B.

EARLY YEARS, EVOLUTION AND EVOLVING STANDARDS, TREATMENT OF FOREIGN

INVESTORS BY HOST STATES UNDER CUSTOMARY INTERNATIONAL LAW

Early years

International investment law has emerged as a sub-discipline of public international law (but one with a
distinctive private element) over the last 50 years. 1
1. Appearance of State Contracts
State contracts are agreements signed between a State and a foreign private person, to which international
law is applicable.2 Such contracts were already quite common in the 19th century, for obvious practical
reasons: when it comes to the exploitation of a mine or the undertaking of public work by a private person,
the need for a contract is quite clear in order to clarify the rights and obligations of both parties, whatever
the nationality of this private person.3
2. Determination of Applicable International Norms in State Contracts
There was a time when the mere existence of international rules applicable to the relations between foreign
investors and States could be questioned. But with the proliferation of investment protection treaties, this
existence is no longer open to controversy. Today, these rules are undoubtedly reinforced by customary
principles and general principles of law as per the definition set in Article 38 of the Statute of the ICJ.
General rules such as good faith, the obligation of adequate compensation in the event of a breach of
contract or the force majeure exception can be invoked and applied to a State contract without a doubt as
to whether they are international norms.4
3. Bilateral Investment Treaties
The first bilateral investment protection and promotion treaty (BIT) was concluded in 1959, when Germany
and Pakistan signed a treaty in which they committed to guarantee a certain level of protection to their
respective investors. There is no doubt that some instruments including provisions on the protection of
foreign investors already existed at that time, even if that was not their main purpose. But it is true that the
1959 Treaty is peculiar in that its exclusive purpose was the protection of investors who were nationals of
the other State party, a feature which was quite innovative at that time. As we can see, the first BIT was
signed at the time when arbitral tribunals settled the first major investor-State disputes. These first cases
were also the starting point of the internationalization of the relationship between States and investors. 5
4. The Birth and Rise of International Investment Law
Since the AAPL award, that by signing a BIT with an arbitration clause, a State consents to recognize a
right to resort to arbitration to investors who are nationals of the other State Party to the treaty.6 The AAPL
award actually modified the entire structure of international investment law. It could be said, to a certain
extent, that ‘modern’ investment law was born in 1990 with this major decision. 7
5. The Asian Agricultural Products Ltd. (AAPL) Award
The Asian Agricultural Products Ltd. (AAPL) is a Hongkong corporation that forwarded a request from
ICSID for the institution of arbitration proceedings against the Democratic Socialist Republic of Sri Lanka
under the terms of the ICSID Convention to which Sri Lanka is a contracting Party, and in reliance upon
Article 8(1) of the Agreement between the Government of the United Kingdom of Great Britain and
Northern-Ireland and the Government of Sri Lanka for the Promotion and Protection of Investments of
February 13, 1980 (hereinafter called "the Bilateral Investment Treaty") which entered into force on
December 18, and was extended to Hong Kong by virtue of an Exchange of Notes with effect as of January
14, 1981.8

1. Whitsitt and Bankes. The Evolution of International Investment Law and its Application to the Energy Sector.
2. Nanteuil. 2020. Chapter 1: The Emergence of International Investment Law: From State Contracts to Bilateral Investment
Treaties.
3. Nanteuil. 2020.
4. Ibid.
5. Ibid.
6. Ibid.
7. Ibid.
8. https://jusmundi.com
Evolution and Evolving Standards

FET FPS NT MFN

1. Fair and Equitable Treatment (FET)

The Fair and Equitable Treatment standard establishes one of the most important elements available to a
foreign investor to protect his investment in a foreign country, because it provides him with a certain
treatment that the host state must grant regardless of the treatment given to its own nationals.9 It should be
noted, this standard is often used in bilateral investment treaties (BITs) and its main purpose is to fill
possible gaps in regulations that protect investors in order to obtain the level of favorable protection of
investor.10

2. Full Protection and Security (FPS)

The second standard is a full protection and security (FPS) standard. It can be a complement to fair and
equitable treatment and like fair and equitable treatment standard is general in nature and its flexibility
makes it apply to different situations.11 This standard imposes an obligation of vigilance and care by the
State under international law comprising a duty of due diligence for the prevention of wrongful injuries
inflicted by third parties to property of aliens in its territory. Of course, it does not mean that any damage
to investment of investors will be included but it means more specifically protection from the physical
integrity of investment against the host state intervention. 12

3. National Treatment (NT)

The third standard is national treatment which is considered as one of the important standards in
international investment law to ensure optimal performance of the host state with foreign investments so
that the host state in the same way which treats domestic investors also deal with foreign investors. 13
National treatment as a relative or contingent obligation causes the host state does not treat foreign
investment less favorable than its nationals. Therefore, this standard is based on non-discrimination.14

4. Most-Favored-Nation (MFN)

The latest protection standard that is discussed in this article will be the most-favored-nation (MFN)
treatment standard that it can be a complement to national treatment. According to this standard, the host
state must treat third state investors as it treats foreign investors because this standard is used to prevent
discrimination against foreign investment.15 Therefore, most-favored-nation treatment clauses commit
contracting parties to treating each other’s investors no less favorably than investors of any non-party. So,
if the host state does not grant interests and favorable treatment to third state, most-favored-nation treatment
will not be applied in practice.16

9. Mahyari and Raisi. 2018. International Standards of Investment in International Arbitration Procedure and Investment Treaties.
p. 17
10. Mahyari and Raisi. 2018. p. 18
11. Mahyari and Raisi. 2018. p. 21.
12. Mahyari and Raisi. 2018. p. 22
13. Mahyari and Raisi. 2018. p. 24
14. Ibid.
15. Mahyari and Raisi. 2018. p. 27
16. Ibid.
Treatment of Foreign Investors by Host States Under Customary International Law

In customary international law, States are permitted to exercise sovereign powers to expropriate
investments, subject to some limits – namely, that any expropriation must be for a public purpose, be
pursued on a non-discriminatory basis, be in accordance with the due process of law, and with just
compensation. Before the proliferation of bilateral investment treaties, foreign investors seeking relief were
limited to two comparatively unattractive options: trying to lobby their own States to take diplomatic actions
against the States hosting their investments or pursuing compensation through the local courts of the States
hosting their investments.17

The possibility of the State incurring international responsibility can only arise if the measure is of a
discriminatory nature, and practical experience has shown this eventuality to be highly unlikely. The same
rule can be said to apply to rights of importers and exporters and to prohibition on the import or export of
specified merchandise: the State can only be held internationally responsible if the measure is not general
but personal and arbitrary.18

Calvo Doctrine

The Calvo clause was first articulated by Argentinean jurist Carlos Calvo in 1863 and mainly incorporated
in Latin American Investor-State concession contracts, Laws and Constitutions in the late 19th and early
20th century. It is a dispute resolution clause providing that investors shall seek redress to claims arising
out of or in connection with such contracts by exclusively relying upon the available local remedies and
waiving the right to invoke diplomatic protection of their States of nationality. 19

The effect of the Calvo clause is twofold:

1. Waiver by the investor of the right to resort to diplomatic protection exercised by its State of
nationality; and
2. Requirement to exhaust the host State’s available local remedies. 20

Drago Doctrine

It essentially restated Calvo Doctrine and articulated by the Argentine foreign minister Luis María Drago
in 1902. Venezuela then was indebted to Great Britain, Germany, and Italy, which threatened armed
intervention to collect. Drago advised the United States government that “The public debt cannot occasion
armed intervention nor even the actual occupation of the territory of American nations.” 21

Monroe Doctrine

December 2, 2023, will mark the bicentenary of President James Monroe’s famous State of the Union to
the U.S. Congress. Out of the 6500 words of his full address, two sentences are remembered as the Monroe
Doctrine: “no future colonization by any European power” in the American continents and “not to interfere
in the internal concerns” of any other countries.22 Hence, the Monroe Doctrine reinforced the principle of
non-intervention as opposed to the European Concert of Powers collectively authorizing armed intervention
in Italy and Spain after the congresses of Ljubljana and Verona.23

17. Kluwer. Chapter 8: Violations of Investor Rights Under Customary International Law. p. 589.
18. Kluwer. p. 590.
19. Irene and A.N. 2023. Jus Mundi. Calvo Clause.
20. Ibid.
21. https://www.britannica.com
22. Justus-Liebig Universität Giessen and the TRACE Research Center. 2023. The Monroe Doctrine: History, Interpretations,
Legacy. p. 2.
23. Ibid.
Hull Formula

A significant number of investment treaties and tribunals adopt the standard of “prompt, adequate and
effective” compensation. This is the so-called Hull formula, meaning that the investor should be granted,
as soon as the investment is made (prompt), an amount equal to the total value of its expropriated investment
(adequate) in a freely transferable and exchangeable currency (effective). Typically, BITs adopting this
standard do not make a distinction between lawful and unlawful expropriation. 24

24. Andrew and Rimantas. 2023. Prompt, Adequate and Effective Compensation.