an investment and the enjoyment
thereof are exempt from the duty to compensate. Obviously, by entering into an IIA,
states do not intend to be held liable for each exercise of sovereign rights that interferes
with the use or enjoyment of a property.
The problem of the protection against unlawful expropriation is that the rules of
customary international law stipulate four conditions to legalize a regulatory measure
that has an effect equivalent to expropriation. And the duty to compensate for the loss is
one of them. Consequentially, a governmental act that interferes with foreign investors’
rights might comply with the first three conditions and still call for adequate and
effective compensation to abide by the rules of customary international law. Cited by
many BITs77, they may be interpreted so as to convey a right to compensation not only
for an unlawful wealth-depriving act, but also for a lawful measure for public purpose.
The question thus rather is: who should bear the cost of regulation – private investors or
the state?
In this regard, it should be noted that whereas in cases of direct expropriation states
appropriate the taken asset to themselves, a regulatory expropriation typically does not
entail a direct public enrichment. The ‘enrichment’ often consists of the preservation of
exhaustible natural resources, a healthy environment or other sustainability gains. So, if
an investor suffers a loss for the sake of public interest but the commonality is not
directly enriched, should the taxpayer nevertheless compensate the investor for the
incurred loss? What should be the determinants for cost allocation?
73
B. WESTON, “‘Constructive Takings’ under International Law: A Modest Foray into the Problem of
‘Creeping Expropriation’”, 16 Va J Int’l L 103, 112 (1975).
74
International Investment 2004/4, pp. 3 et seq.
75
Article 1110 NAFTA.
76
Article 13 ECT.
77
See, e.g. Article13 (1) of the Canadian Model BIT.
20
Tribunals, scholars and policymakers suggest various criteria for deciding whether
investors should be compensated for regulatory measures: the severity of the economic
impact of the measure and its duration, the legitimate expectations of the investor, as
well as the circumstances of the government measure (or measures) at issue, especially
the intent behind it, and whether the relationship between the effects on the investor and
the policy goal is proportionate.
As many IIAs stay mute as to these factors that determine whether compensation shall
be due for regulatory wealth-depriving measures, one could assume they are implied by
virtue of customary international law.78 But treaty negotiators can also reinforce the
consideration of the states’ regulatory interests by formulating the above-mentioned
factors explicitly in clauses stipulating general exceptions from or as justifications for
indirect expropriation. This approach disallows for an assessment on the sole basis of
the effect on the investor and enables the tribunal to deny compensation even if an
investor shows to have incurred a substantive loss.
aa) Suggestions in Draft Conventions

Two draft conventions tried to address this issue in the 1960ies: The Harvard Draft
Convention on the International Responsibility of States for Injuries to Aliens of 1961
and an interpretative note to the 1967 OECD Draft Convention on the Protection of
Foreign Property. Both expressed that wealth-depriving measures “incidental to the
normal operation of the laws of the State” are non-compensable if the measure was
taken without “the intent of wrongfully depriving” the owner of his rights. The authors
of these texts recognized the right and necessity of states to regulate in the pursuit of
their political, social and economic ends.
Article 10 (5) of the Harvard Draft Convention provides for the following exemptions
from the duty to compensate:
“An uncompensated taking of an alien property or a deprivation of the use or enjoyment of property of an
alien which results from the execution of tax laws; from a general change in the value of currency; from
the action of the competent authorities of the State in the maintenance of public order, health or morality;
or from the valid exercise of belligerent rights or otherwise incidental to the normal operation of the laws
of the State shall not be considered wrongful”.
An explanatory note to the OECD Draft Convention clarified that the protection against
uncompensated regulatory expropriation was “intended to bring within its compass any
measures taken with the intent of wrongfully depriving the national concerned of the
substance of his rights and resulting in such loss”. It thus calls for factoring in the state’s
intent and rejects an approach focusing exclusively on the effects of the measure.
Other communiqués pointed to the same viewpoint, i.e. that “the normal non-
discriminatory exercise of regulatory powers by governments” would not trigger any
liability vis-à-vis foreign investors.79
78
Cf. explanatory note to Article 3 of the OECD Draft Convention:“[The article calling for compensation
for direct and indirect expropriation] acknowledges, by implication, the sovereign right of a State, under
international law, to deprive owners, including aliens, of property which is within its territory in the
pursuit of its political, social or economic ends. To deny such a right would be attempt to interfere with
its powers to regulate – by virtue of its independence and autonomy, equally recognized by international
law – its political and social existence.”
79
Declaration by OECD Council of Ministers, 28 April, 1998, OECD document C/MIN(98)16/FINAL.
21
bb) Attempts of Clarification in IIAs
As states undertook to compensate foreign investors for direct and indirect
expropriation without clearly defining the exceptions for the general rule, it often has
been hard to predict which approach a tribunal would adopt: Would it look at the
severity of the measure’s effect, i.e. the investor’s loss only, would it apply a
proportionality test or concur with the view of the OECD and Harvard Draft Convention
that non-discriminatory measures taken for public purpose in good faith are generally
exempt from any duty to compensate?
Because of this uncertainty some states moved on to clarify which elements they want
arbitrators to take into account when determining whether compensation is due for
regulatory expropriation. Without ignoring the necessity of a case-by-case analysis,
treaty makers thus codified the criteria by including specific provisions on regulatory
expropriation into agreements.
The United States, e.g. provide the following guideline in an Annex to their 2012 Model
BIT:
“(a) The determination of whether an action or series of actions by a Party, in a specific fact situation,
constitutes an indirect expropriation, requires a case-by- case, fact-based inquiry that considers, among
other factors:
(i) the economic impact of the government action, although the fact that an action or series of
actions by a Party has an adverse effect on the economic value of an investment, standing alone,
does not establish that an indirect expropriation has occurred;
(ii) the extent to which the government action interferes with distinct, reasonable investment-
backed expectations; and
(iii) the character of the government action.
(b) Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and
applied to protect legitimate public welfare objectives, such as public health, safety, and the environment,
do not constitute indirect expropriations.”
The Annex to the 2004 Canadian Model BIT and the 2007 Colombian Model BIT use
almost the same language as the US draft.
The IISD Model International Agreement on Investment for Sustainable Development
goes far beyond what is found as the proportionality test in jurisprudence and the
balanced inquiry mandated in the above mentioned Model BITs. Regardless of the
economic impact of the measure on the investor, no compensation shall be due for
certain regulatory measures:
“Consistent with the right of states to regulate and the customary international law principles on police
powers, bona fide, non-discriminatory regulatory measures taken by a Party that are designed and applied
to protect or enhance legitimate public welfare objectives, such as public health, safety and the
environment, do not constitute an indirect expropriation under this Article.”80
Broad, general exceptions leave ample room for public interest regulation. But keeping
in mind the purpose of IIAs, i.e. attracting FDI and protecting outbound investments,
the exceptions may not be devised so as to cause the investments protections to dwindle
away.
Governments therefore have to assess carefully how far they want to push back investor
protection and find the right balance for allocating the costs of transition into a green
economy. But treaty makers are in any case strongly advised to draw the line of
demarcation between legitimate regulation and compensable indirect expropriation as
clear as possible to avoid any unexpected liability. This is particularly the case with
80
H. MANN, K. v. MOLTKE, L.E. PETERSON & A. COSBEY, Model International Agreement on
Investment for Sustainable Development (2005) Article 8 (I).
22
regard to the asserted ‘chilling effect’: Observers fear that the mere threat of a claim
could prevent states from adopting or implementing regulatory measures to protect
public health or the environment where possible claims cannot be covered by public
financial resources.81
Accordingly, an analysis conducted by UNCTAD revealed that fifteen of eighteen IIAs

concluded in 2013 (for which texts were available) contain general exceptions in terms
of the preservation of exhaustible natural resources, the protection of the environment
and human life and health.82
The BIT between Austria and Nigeria, the Russian BIT with Uzbekistan and Serbia’s
BIT with the United Arab Emirates that have been concluded in 2013 as well do not
follow suit. Instead of availing themselves of such an explicit exception clause, these
governments probably count on arbitrators to interpret the treaties as implying the said
exceptions. As the treaty negotiators must have been aware of the problematic, acting
contrary to a worldwide trend of devising IIAs to preserve regulatory space and limit
exposure to ISDS is a quite risky policy choice though.
c. Most-favored Nation and National Treatment

The parties regularly assume non-discrimination obligations. Non-discrimination
consists of two aspects: On the one hand the so-called “national treatment clause” and
on the other hand the “most-favored nation (MFN) standard”.
While the national treatment standard obligates the parties to accord to the respective
other party’s investors and their investments treatment no less favorable than that
accorded to its own investors, the MFN-clause obliges the host state to treat investors of
the other party and their investments at least as favorable as investors and investments
of a non-Party in like circumstances with respect to the establishment, acquisition,
expansion, management, conduct, operation and sale or other disposition of investments
in its territory.83
In practice, investors rely on MFN clauses to base their claims on a more favorable
definition of investor or investment respectively and, of course, to profit from more
favorable substantive rights standards in other treaties.84 In addition, investors have also
tried to use the MFN clause to benefit from more advantageous dispute resolution
provisions to avoid, e.g. the exhaustion of local remedies85 or waiting periods86 as well
as to avail themselves of helpful arbitration provisions.
81
N. BERNASCONI-OSTERWALDER & R. T. HOFFMANN, “The German Nuclear Phase-Out Put to
the Test in International Investment Arbitration? Background to the new dispute Vattenfall v. Germany
(II)”, IISD Briefing Note June 2012, p. 5; R. DOLZER, M. STEVENS, Bilateral Investment Treaties
(1995), p. 99.
82
83
See, e.g., Article 4 Canadian Model BIT and Article 4 of the US Model BIT and Article 4 Norwegian
Model BIT.
84
For an importation of the FET obligation by operation of the MFN clause see Bayindir Insaat Turizm
Ticaret Ve Sanayi A.Ş. v. Islamic Republic of Pakistan, ICSID Case No. ARB 03/29, Award of 27 August
2009, pp. 41 et seq and MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case
No. 01/7, Award of 25 May 2004, p. 28.
85
Emilio Augustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB 97/7, Decision on
Objections to Jursdiction of 25 January 2000, p. 15 n. 40.
86
Ethyl Corporation v. Canada, NAFTA/UNCITRAL Case, Award on Jurisdiction of 24 June 1998.
23
Some treaties combine both standards, i.e. the MFN and National Treatment obligation
in one article; others stipulate the two dimensions of non-discrimination separately.
The German Model BIT combines national treatment and the MFN standard in one
provision and specifies which kind of treatment is considered to be less favorable:
“Neither Contracting State shall in its territory subject investors of the other Contracting State, as regards
their activity in connection with investments, to treatment less favourable than it accords to its own
investors or to investors of any third State. The following shall, in particular, be deemed treatment less
favourable within the meaning of this Article:
1. different treatment in the event of restrictions on the procurement of raw or auxiliary materials, of
energy and fuels, and of all types of means of production and operation;
2. different treatment in the event of impediments to the sale of products at home and abroad; and
3. other measures of similar effect. “87
Regarding MFN and national treatment standard, many, but not all BITs additionally
mandate to accord the treatment of these two, which is more favorable.88 Italy explicitly
states this in the context of the notion “non-discriminatory treatment”:
“The term ‘non-discriminatory treatment’ shall mean treatment that is at least as favourable as the best
between of national treatment and the most-favoured- nation treatment.”89
aa) “Like Circumstances”

Whereas the reference to “like circumstances” is frequently found in IIAs, the drafters
usually omit to elaborate on the exact meaning of this term. The claimant in Pope &
Talbot v. Canada90 was of the opinion that in order to discern “like circumstances”, the
tribunal should import the likeness-test established in GATT/WTO 91 cases. In the
context of international trade, the WTO jurisprudence does not look at the process and
production method of products to establish their likeness. Consequentially, it does not
distinguish between products produced sustainably and those produced unsustainably –
they may well be ‘like products’.92
The Talbot tribunal, as well as other tribunals, refused to import the likeness-test from
WTO/GATT jurisprudence because contrary to GATT, most IIAs do not contain a
general exception clause for environmental and health measures similar to
Article XX GATT. If the environmental impact of the product or investment would not
be considered to assess whether the circumstances are like, states would be strictly
liable if they treat two similar investments differently.93 Hence, while the environmental
purpose behind a measure operates as a justification for discriminatory treatment in the
WTO context, in international investment law it determines whether the circumstances
are like and hence whether the investor has been discriminated against comparators at
all.
To bar a GATT approach to the interpretation of “like circumstances” at the outset, the
authors of the IISD Model Treaty seek to clarify it and thereby give an example for
87
Article 3 (2) of the German Model BIT.
88
See, e.g. Article 4 (1) of the Colombian Model BIT, Article 4 (1) of the French Model BIT,
Article 4 (1) of the Indian Model BIT and Article 6 (D) of the IISD Model International Agreement on
Investment for Sustainable Development.
89
Article 1 (8) of the Italian Model BIT.
90
Pope & Talbot Inc. v. Canada, UNCITRAL, Partial Award of 26 November 2002.
91
General Agreement on Tariffs and Trade and World Trade Organization respectively.
92
See K v. MOLTKE, Reassessing ‘Like Products’(1998).
93
R. MOLOO & J. JACINTO, “Environmental and Health Regulation: Assessing Liability under
Investment Treaties,” 29 Berkeley J Int’l L 1, 57 et seq. (2011).
24
instructing arbitrators how to determine whether different instances are “like
circumstances”:
“For greater certainty, the concept of “in like circumstances” requires an overall examination, on a case-
by-case basis, of all the circumstances of an investment, including, inter alia:
a) its effects on third persons and the local community;
b) its effects upon the local, regional or national environment, or the global commons;
c) the sector the investor is in;
d) the aim of a measure of concern;
e) the regulatory process generally applied in relation to a measure of concern; and
f) other factors directly relating to the investment or investor in relation to the measure
of concern.
The examination shall not be limited to or biased toward any one factor.”
The list of elements to be taken into account is obviously intended to justify
discrimination on the basis of public interest concerns such as environment. It is hence
drafted to keep quite ample regulatory space.
The Norwegian Model BIT rather adheres to the WTO-approach of justification when it
notes in a footnote:
“The Parties agree/ are of the understanding that a measure applied by a government in pursuance of
legitimate policy objectives of public interest such as the protection of public health, safety and the
environment, although having a different effect on an investment or investor of another Party, is not
inconsistent with national treatment and most favoured nation treatment when justified by showing that it
bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign
owned investment.”
The Norwegian model thus introduces a proportionality test: To justify any
contravention of the MFN or National Treatment obligation, it has to be committed for
the sake of a “legitimate policy objectives of public interest” and in a “reasonable
relationship” between the measure and the underlying policy aim. This wording allows
for a sophisticated assessment of the circumstances on a case-by-case basis. It also
enables the arbitrators to take into account both the investor’s interests and the state’s
demand for public interest regulation.
In contrast, the German equivalent provision is way more concise and its ambit is rather
narrow:
“Measures that have to be taken for reasons of public security and order shall not be deemed treatment
less favourable within the meaning of this Article.”94
The wording obviously does not allow taking into account any legitimate policy
objectives of public interest, but only the preservation of public security and order are
eligible motives for justifying an apparently discriminatory measure. Furthermore, the
provision does not call for proportionality assessment, but leaves it to the arbitrators to
decide whether the measure at issue was necessary (“have to be taken”) or not.
Consequently, the German provision leaves the arbitrators significantly less room for
taking into account public interest when discerning an infringement of the non-
discrimination obligation.
bb) Carve outs: Narrowing the Scope of Application

All other model BITs analyzed for this thesis use other techniques in the attempt to
preserve their policy space. They provide for explicit exceptions from the non-
94
Article 3 (2) of the German Model BIT.
25
discrimination clause. For example, a lot of countries exclude matters of taxation from
the scope of application.95
Canada provides a detailed list of exceptions from Most-Favored-Nation Treatment in

an annex to its Model BIT. According to the annex, treatment accorded under
international agreements that predate the entry into force of the BIT in question is
exempted from the MFN clause. Furthermore, the MFN obligation shall not apply to
treatment by a Party pursuant to any existing or future bilateral or multilateral
agreement relating to aviation, fisheries and maritime matters, including salvage. The
annex also clarifies that the MFN standard should not apply to any current or future
foreign aid program to promote economic development under a bilateral agreement, or
pursuant to a multilateral arrangement or agreement.
Yet the most extensive exceptions are contained in the US Model BIT. According to
Article 14 of the US Model BIT, the non-discrimination standards do not apply to
measures already existing and expressly reserved to be maintained as well as future
measures adopted by a Party with respect to certain specified sectors and activities.
Furthermore, it does not apply to measures allowed by Article 5 of the TRIPS
Agreement.
The US Model Treaty also seeks to carve out the entire realm of government
procurement and subsidies or grants from the application of the non-discrimination
obligation.
The IISD Model Treaty for Sustainable Development endorses this approach and
suggests the exemption of government procurement from the MFN and national
treatment, too.
Apart from that, the IISD Treaty provides for another important exemption that is
emulated by some countries: the treaty authors narrow the application of the clause to
substantive provisions and thus exempt dispute settlement provisions from national
treatment and MFN.96 It must be noted however, that a number of BITs „have provided
expressly that the most favored nation treatment extends to the provisions on settlement
of disputes. This is particularly the case of investment treaties concluded by the United
Kingdom.“97
95
Article 4 (3) (b) of the Indian Model BIT, Article 4 (3) of the French Model BIT, Article 3 (4) and (5)
of the German Model BIT.
96
Article 4 (2) of the Colombian Model BIT and Article 4 (3) of the Norwegian Model BIT; Article 6 of
the IISD Model Treaty even restricts the application of the MFN clause to substantive provisions of other
IIAs that enter into force after the entry-into-force of the agreement in question.
97
Emilio Augustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB 97/7, Decision on
Objections to Jursdiction of 25 January 2000, p. 19 n. 52.
26
d. Standard of Treatment and Protection
BITs usually mandate a minimum standard of treatment with regards to foreign
investments and investors. The two aspects of state behavior that are generally codified
are “Fair and Equitable Treatment” (FET) and “Full Protection and Security” (FPS).
Whereas some treaties do not further qualify this standard of treatment and protection,
other IIAs qualify it by reference to international law or the “international minimum
standard”. In this regard, the Indian Model BIT employs the simplest wording without
any limiting or amplifying amendments:
“Investments and returns of investors of each Contracting Party shall at all times be accorded fair and
equitable treatment in the territory of the other Contracting Party.”98
In comparison to other countries’ model provisions, the effect of this generic wording
becomes apparent: it leaves quite ample space for interpretation. What is “fair and
equitable”? Does the codified provision mean an extra obligation beyond the
international minimum standard of treatment that states owe aliens by virtue of
customary law?
The Norwegian Model BIT uses a generic phrase as well, but makes clear that the
standard of treatment owed is that anyway imposed by customary international law:
“Each Party shall accord to investors of the other Party, and their investments treatment in accordance
with customary international law, including fair and equitable treatment and full protection and
security.”99
The US model clause, very similar in wording and structure to the Colombian and the
Canadian Model BITs100 as well as the IISD Model Treaty101, is even more precise in
this regard and obviously intents to remove any ambiguity as to equaling the standard of
treatment to the international minimum standard:
“1. Each Party shall accord to covered investments treatment in accordance with customary international
law, including fair and equitable treatment and full protection and security.
2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of
treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The
concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in
addition to or beyond that which is required by that standard, and do not create additional substantive
rights.”102
In addition to the explanation of what is not contained in the notions of FET and FPS,
the US model clause amplifies the obligation to be assumed by entering into the BIT:
“(a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil,
or administrative adjudicatory proceedings in accordance with the principle of due process
embodied in the principal legal systems of the world; and
1. (b) “full protection and security” requires each Party to provide the level of police protection
required under customary international law.
Approximately half of the IIAs signed in 2013 for which texts are available follow this
example and equate the FET standard to the minimum standard of treatment of aliens
under customary international law. 103 It is hard to predict whether arbitrators will
98
Article III (2) of the 2003 Indian Model BIT.
99
Article 5 of the Norwegian Model BIT.
100
Article 5 of the Canadian Model BIT.
101
Article 7 of the IISD Model International Agreement on Investment for Sustainable Development.
102
Article 5 of the US Model BIT.
103
Canada’s BITs with Benin and Tanzania as well as its FTAs with Honduras and Costa Rica refer to the
international minimum standard to define the FET standard. The same applies to the Colombian FTAs
with Panama and Korea as well as the BIT between Colombia and Singapore and the FTA concluded by
New Zealand and Taiwan.
27
require higher standards of treatment from those governments whose BITs do not use
this restrictive language104 or whether the international minimum standard according to
international customary law is the point of reference in any case.
The Notes and Comments to the OECD Draft Convention on the Protection of Foreign
Property of 1967 argue that the FET “standard required conforms in effect to the
‘minimum standard’ which forms part of customary international law.”105 However,
most arbitral decision point in the opposite direction: i.e. that the FET standard as, e.g.
contained in the Indian Model BIT is not synonymous to the international minimum
standard, but has an autonomous meaning.106
aa) Customary International Law: The Minimum Standard

The reference to customary international law shows in any case that the drafters
presume the existence of a shared understanding of legally binding minimum standards
of treatment. In an annex, the US BIT clarifies that “[…], the customary international
law minimum standard of treatment of aliens refers to all customary international law
principles that protect the economic rights and interests of aliens.”
The majority of the model clauses analyzed for this thesis, however, do not describe the
content of the minimum standard defined by customary law. Yet, the US model
provision cannot readily be taken as an explanatory note applicable for all countries’
IIAs. Hence, what exactly is this customary international law minimum standard of
treatment of aliens? And how to delineate “the boundary between an international
delinquency” [i.e. a violation of this minimum standard] “and an unsatisfactory use of
power included in national sovereignty”107?
When discerning an offense against customary international law, many arbitrators108
and authors have cited the decision rendered in the famous Neer v Mexico case of 1926.
The formula expressed therein can therefore be seen as a reproduction of customary
international law:
“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
109
insufficiency.”
The arbitrators in this case noted that both the deficient execution of a law that is
consistent with international standards and the enactment of a law infringing
international standards could violate international customary law. Hence, all three
powers of the state, the legislative, executive and judiciary power, may infringe the
minimum standard by their respective acts.
104
The following IIAs signed in 2013 do not qualify FET by reference to the international minimum
standard: Serbia’s BITs with Morocco and the United Arab Emirates, the BIT between the Russian
Federation and Uzbekistan, Japan’s BITs with Mozambique, Myanmar and Saudi Arabia, the FTA
between the European Free Trade Association (EFTA), Costa Rica and Panama, the FTA between
Colombia and Israel, and the BITs between Austria and Nigeria as well as between Belarus and Laos.
105
C. SCHREUER, “Selected Standards of Treatment Available Under the Energy Charter Treaty“, in C.
SCHREUER, P. FRIEDLAND, & W. PARK, Investment Protection and the Energy Charter Treaty
(2008), p. 63, 80.
106
S. VASCIANNIE, “The Fair and Equitable Treatment Standard in International Investment Law and
Practice”, 70 The British Year Book of International Law 104/105, 139-144 (1999).
107
L.F.H. Neer and Pauline Neer (US v. Uniteded Mexican States), 1926 4 RIAA 60, 61.
108
Cases referring to the Neer case are, e.g. Pope & Talbot v. Canada, LG&E v. Argentina, Thunderbird
v. Mexico, Waste Management II v. Mexico, GAMI v. Mexico, Mondev v. United States, ADF v. United
States, Glamis Gold v. United States, and Merrill & Ring Forestry v. Canada.
109
L.F.H. Neer and Pauline Neer (US v. Uniteded Mexican States), 1926 4 RIAA 60, pp.61-62.
28
Whereas the US model provision seems to limit the notion “denial of justice” to acts of
the judiciary, the French model provision echoes the Neer case’s broad conception of
the international customary standard as follows:
“Either Contracting Party shall extend fair and equitable treatment in accordance with the principles of
International Law to investments made by nationals and companies of the other Contracting Party on its
territory or in its maritime area, and shall ensure that the exercise of the right thus recognized shall not be
hindered by law or in practice [emphasis added].
In particular though not exclusively, shall be considered as de jure or de facto impediments [emphasis
added] to fair and equitable treatment any restriction on the purchase or transport of raw materials and
auxiliary materials, energy and fuels, as well as the means of production and operation of all types, any
hindrance of the sale or transport of products within the country and abroad, as well as any other
measures that have a similar effect.”110
The second aspect, Full Protection and Security (FPS) requires states to guarantee
physical and legal safety and to exercise due diligence and vigilance. The obligation
refers to the conduct of state authorities and the means employed, but does not mean
any obligation as to a certain result and particularly cannot be construed as to provide a
kind of investment insurance111. Hence, the undertaking to afford full protection and
security does not constitute an “absolute obligation which guarantees that no damages
will be suffered, in the sense that any violation thereof creates automatically a strict
liability’ on behalf of the host State.”112 The due diligence owed “is nothing more nor
less than the reasonable measures of prevention which a well-administered government
could be expected to exercise under similar circumstances.”113
FET and FPS are frequently contained in the same article and some tribunals understand
both aspects as forming one standard of treatment, especially when the IIA refers to the
standard of treatment required under customary international law. Other tribunals
however made a distinction whether FET and FPS appear as a single standard in the
BIT or if they are listed separately. In the latter case, it was held that a phrasing that
calls for full protection and security without limiting it to the level of police protection
required under customary international law shows the parties’ intention to place them
under an obligation beyond the duty to grant protection against physical violence.
Instead, the arbitrators found the commitment undertaken to amount to a guarantee to
provide a secure investment environment.114
A secure investment environment requires apart from physical protection the
availability of legal remedies against adverse interference with the investor’s rights by
private parties and public authorities.115
bb) Autonomous or Variable Standard?

Now we have a vague understanding of the minimum standard of treatment as required
by customary international law and the content of FET and FPS standards. But does this
standards command a better treatment of aliens than nationals in certain circumstances
110
Article 3 (1) of the French Model BIT.
111
MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award
of 25 May 2004p. 62 para. 178 (citing Maffezini et al. v. Spain).
112
Asian Agricultural Product Ltd. (AAPL) v. Republic of Sri Lanka, ICSID Case No. ARB 87/3, Award
of 27 June 1990, p. 545 n. 48.
113
A.V. FREEMAN, Responsibility of States for Unlawful Acts of Their Armed Forces, Vol. 88 (1955)
p. 268.
114
Azurix Corp. v. The Argentine Republic, CSID Case No. ARB/01/12, Award of 14 July 2006, p. 146.
115
(2008), pp. 63, 68 et seq.
29
or is the minimum standard fulfilled if the foreigner is treated “just as bad as” nationals?
According to the Neer case, the international minimum standard is an autonomous
standard, i.e. independent of the standard of treatment of nationals. This viewpoint,
however, is not universally shared.
The so called Calvo doctrine116 assumes that states are obliged to afford foreigners just
the same standard of treatment as nationals. Unsurprisingly, in the past particularly
Latin-American countries endorsed this approach while European countries rejected the
Calvo doctrine. The latter successfully argued that it does not guarantee any minimum
rights and lacks certainty as the rights of aliens depend on how the state treats its own
nationals. For reasons of uncertainty and the related difficulties to attract FDI, the Calvo
doctrine failed to become part of international customary law and the Latin American
countries abandoned this viewpoint as well.117 However, some countries still adhere to
it and accordingly incorporate Calvo-clauses. A good example is the Colombian Model
BIT, which basically follows the US Model BIT in wording and structure but
remarkably adds with respect to FPS:
„The "Full protection and security" standard does not imply, in any case, a better treatment to that
accorded to nationals of the Contracting party where the investment has been made.“118
The question whether a state may violate the FET standard contained in the Energy
even though a measure hits national investors just the same way as foreign investors,
will also play a role in the currently pending case of Vattenfall v. Germany119:
Vattenfall’s power plants, which have been affected by the government’s decision to
phase out nuclear energy and the adoption of the Atomic Energy Act, are partially
owned by E.ON, a German corporation. The policy change equally takes a toll on
national and foreign investors. The question is whether the ECT protects foreign
investors against it via the FET standard.
cc) Introducing Higher Standards in IIAs

Whereas many BITs refer to the international minimum standard without explaining its
content, the presumption of a general consensus on its meaning is risky. UNCTAD
notes in this regard, “the minimum standard itself is highly indeterminate, lacks a
clearly defined content and requires interpretation.”120 In any case, the standard of
treatment according to international customary law does not necessarily impose an
obligation of “good governance” on states. Consequentially, some states seek to
introduce this obligation into their IIAs, and thereby - contrary to the efforts shown
above to limit the obligations - even expand the commitments undertaken under IIAs.
If states undertake to accord fair and equitable treatment without reference to the
international minimum standard, the behavior in dispute does not have to be outrageous
to violate the treaty. Instead, a measure contravenes the treaty whenever it is unfair or
inequitable. Although there have been some opposing statements in this regard121, an
116
Named after Carlos Calvo, Argentinian diplomate, 1824-1906.
117
B. SCHÖBENER (ed.), Völkerrecht Lexikon, p. 102.
118
Article II (4) (d) of the Colombian Model BIT.
119
Vattenfall AB and others v. Federal Republic of Germany (ICSID Case No. ARB/12/12).
120
UNCTAD, “Fair and Equitable Treatment”, UNCTAD Series on Issues in International Investment
Agreements II (2012), p. 28.
121
This is the position of the OECD expressed in the Notes and Comments to the OECD Draft
Convention on the Protection of Foreign Property of 1967. The NAFTA Free Trade Commission issued a
concurrent interpretative note in 2001 in which it stated that fair and equitable treatment did not “require
30
unrestrictive wording is likely and has repeatedly been interpreted as to lower the
liability threshold significantly. However, an individual assessment of the facts is never
dispensable for finding an offense against the FET standard.
In some treaties, countries do not only refrain from limiting the measures eligible to
infringe the FET standard by equaling it to the minimum standard. Some countries also
add supplementary undertakings. Article II of the German Model BIT, e.g. provides:
“Neither Contracting State shall in its territory impair by arbitrary or discriminatory measures the activity
of investors of the other Contracting State with regard to investments, such as in particular the
management, maintenance, use, enjoyment or disposal of such investments. […]”.
Article 2 (3) of the Italian Model BIT stipulates a non-discrimination obligation and
proscribes arbitrary measures as well. Additionally, in section 4 it places the contracting
parties under the obligation to “create and maintain a legal framework capable of
guaranteeing investors the continuity of legal treatment”.
The Energy Charter Treaty goes one step further and elaborates in Article 10 (1):
“Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create
stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make
Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments
of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy
the most constant protection and security and no Contracting Party shall in any way impair by
unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In
no case shall such Investments be accorded treatment less favourable than that required by international
law, including treaty obligations.[…]”
Such clauses are less common in investment agreements than conventional clauses
prescribing a general duty to accord fair and equitable treatment. Scholars are not
unanimous whether the proscription of arbitrary and discriminatory measures places
governments under additional obligations at all or whether the FET standard contains
such a duty anyway.122 The tribunal in Noble Ventures v. Romania interpreted the
relevant provision in the US-Romania BIT as containing one generic FET standard:
“Considering the place of the fair and equitable treatment standard at the very beginning of Art. II(2), one
can consider this to be a more general standard which finds its specific application in inter alia the duty to
provide full protection and security, the prohibition of arbitrary and discriminatory measures and the
obligation to observe contractual obligations towards the investor.”123
In a dispute arising from Article 10 (1) of the ECT, the tribunal also found it
unnecessary to deal with the individual obligations contained therein and noted instead
that “this paragraph in its entirety is intended to ensure a fair and equitable treatment of
investments.”124
Having a look at various investment awards, C. Schreuer concludes that there is a
tendency to interpret the prohibition of unjustified measures and arbitrariness as an
element contained in the more general FET standard. This means that even if treaties
like NAFTA omit stipulating such an obligation separately and expressly, arbitrators
find it incorporated in the FET standard.125
treatment in addition to or beyond that which is required by the customary international law minimum
standard of treatment of aliens.”
122
(II)”, IISD Briefing Note June 2012, p. 8.
123
Noble Ventures. Inc. v. Romania, ICSID Case No. ARB/01/11, Award of 12 October 2005, p. 112.
124
Petrobart v. The Kyrgyz Republic, SCC Case No. 126/2003, Award of 29 March 2005, p. 76..
125
(2008), pp. 63, 70 et seq.
31
e. The Umbrella Clause
Umbrella Clauses convert any contractual commitment and public law obligation with
respect to an investor covered by the treaty into an obligation under international law.
Article 10 (1) of the Energy Charter Treaty contains such a clause:
“Each Contracting Party shall observe any obligations it has entered into with an Investor or an
Investment of an Investor of any other Contracting Party.“
The Italian Model BIT126 also exposes the involved governments to a high risk of being
sued in ISDS:
“Each Contracting Party shall create and maintain in its territory a legal framework capable of
guaranteeing investors the continuity of legal treatment, including compliance in good faith to all
undertakings entered into with regard to each individual investor [emphasis added].”
The German Model BIT contains a corresponding provision that could hardly be more
favorable to foreign investors:
“(1) If the legislation of either Contracting State or international obligations existing at present or
established hereafter between the Contracting States in addition to this Treaty contain any provisions,
whether general or specific, entitling investments by investors of the other Contracting State to a
treatment more favourable than is provided for by this Treaty, such provisions shall prevail over this
Treaty to the extent that they are more favourable.
(2) Each Contracting State shall fulfill any other obligations it may have entered into with regard to
investments in its territory by investors of the other Contracting State.”127
Some tribunals and scholars construed umbrella clauses in a way that “a State‘s breach
of contract with a foreign investor or breach of an obligation under another treaty or law
becomes, by virtue of an umbrella clause contained in the relevant BIT, a breach of the
BIT actionable through the mechanism provided in such treaty, i.e […] arbitration.”128
Although this view is not universally shared, the trend is to omit the umbrella clause in
order to avoid overexposure to ISDS. Only four of the eighteen IIAs signed in 2013 do
contain an umbrella clause.129 The opposite applies to the ECT, though: Only four of
approximately fifty members (Australia, Canada Hungary and Norway) made a
reservation and disallow investors to submit a dispute arising from the umbrella clause
to investment arbitration.
The effect of omitting the umbrella clause or exempting it from ISDS is that the general
rule applies:
“[…]a BIT is not meant to correct or replace contractual remedies, and in particular it is not meant to
serve as a substitute to judicial or arbitral proceedings arising from contract claims. Within the context of
claims arising from a contractual relationship, the tribunal‘s jurisdiction in relation to BIT claims is in
principle only given where, in addition to the alleged breach of contract, the Host State further breaches
obligations it undertook under a relevant treaty. Pure contract claims must be brought before the
competent organ, […] be it a court or an arbitral tribunal.”130
126
Article II (4) of the Italian Model BIT.
127
Article 7 of the German Model BIT.
128
Abaclat and Others v. The Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction,
p. 118 (citing amongst others E. BALDWIN, M. KANTOR & M. NOLAN, “Limits to Enforcement of
ICSID Awards”, 23 Journal of International Arbitration 1, 3 et seq. (2006)).
129
These are the BIT between Austria and Nigeria, the Belarus –Laos BIT and the Japanese BITs with
Mozambique and Myanmar.
130
Abaclat and Others v. The Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction,
p. 118.
32
Here again, the MFN clause comes into play. Even if a treaty does not contain an
umbrella clause, an investor might use the MFN standard to invoke the umbrella clause
contained in another BIT.131
Apart from that, some tribunals even seem to be of the opinion that a breach of contract
by the host state may simultaneously constitute an infringement of the FET standard.132
This view has been criticized with good reason, though.133 The most compelling point
of criticism is that the umbrella clause would be a mere redundancy if any breach of
contract would automatically amount to a violation of the FET standard.
The second aspect of the umbrella clause is the state’s commitment to abide by its own
internal law.
“Compliance with domestic law would be the primary responsibility of domestic enforcement
mechanisms and not a matter for international adjudication. On the other hand, non-observance of
important aspects of domestic law may well affect the transparency and stability of the investment’s
regulatory framework and may therefore be contrary to the FET standard.”134
131
Cf., e.g. Abaclat and Others v. The Argentine Republic, ICSID Case No. ARB/07/5, Decision on
Jurisdiction, p. 119.
132
Noble Ventures. Inc. v. Romania, ICSID Case No. ARB/01/11, Award of 12 October 2005, p. 112;
SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on
Jurisdiction of 29 January 2004, p. 62; Mondev Intl. Ltd. v. The United States of America, ICSID Case
No. ARB(AF)/99/2, Award of 11 October 2002, p. 48.
133
(2008), p. 63, at 90 and 93.
134
(2008), p. 63, 93.
33
f. Interim Conclusion
The vague concepts of indirect expropriation and FET can, even without any
amendments, restrict the space for public interest regulation to the detriment of
investors. As shown by the various examples of treaty provisions, countries use quite
different wording to express their intentions. Whereas some states content themselves
with using generic wording and undertake to fulfill vague standards, other governments
take into account that the exact meaning of international standards regarding foreign
investments is far from being uniformly settled. The logical consequence is to give
arbitrators more precise instructions by drafting the treaties in a more sophisticated way.
At the very beginning, countries should set out for themselves in how far they want to
oblige themselves. The question is whether a government is ready to go beyond what is
required under customary international law. If this is not the case, the treaty drafters
nevertheless should not leave it to a mere reference to customary international law, but
explain their understanding of what it mandates. The wording should as far as possible
reflect the coverage of protection and the kind of measures that are carved out.
When using points of reference such as “the principles of international law” or
“international customary law” treaty partners should try to clarify if they have a
common understanding of the standard of treatment at all. Governments should try to
reach a consensus on this issue and set it out in writing.
As the intention of creating favorable and stable business conditions forms the basis of
every IIA, this aspect predominantly guides the interpretation of the respective treaty
provisions almost inevitably. The reason for this is not that all tribunals favor investors
over governments. As the tribunal in Azurix Corp. v. Argentina reasons, IIAs should
neither be interpreted in favor nor against the investor. Instead, like all other
international agreements they should be interpreted in accordance with the
interpretation norms set forth by the Vienna Convention on the Law of the Treaties (‘the
Vienna Convention’).135 Article 31 (1) of the Vienna Convention requires:
“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object and purpose.”
Therefore, if countries want to make sure that arbitrators take public interest into
account to a greater extent, treaties should not only contain generic references to
environmental protection and sustainability in the preamble; they should also purport a
clearly shaped mandate for the arbitrators to factor in public interest.
Arbitrators interpret IIAs pursuant to the rules of treaty interpretation. But governments
are responsible for guiding the neutrals’ interpretation in a way that fits their original
intentions and needs. Even if needs and consequentially prioritization change, states are
able to influence the treaty interpretation according to these changes because Article 31
of the Vienna Conventions further provides:
“2. The context for the purpose of the interpretation of a treaty shall compromise, in addition to the text,
including its preamble and annexes:
(a) Any agreement relating to the treaty which was made between all the parties in connexion
with the conclusion of the treaty;
(b) Any instrument which was made by one or more parties in connexion with the conclusion of
the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the
application of the provisions;
135
Azurix Corp. v. Argentina, ICSID Case No. ARB 01/12, Award of 14 July 2006, p. 109.
34
(b) Any subsequent practice in the application of the treaty which establishes the agreement of
the parties regarding its interpretation;
(c) Any relevant rules of international law applicable in the relations between the parties.
4. […]”
The rules of interpretation are well known. So are the reasons of countries for entering
into IIAs. Additionally, the parties usually set out these grounds, i.e. creating favorable
investment conditions and promoting FDI, in the preamble of the respective IIA. If
parties wish to attach more importance to sustainability concerns and preserving
regulatory freedom, they should state so in the treaties they negotiate.
If parties merely wish to codify what is customary international law instead of assuming
stricter obligations under IIAs, they should follow the recent trend and expressly equal
the standard of treatment and protection to the international minimum standard. For
those treaties that are already in force and provide very vague standards like e.g. the
Indian Model BIT, parties are able to ensure regulation friendly interpretation by
reaching subsequent agreements as provided in Article 31 (3) (a) of the Vienna
Convention on the Law of Treaties.
Some treaties and model conventions as well as legislative guides and other
publications by organizations like UNCTAD or the International Institute for
Sustainable Development give examples how to devise treaty clauses that leave
regulatory space for building a greener economy.
In addition, governments could emulate the general exception clauses contained in the
General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade
in Services (GATS). As these agreements have been reached on the multilateral stage, it
is likely that most countries are able to agree on the inclusion of similar clauses that
allow uncompensated measures aimed at legitimate public policy objectives.
35
IV. The Impact of International Investment Protection on
States’ Regulatory Freedom
This chapter starts sketching the main points of criticism with regard to the constraints
investment arbitration is said to put on states in their pursuance of a green agenda. It
then discusses their justification by analyzing arbitral awards. Showing how arbitral
tribunals interpreted the treaty provisions allows verifying, falsifying or relating the
criticisms: Do the awards show a bias towards private investors? Was the right to
regulate given sufficient regard when interpreting concise treaty terms?
1. The main points of criticism

As mentioned in the introduction not everyone endorses the international investment
regime. Instead, many observers criticize it for being biased in favor of investors and
lacking due regard for legitimate policy goals and regulatory freedom. This section
sums up the arguments that opponents invoke against investment arbitration.136
a. ISDS favors Investors

One point of criticism frequently uttered is that ISDS allegedly favors investors. As
only private investors can bring a claim against the host state before an international
tribunal and not vice versa, some skeptics assert a relationship of dependency137:
Arbitrators were inclined to please private investors in proceedings by assuming
investor friendly positions in order to secure their case flow. Investor would use the
ISDS system only if they liked how arbitrators handle it in practice it, i.e. if it promises
a high likelihood of succeeding. Consequentially, arbitrators allegedly have an incentive
to align their views with investors’ interests.
Apart from the incentive to make investors use arbitration, critics also argue that the
constitution of the tribunal by party-appointment further aggravates the problem.
Investors are likely to appoint an arbitrator who has a track record that promises an
outcome in favor of the investor; and arbitrators know that future nominations do not
depend on the way they manage the case or on the brilliance of their legal reasoning
only, but to some extent on the extent to which they meet party expectations.138
Furthermore, as mentioned in previous chapters, most investors and therefore private
parties in investment arbitration originate from capitalistic developed countries. As a
result, many developing countries have the impression that tribunals favored
multinationals enterprises from the developed world and neoliberal economic
136
Of course, there are many more points of criticism, such, as, e.g. a lack of transparency and
involvement of the public in the proceedings. These issues primarily relate to the procedure and are
partially addressed by the new UNCITRAL Transparency Rules (see p. 15). Yet for the purpose of this
dissertation, I limit the analysis to the main points relating to the impact of ISDS on public interest
regulation.
137
J. HUECKEL, “Rebalancing Legitimacy and Sovereignty in International Investment Agreements”, 61
Emory LJ 601, 606 (2012).
138
M. INFANTINO, “International Arbitral Awards’ Reasons: Surveying the State of the Art in
Commercial and Investment International Dispute Settlement”, 5 JIDS 175, 192 (2014); J. HUECKEL,
612 (2012); A. ROBERTS, “Power and Persuasion in Investment Treaty Interpretation: The Dual Role of
States”, 104 Am. J. Int’l L. 179, 197 et seq. (2010).
36
policies.139 Yet this allegation has been falsified: an empirical analysis conducted by
S.D. Franck showed no evidence that arbitrators are biased in favor of either the
developed or the developing world.140
b. ISDS lacks Predictability

The previous chapter already revealed the vagueness of the standards of protection
contained in IIAs. Many of the concepts that are referred to as customary international
law or at least wide spread treaty practice are not uniformly settled and interpreted
differently. However, countries used to employ broad standards as at the time of
crafting the investment agreement they were unable to depict or anticipate the situations
that would ultimately lead to a dispute.141 Consequentially, they left it to the arbitrators
to discern whether a certain action violates the obligation to accord fair and equitable
treatment or whether an interference with foreign property is to be considered a measure
tantamount to expropriation and therefore to be compensated.
As states did not craft rule-like clauses but gave extensive interpretative power to
arbitrators, arbitrators used this power to fulfill their mandate.142 Lacking an appellate
mechanism that could ensure consistent interpretation as well as a rule of stare decisis,
the system produced “a patchwork of awards that do not form a coherent whole.”143 The
resulting lack of predictability is frequently held against the ISDS system.
c. Investment Arbitration Hampers Public-Interest Regulation

The first two points of criticism entail a further one: the flip side of the same coin is of
course the assertion that investment tribunals fail to give sufficient regard to the
regulatory needs of the respective host states. As a consequence, the thread of being
ordered to pay damages in investment arbitration is said to have a chilling effect on
regulatory activity.144 Furthermore, the impact of ISDS on sovereign acts is not a mere
theoretic hazard: In an earlier dispute between Vattenfall and the Federal Republic of
Germany, the latter accepted to settle by partially withdrawing certain administrative
orders by the competent environmental authority and thus alleviating Vattenfall’s
environmental obligations. 145 Not only left-wing activists fear that exposure to
139
S. A. SPEARS, “The Quest for Policy Space in a New Generation of International Investment
Agreements”, 13 J. Int’l Econ L. 1037, 1040 et seq. (2010); P. M. BLYSCHAK, “State Consent, Investor
Interests and the Future of Investment Arbitration: Reanalyzing the Jurisdiction of Investor–State
Tribunals in Hard Cases”, 9 Asper Rev. Int’l Bus & Trade L 99, 116 et seq. (2009).
140
S. D. FRANCK, “Development and Outcomes of Investment Treaty Arbitration”, 50 HARV. Int’l L.J.
435, 436 et seq. (2009).
141
Emory LJ 601, 611 (2012).
142
A. ROBERTS, “Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States”,
104 Am. J. Int’l L. 179, 179 (2010).
143
Emory LJ 601, 611 (2012).
144
Emory LJ 601, 613 (2012); R. MOLOO & J. JACINTO, “Environmental and Health Regulation:
Assessing Liability under Investment Treaties,” 29 Berkeley J Int’l L 1, 2 (2011).
145
Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of
Germany, ICSID Case No. ARB/09/6), Award by Consent of 11 March 2011; D. BUNTENBROICH &
M. KAUL, “Transparenz in Investitionsschiedsverfahren – Der Fall Vattenfall und die UNCITRAL-
Transparenzregeln”, SchiedsVZ 2014, 1, 6; N. BERNASCONI-OSTERWALDER & R. T. HOFFMANN,
“The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to
the new dispute Vattenfall v. Germany (II)”, IISD Briefing Note June 2012, p. 4.
37
investment arbitration with unpredictable outcomes deters public interest regulation, but
also UNCTAD raises the concern that the present regime “may pose obstacles to
countries’ sustainable development path”.146
Remarkably, UNCTAD even questions the cornerstones of investment arbitration when
casting doubts on the legitimacy of “three individuals assessing the validity of States’
acts, particularly when they involve public policy issues.”147
In practice the problematic is particularly relevant with respect to alleged regulatory
expropriation and the interpretation of the FET standard. Whenever an investor
challenges wealth-depriving measures, he will most probably rely on the standard of
treatment the governments has to comply with under the treaty with his home state. The
reason is that it is so vague that - depending on its interpretation - it covers a wide range
of government measures.148 Some critics argue that even a “legitimate, proportionate,
and non-discriminatory environmental measure or regulation” entitles foreign investors
to compensation in case they are adversely affected. 149
When IIAs lack mentioning of environmental, human and plant health concerns, the
FET standard might become a trump card for the investor: as investment promotion and
protection are the spirit and purpose of every investment agreement, there is a risk of
overrating the investors’ legitimate expectations. If tribunals assess the violation of
international obligations from the viewpoint of the investor only, the financial risk
might prevent states from adopting and implementing ‘green’ policies.
2. How do Tribunals Strike the Balance between Investment Protection

and Regulatory Discretion?
In several cases, respondent states invoked their right to regulate and the need to pursue
public interest as a justification for wealth depriving measures without compensation. In
some instances, the respectively sued government was successful with this objection, in
others it was not.150 The reason is that in the absence of general exception clauses or
supplementary binding guidelines, like, e.g. subsequent agreements between the parties
regarding the interpretation or application of provisions as envisaged in
Article 31 (3) (a) of the Vienna Convention, tribunals have weighted different factors to
discern a compensable measure from a lawful non-compensable regulation.
a. The Sole-effect Doctrine

Among these factors is first and foremost the severity of the impact, i.e. whether the
state action radically deprived the investor of the economical use and enjoyment of his
146
147
Id. See also M. INFANTINO, “International Arbitral Awards’ Reasons: Surveying the State of the Art
in Commercial and Investment International Dispute Settlement”, 5 JIDS 175, 180 (2014): “[…] many
question the legitimacy and appropriateness of a system which gives unelected, unrepresentative and
unaccountable individuals such an enormous power.”
148
(II)”, IISD Briefing Note June 2012, p. 7.
149
I. MADALENA, “Foreign direct investment and the protection of the environment: the border
between national environmental regulation and expropriation” 12 Eur En and Envt’l L Rev 70, 70 (2003).
150
Azurix Corp. v. Argentina, ICSID Case No. ARB 01/12, Award of 14 July 2006, p. 110: “Whether to
consider only the effect of measures tantamount to expropriation or consider both the effect and purpose
of the measures is a point on which not only the parties disagree but also arbitral tribunals.”
38
investments, “as if the rights related thereto had ceased to exist.”151 Tribunals assessed
whether the interference deprived the investor of fundamental property rights, “i.e.
ownership, use, enjoyment or management of the business, by rendering them
useless.” 152 In assessing the severity of the effect, arbitrators also considered the
duration of the impairment and its reversibility.153 In this regard, a merely ephemeral
adverse effect was held not to amount to expropriation.
The effect of governmental measures on the investors and investments evidently forms
the starting point of any assessment as to whether a direct or indirect expropriation
occurred. As opposed to this, the question whether it should be left to this or whether
the intent behind the measure at issue should be factored in as well is less obvious.
Some tribunals adopted the sole-effect doctrine: The decision on the right to
compensation was taken on the economic impact of the measure regardless of its
purpose.
In Santa Elena v. Costa Rica154, the tribunal held that the reason for a taking of foreign
property did not alter the character of a measure. The legitimate cause for an otherwise
expropriatory measure did not dispense the government from its duty to compensate. It
further reasoned that international law permits a state to expropriate foreign-owned
property within its territory for a public purpose and against the prompt payment of
adequate and effective compensation.
As in this case Costa Rica’s intent behind the measure at issue was environmental
protection, the tribunal in principal found a public purpose, but still insisted on the
fulfillment of the second precondition of a lawful expropriation, i.e. full compensation
for the investor’s loss. Even though Costa Rica invoked its international obligation to
protect the environment, the tribunal did not accept this as a justification for an
exception from the duty to compensate.
“Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole –
are, in this respect, similar to any other expropriatory measures that a state may take in order to
implement its policies: where property is expropriated, even for environmental purposes, whether
domestic or international, the state’s obligation to pay compensation remains.155
Some awards in the history of the Iran-US Claims Tribunal show the same line of
argumentation: The relevant factor triggering the duty to compensate is the effect of the
measure on the owner. If the owner is fundamentally deprived of the value of his
property rights, he is “entitled under international law and general principles of law to
compensation for the full value of the property” notwithstanding the government’s
intention.156 Even though the tribunal acknowledged that the government acted on the
basis of financial, economic and social concerns and felt compelled to act the way it did,
it rejected the government’s situation as a justification for not paying compensation.157
151
Tecnicas Medioambientales Tecmed S.A, v. The United Mexican States, ICSID, Case No. ARB
(AF)/00/2, Award of 29 May 2003, p. 43.
152
International Investment 2004/4, p. 11.
153
Hauer v. Rheinland-Pfalz, ECJ Judgment of 13 December 1979 - Case 44/79; Tippetts, Abbett,
McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, Award No. 141-7-2, 22 June 1984, 6
Iran-US CTR, p. 219.
154
Compañía del Desarrollo de Santa Elena, S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1,
Award of 17 February 2000
155
Id., at p. 192.
156
Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, Award No. 141-7-
2, 22 June 1984, 6 Iran-US CTR, p. 219.
157
Phelps Dodge International Corp. v The Islamic Republic of Iran, Award No. 217-99-2, 19 March
1986, 10 Iran-US CTR 121, p. 130.
39
The sole-effect doctrine is based on the assumption that the principles of international
law do not burden private owners with the costs of public interest regulation. The
question whether the government acts in pursuance of a legitimate public purpose is
thus not decisive for its compensation obligation. The legitimate cause rather
determines whether the deprivation was lawful or unlawful.
On the one hand, one might argue that the costs for measures that benefit the
commonality should be borne by the commonality. The argument is captivating as the
allocation of costs and benefits is synchronous and at first glance seems to be just. On
the other hand, however, the consequence of this approach is that the financial capacity
of a country can limit its ability to pursue environmental and other public interest goals.
Considering that some large multinational corporations’ revenues exceed the GDP of
many countries, the allocation of costs and benefits of public interest regulation must be
put into perspective. Ultimately, a few foreign owners of assets could block the
implementation of the democratically formed will in the host country. Furthermore,
under this approach IIAs could freeze environmental standards and prevent countries
from taking part in the international efforts against climate change and environmental
protection because they cannot afford compensating foreign investors. This is of course
the worst-case scenario, but it nevertheless shows a need for a more balanced approach.
b. Public Interest Regulation as General Exception

Bearing in mind the above-mentioned considerations, some tribunals took the
government’s intent and the overall circumstances into account when deciding on
compensation. This approach, of course, allows for a much greater regulatory freedom
and considers the sovereign right to regulate in public interest without having to pay
compensation.
The NAFTA tribunal in Tecmed v. Mexico rejected the sole-effect doctrine and
acknowledged certain exceptions from the duty to compensate aliens for wealth
depriving measures. However, the arbitrators held that these exceptions are limited to
ordinary exercises of the state’s police power.158
The ambit of police power is sometimes pretty narrowly construed and encompasses
only measures necessary for reasons of public security and order. It dispenses
governments from the compensation obligation if the wealth-depriving measure protects
essential public interests from certain types of harms.159 The exception would apply for
example in a case where scientific studies proved that a medicine has lethal side effects.
A government banning the sale of the medicine would not owe a producer who is
basically protected by a BIT any compensation although his economic rights related to
the medicine would be rendered useless.
In this case the government would take action to protect public health and interfere with
the investor’s rights without being liable. However, some tribunals limited the police
power exception to the obvious and most basic regulatory needs whereas others granted
more regulatory freedom.
158
(AF)/00/2, Award of 29 May 2003, p. 43.
159
A. NEWCOMBE, “The Boundaries of Regulatory Expropriation in International Law” (2005) p. 22.
40
Two years after the Tecmed decision, the NAFTA tribunal in Methanex vs. United
States granted considerably greater freedom for taking non-compensable wealth-
depriving measures:
“As a matter of general international law, a non-discriminatory regulation for a public purpose, which is
enacted in accordance with due process and, which affects, inter alia, a foreign investor or investment is
not deemed expropriatory and compensable unless specific commitments had been given by the
regulating government to the then putative foreign investor contemplating investment that the government
would refrain from such regulation.”160
The tribunal held that in default of any such specific commitments the interference with
the investor’s rights did not amount to a creeping expropriation or an offense against the
FET standard. It did not expressly deny that actions taken by the US government were
damaging and contrary to the economic interests of the foreign investor. It rather found
no right to compensation as it found the regulation to be the normal non-discriminatory
exercise of regulatory powers.
In Metalclad v. Mexico, the arbitrators had found such specific representations by the
government and, based on that finding, established a violation of NAFTA protection
standards.
The Mexican Government had denied a permit to further operate a hazardous waste
landfill. It argued that it did not renew the permit due to ecological concerns.
Subsequently, the Government issued a decree declaring the area of the landfill an
ecological preserve.161
The tribunal found a violation of the duty compensate for expropriation and an offense
against the FET standard. It first established that
“expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property,
such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert
or incidental interference with the use of property which has the effect of depriving the owner, in whole
or in significant part, of the use of reasonably-to-be- expected economic benefit of property even if not
necessarily to the obvious benefit of the host State”.162
The arbitrators did not entirely fail to consider the purported environmental motivation
of the measures at issue, but based their argument regarding the denial of FET
predominantly on issues of domestic divided responsibilities and due process. Whereas
the federal government competent for deciding on ecological concerns issued the
required permits and assured the investor that it had all that was needed to operate the
investment, the municipality denied the construction permit by reference to
environmental impact considerations. The tribunal found the denial of the permit on any
other reason than those related to physical construction ‘improper’, as these areas were
outside the municipality’s authority.163
In short, the tribunal rejected environmental protection as a justification for non-
compensation because of procedural deficiencies and inconsistencies in denying the
renewal of the operation permit. It should be noted, though, that the Supreme Court of
British Columbia essentially overruled the principal reasoning of the tribunal’s
decision.164
160
Methanex Corp. v. US, NAFTA/UNCITRAL, Award of 3 August 2005, Part IV Chapter D p. 4
para. 7.
161
Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, p. 17 para. 59.
162
Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, p. 28
para. 103.
163
Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, at p. 25
paras. 85 et seq. and p. 28 paras. 105 et seq.
164
Cf. Marvin Feldman ( CEMSA) v. The United Mexican States, ICSID Case No. ARB(AF)/99/1, Award
of 16 December 2002, p. 527 para. 107.
41
In the case of Saluka Investments v. Czech Republic, the BIT between Slakua’s home
country the Netherlands and the Czech Republic also lacked any exception provision as
the exercise of regulatory power. But the tribunal was of the opinion that pursuant to
customary international law a deprivation was justifiable if it was the result of
regulatory actions taken for the sake of maintaining public order.
The Czech Government invoked the Harvard Draft Convention. Although this is not a
binding legal instrument, the tribunal took the provisions, as well as the 1987 United
States Third Restatement of the Law of Foreign Relations and the 1967 OECD Draft
Convention on the Protection of Foreign Property into account to establish customary
international law. The tribunal concluded that
“the principle that a State does not commit an expropriation and is thus not liable to pay compensation to
a dispossessed alien investor when it adopts general regulations that are ‘commonly accepted as within
the police power of States’ forms part of customary international law today.”165
The reason for the police powers exception is the general principle that “property cannot
be used in a way that results in serious harms to public order and morals, human health
or the environment.”166 But the tribunal adopted an even broader understanding of what
is generally accepted as within the police powers of States. It explained that the exercise
of police powers forming an exception from compensable expropriation is essentially
synonymous to good faith non-discriminatory regulation for a public purpose:
“It is now established in international law that States are not liable to pay compensation to a foreign
investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory
manner bona fide regulations that are aimed at the general welfare.”167
However, the arbitrators in Saluka Investments v. Czech Republic had to admit that
international consensus on what is ‘normal exercise of regulatory powers’ is still
lacking. Additionally, they did not conceal that instead of the adjudicator, it should be
the law that draws a clear line of demarcation between non-compensable regulations on
the one hand and compensable measures on the other.168
The problem is that international agreements frequently lack clauses in which they
exempt good faith regulation from the duty to compensate. If arbitrators stick to the
words of the agreement, they are right in primarily taking the impact of the measure on
the investor into account. If they base their argument on customary international law,
the first drawback is to establish its content and the second its application.
First, the views on what measures governments usually take and what is normal
regulation are highly likely to vary considerably in a pluralistic world. As the
assessment of what comes under these conceptions depends on political choices, the
determination whether compensation is due for regulatory measures adversely affecting
foreign investments is not devoid of uncertainty.169
Second, can non-binding draft and model conventions be admitted as evidence of
widespread state practice and opinio iuris? If the provisions contained therein should
165
Saluka Investments B.V. vs. The Czech Republic, UCNTIRAL/Permanent Court of Arbitration, Partial
Award of 17 March 2006, p. 53.
166
A. NEWCOMBE, “The Boundaries of Regulatory Expropriation in International Law” (2005), p. 21.
167
168
169
A. NEWCOMBE, “The Boundaries of Regulatory Expropriation in International Law” (2005), pp. 21
et seq.
42
apply to the dispute, why did the state parties to the BIT in question omit to emulate
these provisions or to make any reference to them in the treaty itself or in a subsequent
agreement regarding its interpretation? And is an ad hoc investment tribunal made out
of three individuals the right instance to arbitrators to discern ‘normal’ regulatory
activity from abnormal regulation for which compensation is due?
Furthermore, in case of direct expropriation, customary international law requires
compensation even if the property is taken in public interest, in accordance with due
process of law and in a non-discriminatory manner. If the effect on the investor is the
same for direct expropriation and a regulatory measure, and both the direct taking and
the regulation are intended to serve the public good, is any differentiation justified at
all?
These questions still lack clarification. Even though tribunals base their arguments on
customary international law, they come to different results. Thus, a country may never
be sure whether legitimate reasons underlying a certain action adversely affecting
investors will be accepted as a legitimate exercise of its police powers.
On the one hand, even if the government acts under an international obligation to
achieve a specific regulatory outcome, such as the reduction of greenhouse gases under
the Kyoto Protocol, it risks liability under an IIA.170 On the other hand, however, the
tribunal in Pope & Talbot v. Canada was absolutely right when it stated that “a blanket
exception for regulatory measures would create a gaping loophole in international
protection against expropriation.”171
c. Proportionality Test and Legitimate Expectations

The tribunals in the previous section looked at the underlying reason and the character
of the measure to determine whether the measure at issue amounted to indirect
expropriation or was a denial of FET. Other tribunals analyzed the relationship between
this aspect, the impact on the investor and his reasonable, investment-backed
expectations. Whereas this approach considers the states’ right to regulate, it does not
automatically accept good faith regulation as a justification for non-compensation, but
analyzes whether the disputing investor could reasonably bank on the status quo.
In earlier times, tribunals generally have been reluctant to relieve investors from the risk
that favorable business conditions might change. Hence, in many instances investors
had been rejected with their claim that the investment was made on the ground of
reasonable expectations that had been frustrated by state actions.
The decision in Marvin Feldman (CEMSA) v. Mexico gives evidence on that: the
tribunal held that a policy change in reaction to newly discovered needs that makes an
investment unviable does not automatically constitute an indirect expropriation or
denial of fair and equitable treatment. In its reasoning, the tribunal sought guidance with
the Restatement and earlier NAFTA awards. It rejected the assertion that international
law recognizes that any business adversely affected by reasonable governmental
regulation may seek compensation. The arbitrators explained that
“governments must be free to act in the broader public interest through protection of the environment
[…], and the like.” 172
170
UNCTAD, , “Fair and Equitable Treatment”, UNCTAD Series on Issues in International Investment
Agreements II (2012), p. 14.
171
Pope & Talbot Inc. v. Canada, UNCITRAL, Partial Award of 26 November 2002, p. 34 para. 99.
172
Marvin Feldman ( CEMSA) v. Mexico, ICSID Case No. ARB(AF)/99/1, Award of 16 December 2002,
pp. 525 et seq. para. 103.
43
Citing the decision in Azinian and Others v. Mexico173 the tribunal further stated that
people commonly may be disappointed in their dealings with public authorities and thus
have to put up with it.
“Governments, in their exercise of regulatory power, frequently change their laws and regulations in
response to changing economic circumstances or changing political, economic or social considerations.
Those changes may well make certain activities less profitable or even uneconomic to continue.” 174
Even though the arbitrators acknowledged that the investor was treated in “a less than
reasonable manner”, they denied a violation of international law on the basis that the
corresponding authorities in most countries do not always act consistently and
predictively.175
Yet, in Tecmed v. Mexico, the tribunal saw a regulatory expropriation in the
government’s actions that disappointed the investor’s expectations. The NAFTA
tribunal expressed the need for proportionality between the investor’s interests and the
state’s concerns when it called for “a reasonable relationship of proportionality between
the charge of weight imposed to the foreign investor and the aim sought to be realized
by an expropriatory measure.”176
Applying a proportionality test, the tribunal considered the investor’s expectation of the
investment to be on long term, which was widely known and at least partly raised by the
government even before he made his tender offer for the acquisition of a landfill (i.e. the
investment in dispute). In this case, the expectations were considered ‘legitimate’ and
weighted against grounds on which the government interfered with the investment and
eventually deprived the assets and rights of any economic use and substance.177
The tribunal also considered a violation of the FET standard contained in the BIT and
concurred with the view of the tribunal in Mondev International Ltd v US. The
arbitrators in that case rejected the opinion that unfair or inequitable treatment would
equate to outrageous or egregious behavior by the government. They held that from a
modern viewpoint, states “may treat foreign investment unfairly and inequitably without
necessarily acting in bad faith.”178
Consequentially, the Tecmed tribunal did not require bad faith as a precondition for
finding an offense against the FET standard. Instead it construed the FET standard so as
to purport an obligation of good governance:
“The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally
transparently in its relations with the foreign investor, so that it may know beforehand any and all rules
and regulations that will govern its investments, as well as the goals of the relevant policies and
administrative practices or directives, to be able to plan its investment and comply with such
regulations.”179
The tribunal hence adopted the view of the Metalclad tribunal that also required that
173
Robert Azinian and Others v. Mexico, Case No. ARB(AF)/97/2, Award of 1 November 1999, p. 23
para. 83.
174
Marvin Feldman ( CEMSA) v. The United Mexican States, ICSID Case No. ARB(AF)/99/1, Award of
16 December 2002, p. 530 para. 112.
175
Marvin Feldman ( CEMSA) v. The United Mexican States, ICSID Case No. ARB(AF)/99/1, Award of
16 December 2002, p. 530 para. 113.
176
(AF)/00/2, Award of 29 May 2003, p. 47.
177
(AF)/00/2, Award of 29 May 2003, pp. 43 et seq.
178
Mondev International Ltd v United States of America, ICSID Case No. ARB(AF)/99/2, Award of
11 October 2002, pp. 40, 116.
179
(AF)/00/2, Award of 29 May 2003, p. 61.
44
“[…] all relevant legal requirements for the purpose of initiating, completing and successfully operating
investments made, or intended to be made, under the Agreement should be capable of being readily
known to all affected investors of another Party. There should be no room for doubt or uncertainty on
such matters.”180
In MTD v Chile181 the government was also held liable for inconsistent actions of two
arms of the same Government vis-à-vis the same investor although the legal framework
of the country provided for a mechanism to coordinate.
Quite the opposite was the approach of the arbitrators in Methanex v. US. Instead of
requiring the host state to act in a consistent manner, the tribunal based its argument on
the regulatory changes democracy typically entails. Thus, the tribunal particularly took
the political environment of the host country into account and measured the investor’s
expectations against this circumstance. It held that the investor must have been aware of
the fact that the US is
“a political economy in which it was widely known, if not notorious, that governmental environmental
and health protection institutions at the federal and state level, operating under the vigilant eyes of the
media, interested corporations, non-governmental organizations and a politically active electorate,
continuously monitored the use and impact of chemical compounds and commonly prohibited or
restricted the use of some of those compounds for environmental and/or health reasons.”182
However, in most cases, like in El Paso v. Argentina 183 , tribunals followed the
“overwhelming trend to consider the touchstone of fair and equitable treatment to be
found in the legitimate and reasonable expectations of the Parties” and concluded that
host states are liable for “unreasonably” modifying the legal framework or any
alteration of the legal and business environment in which the investment has been made
or which contradicts a specific commitment.184
The arbitrators in ADC v. Hungary and Parkerings v. Lithuania described this
widespread position regarding the relation between the state’s right to regulate and
investors’ right to stable and predictable business conditions when expressly
acknowledging each State’s undeniable right and privilege to exercise its sovereign
regulatory powers. Furthermore, they stated that any businessman or investor knows
that laws will evolve over time. But the tribunals saw a violation of the FET when a
states acts unfairly, unreasonably or inequitably in the exercise of its legislative power
or contrary to an agreement, in the form of a stabilization clause or the like.185 The right
180
Id., at p. 23 para. 76.
181
MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award
of 25 May 2004, see p. 56 para. 163.
182
Methanex Corp. v. US, NAFTA/UNCITRAL, Award of 3 August 2005, Chapter D Part IV p. 5
para. 9.
183
El Paso Energy Int’l Co. v. Argentine Republic, ICSID Case No. ARB 03/15, Award, of 27 October
2011, para. 348 and 364.
184
Marion Unglaube v. Republic of Costa Rica, ICSID Case No. ARB/08/1, Award of 16 May, 2012,
para. 220 et. seq.; see also Jan Oostergetel and Theodora Laurentius v. The Slovak Republic,
UNCITRAL, Award of 23 April 2012, para. 224; PSEG Global, Inc., The North American Coal
Corporation, and Konya Ingin Electrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey,. Turkey,
ICSID Case No. ARB/02/5, Award of 19 January 2007, paras. 249 et seq.; Occidental Exploration and
Production Company v. The Republic of Ecuador, LCIA Case No. UN3467, Final Award of 1 July 2004,
para. 183.
185
Parkerings Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award of
11 September 2007, p. 71 para. 332.
45
to regulate is thus constrained by the investment-protections obligations a state
undertakes in an IIA.186
As revealed by a review of arbitral awards, in the majority of cases, investors invoke the
FET standard. Virtually every wealth-depriving measure that is found to be
compensable violates the FET standard and the burden of proof is lighter for an offense
against this protection standard than for showing an expropriation. Thus, a violation of
the FET standard has become the most promising and popular way to seek
compensation in investment arbitration.187
The reason surely is the proportionality test as developed in investment arbitration
jurisprudence. Although in principle the right to regulate is taken into account, a bias
towards investors’ expectations is inherent in the basic system of the international
investment regime: the state’s interests usually do not have the same weight as the
investor’s legitimate expectations. First, the expectations have to take the hurdle of
being legitimate. And, if they are in fact legitimate, then they can be taken as prevailing
over the state’ regulatory interests as IIAs are designed to promote and protect the
investor’s interests. Hence, given the fact that IIAs are not conceived as synallagmatic
agreements between the state and the investor, but unilaterally obligate the state to
provide an investor-friendly climate, they favor investors. Thus the one-sided manner in
which IIAs are drafted shifts the balance towards greater respect for investors’
interests.188
Despite this inherent bias towards the investor, the proportionality test as a decision-
making technique is eligible to balance competing private and public interests. Because
of that, it appears to be the most promising approach to render decisions that are
thoroughly reasoned and therefore more likely to find acceptance by the
commonalities.189
3. Concluding Remarks
The review of awards reveals that regardless of the exact wording and in light of its
frequent vagueness tribunals interpreted the FET obligations rather broadly: apart from
non-discrimination investors may expect transparency, reasonableness, consistency, and
stability. The investor’s legitimate expectations must be respected and thus set the
framework in which the host state may lawfully exercise its regulatory powers. Arbitral
jurisprudence mostly accepts a reversal of a certain policy course negatively affecting
an investment only in the presence of compelling exceptional circumstances.190 The
consequence is of course that public interest generally does not override individual
rights conferred by an IIA.
186
ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID
Case No. ARB/03/16, Award of 2 October 2006, p. 78 para. 423.
187
C. . SCHREUER, “Selected Standards of Treatment Available Under the Energy Charter Treaty“, in
C. SCHREUER, P. FRIEDLAND, & W. PARK, Investment Protection and the Energy Charter Treaty
(2008), p. 63, 96.
188
R. DOLZER, “Fair and Equitable Treatment: Today’s Contours”, 12 Santa Clara J Int’l L 7, 28
(2014): “[…] absent a special treaty clause, a rebalancing of interests in the case of a dispute by a tribunal
would not be appropriate.”
189
See also C. HENCKELS, “Indirect Regulation and the Right to Regulate: Revisiting Proportionality
Analysis and the Standard of Review in Investor-State Arbitration”, 15 JIEL 223, 228 et seq. (2012).
190
R. DOLZER, “Fair and Equitable Treatment: Today’s Contours”, 12 Santa Clara J Int’l L 7, 21
(2014).
46
Tribunals in international investment arbitration are generally “well aware of the
delicacy of the tasks they are entrusted with” and seek to convince a broader audience
than the parties themselves of their decision’s adequacy. Therefore, arbitrators often
reinforce their reasoning by references to various sources of authority outside the treaty
in question that promise to convey widely accepted notions. Among these are
international conventions, scholarly works and public statements made by international
organizations. Additionally, most investment awards cite and discuss earlier awards.
This shows a clear tendency towards the attempt of creating some uniformity in
jurisprudence with respect to certain key areas.191 One example is the proportionality
analysis that many international tribunals employ and which may evolve into a general
principle of international law.192
The reasoning in investment awards should be seen against the background that
investment arbitrators are charged with the task of deciding whether, under the relevant
IIA, the state party violated its duties or not. No legal obligation requires them to follow
precedents or to contribute to a consistent body of international investment law. Hence,
the widespread practice of heavily relying on other tribunals’ decisions can be seen as
evidence for investment arbitrators’ self-conception as being part of a bigger whole.
While relying on earlier awards is likely to reduce uncertainty about the outcome of a
dispute, it also bears a risk of obliterating differences in treaties. UNCTAD bemoans
that tribunals tend to justify their findings by reference to earlier awards failing to
consider that different treaty wordings may call for nuanced interpretation.193
191
M. INFANTINO, “International Arbitral Awards’ Reasons: Surveying the State of the Art in
Commercial and Investment International Dispute Settlement”, 5 JIDS 175, 181 and 185 (2014).
192
C. HENCKELS, “Indirect Regulation and the Right to Regulate: Revisiting Proportionality Analysis
and the Standard of Review in Investor-State Arbitration”, 15 JIEL 223, 226 (2012).
193
Agreements II (2012), pp. 11.
47
V. Conclusion
This dissertation analyzed the international investment regime in respect of its
implications for pubic interest regulation. The inquiry showed that international
investment treaties historically have been drafted to fill a vacuum in customary
international law and diminish uncertainty. Although the most common form of
international investment agreements is the BIT, most BITs in fact contain duties mainly
for one state: the capital importer. The reason is that most BITs have been concluded
between pretty unequal treaty partners: one capital importing and one capital exporting
country. The common interest of both parties was to create a stable business
environment, as the host country was seeking to attract FDI and the home state of
investors was interested in protecting its nationals’ foreign assets. Preserving regulatory
space was not an issue as the BITs were conceived exactly to restrict regulatory
freedom. Proponents believe that the restraints placed on states by IIAs have positive
effects on governance of the host state and enhances the rule of law.194
Nowadays, the situation is changing as more IIAs are negotiated between developed
countries that assume both the role of a capital exporter and host to foreign investors. In
this new situation, the interests change: Both parties are now interested in attracting FDI
and securing adequate protection of nationals’ foreign assets on the one hand, and
reserving enough regulatory autonomy to pursue environmental, health and other
sensitive policies. This changed awareness of the need to regulate in public interest free
from the duty compensate foreign investors is not reflected in earlier IIAs.
Arbitral tribunals have been criticized for not giving due regard to the right to regulate.
The analysis of the background of the international investment regime, countries’
motives for entering into IIAs, the scrutiny of treaty wordings and eventually the review
of investment awards however lead to the conclusion that it is not the arbitrator that
hampers public interest regulation - it is the treaty.
Critics assert that arbitrators construed treaty provisions in a flawed way and call for an
interpretation that strikes “a balance between the expectations of the investor and those
of the host country and host community in order to establish approaches to
interpretation reflecting the actual social and policy context in which foreign investors
find themselves.”195
I argue that this is the wrong approach. Arbitrators are charged with the task to decide
on the resolution of a dispute in accordance with the treaty provisions and other sources
of international law. They are, however, neither in charge of re-writing treaties nor are
they competent to do so. If there is no mention about environmental protection or
sustainability in the treaty, it protects the investor’s rights against adverse changes even
if they are side effects of an environmental regulation. As set out above, the reason for
this is that in the first place IIAs protect only the private business interests but not
public regulatory interests.
Consequentially, it is not the dispute settlement system that suffers from deficiencies
and ought to be changed. It is the treaty drafting and subsequent behavior of states.
Negotiators should apply lessons learned in ISDS and consider how treaties have been
implemented by governments and interpreted by international tribunals. In light of this
194
M. HERDEGEN, Principles of International Economic Law (2013), p. 10 and 55; J. HUECKEL,
604 (2012); S. D. FRANCK, “Development and Outcomes of Investment Treaty Arbitration”, 50 HARV.
Int’l L.J. 435, 435 (2009).
195
Agreements II (2012), pp. 9 et seq.
48
information and its assessment, policymakers need “to determine where on a spectrum
between utmost investor protection and maximum policy flexibility a particular
agreement should be located.”196
Obviously, this is only a suitable solution for future IIAs that currently are or will be
negotiated. With regards to those former treaties that reflect the historic origins of the
international investment regime, international law offers the possibility to influence
their interpretation according to contemporary needs. As the tribunal in Methanex v. US
correctly noted:
“If a legislature, having enacted a statute, feels that the courts implementing it have misconstrued the
legislature’s intention, it is perfectly proper for the legislature to clarify its intention. In a democratic and
representative system in which legislation expresses the will of the people, legislative clarification in this
sort of case would appear to be obligatory. The Tribunal sees no reason why the same analysis should not
apply to international law.”197
While in former times the heterogeneity of treaty partners (one capital exporter and one
capital importer) made it difficult to reach collective interpretative agreements and
common practices198, more recent dynamics are likely to change this: nowadays not
only developing countries have to respond in ISDS, but also developed countries are
sued in investment arbitration. The changing role allocation in international investment
relations will probably facilitate reaching consensus on the importance of the state’s
right to regulate in the context of FDI protection.
196
197
Methanex Corp. v. US, NAFTA/UNCITRAL, Award of 3 August 2005, Part IV Chapter C p. 10
para. 22.
198
A. ROBERTS, “Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States”,
104 Am Int’l L 174, 196 (2010).
49
50
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53

International Investment Regime: Balancing Investment Protection and Public Interest

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International Investment Regime: Balancing Investment Protection and Public Interest

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THE INTERNATIONAL INVESTMENT REGIME:

DOES INVESTMENT PROTECTION TRUMP THE RIGHT TO

A Final Dissertation Submitted for the

Munich, November 26, 2014

LIST OF FIGURES IV

LIST OF TABLES IV

LIST OF ABBREVIATIONS V

II. THE INVESTMENT PROTECTION REGIME 4

III. STANDARDS OF SUBSTANTIVE INVESTMENT PROTECTION 18

IV. THE IMPACT OF INTERNATIONAL INVESTMENT PROTECTION ON STATES’

BIT Bilateral Investment Agreement

ECT Energy Charter Treaty

EFTA European Free Trade Association

FDI Foreign Direct Investment

GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade

ICC International Chamber of Commerce

ICSID International Center for Settlement of Investment Disputes

IISD International Institute for Sustainable Development

ISDS Investor-State Dispute Settlement

IIA International Investment Agreement

LCIA London Court of International Arbitration

MFN Most Favored Nation

NAFTA North American Free Trade Agreement

REIO Regional Economic Integration Organization

SCC Arbitration Institute of the Stockholm Chamber of Commerce

UNCITRAL United Nations Commission on International Trade Law

UNCTAD United Nations Conference on Trade and Development

WTO World Trade Organization

1. Investment Arbitration in Times of Green Economy

Nearly a quarter of all known investment arbitrations initiated in 2013 involve

1. The Landscape of Investment Protection Treaties

a. The proliferation of IIAs

Source: UNCTAD, World Investment Report 2014, p. 114

Some parts of the world are part of a burgeoning dynamism characterized by

Source: UNCTAD, World Investment Report 2014, p. 116

Table 1: Mega-Regional Agreements under Negotiation

Depicting the success story of international investment treaties, the countermovement

aa) Treaties instead of Mere Customary Law

bb) Reasons for Treaty Making

a. The Functioning of Investment Arbitration and Enforcement

Arbitration is a dispute resolution mechanism based on consent of the parties in which

In a nutshell, ISDS usually works by submitting investment disputes to arbitration in the

b. Institutions and Case Load

Figure II.4: Known Investment Disputes, 1983-2013

Source: : UNCTAD, World Investment Report 2014, p. 124

Source: UNCTAD, World Investment Report 2014, p. 125

c. Reasons for ISDS via Arbitration

1. Substantive Protection Standards

a. Ambit of Investment Protection

Principally, an “investment” is every kind of economic asset owned or controlled,

Reckoned together, there seems to be a trend towards narrowing the definition or at

b. Indirect and Regulatory Expropriation

aa) Suggestions in Draft Conventions

Accordingly, an analysis conducted by UNCTAD revealed that fifteen of eighteen IIAs

c. Most-favored Nation and National Treatment

aa) “Like Circumstances”

bb) Carve outs: Narrowing the Scope of Application

Canada provides a detailed list of exceptions from Most-Favored-Nation Treatment in

aa) Customary International Law: The Minimum Standard

bb) Autonomous or Variable Standard?

cc) Introducing Higher Standards in IIAs

1. The main points of criticism