Challenges for the International Investment Law 1 towards development- critical notes

from the International Economic Law theory

MARIANA YANTE B. PEREIRA

Student ID n. 2015171060004

Introduction

This paper aims to raise some critical reflections about the classical investment
approach from International Economic Law to development issues.

The analysis departs from the intersections between core concepts of International
Investment Law and its impacts over some traditional and contemporary challenges involving
the International Law of Development regime.

Furthermore, the paper has sought to discuss the scholar’s view of investment itself
and its legal framework as an adequate ground for the challenges that emerge from the
crossing-over between the investment protection scope and other regimes that are
interrelated to development (such as governance and environmental issues).

Some cases were provided along the exposition, with the propose of contextualizing
the pointed limitations and to provoke thoughts around the emerging defiance for
International Economic Law order – which are far from being settled without controversies.

The paper sets out the undisclosed definitions for investment as well as for
development from the recent past, by illustrating how International Economic Law has
handled both from the distinct fields of finance and development studies.

In addition, it analyzes the influences of the exercise of adjudicative powers in the

realm of investment disputes, regarding the enhanced concerns by States around the loss of
governance over matters that would be critical for development.

As it will be discussed, the main critiques encompass the fragile mechanisms to

determine whether a policy can be taken regardless investment agreements binding clauses
when the public interest itself is at stake, and the apparent bias of the existing dispute
settlement regimes of privileging the investment protection when these conflicts emerge.

These controversies have been highlighted since the establishment of the

Sustainable Development Goals and its financial agenda, that claims for an enhanced
participation of the international investors.

1. International Investment Law from its scope: a premise for development?

1
For the purpose of this article, International Law of Foreign Investment and International Investment
Law are used as synonyms.

1
 The disagreements involving the relationship between investment and development
under the legal glance arise at the first place from the hypothesis that the former consists of
a conditio sine qua non for the latter.

In his appointments about the International Law of Foreign Investment 2, Matthias

Herdergen starts out with the premise that the economic growth in host countries depends on
the improvement of the legal framework for foreign and domestic investments, including the
enhancement of protections over tangible and intangible property rights and independent
judicial bodies. Departing from the content of the Monterrey Consensus (2002), the author
suggests that the private international capital flows lead to long-term development.

This perspective has been criticized by many legal scholars who point out resistance
and imbalance of power regarding the International Law of Foreign Investment and the local
realms of decision-making. Some argue that its premises were themselves built-up from an
unequal paradigm of protection for investors3 that have been challenged in the two past
centuries, mostly due to the fundamental influence of environmentalists and grassroots
movements. Their plea consists of encompassing human rights agenda, as well as other
actors than states as the core actors to ensure harmony between foreign investment and
development.

Others will claim that the very shift in the legal meaning of economic development
within International Law, which focus became the people – instead of the former approach on
resources – made room for the dangerous assumption that including local communities
would be itself enough to foster development through investment:

The importance of a perspective that directly incorporates the poor,

including some members of some host communities to foreign investment,
cannot be overemphasized. In fact, the experience of Nigeria’s oil and gas
sector and the extractive industries in many Third World countries supports
a cautious approach, given that they have manifested situations similar to
those under a ‘resource curse’ scenario. Irrespective of the position that
one takes on the centrality or otherwise of FDI to socio-economic
empowerment, given the history and the debate surrounding foreign
investment law it is necessary to investigate the utility of a framework that
directly incorporates local communities as relevant actors in the foreign
investment regime.4

Furthermore, an incongruence comes up when the controversies involving foreign

investment since the 1990s arose, creating new challenges for the International Economic
Law and, specifically, for the International Law on Foreign Investment.

2
The observations concerning Matthias Herdegen’s considerations are based on his book Principles
of International Economic Law. Oxford: Oxford University Press, 2013.
3
This argument will be further discussed below, but is essentially grounded in MILES, Kate. The
Origins of Investment Law: empire, environment and safeguarding of capital. Cambridge
University Press, 2013, as well as in RAJAGOPAL, Balakrishnan. International Law From Below:
development, social movements and third world resistance. Cambridge: Cambridge University
Press, 2003.
4
ODUMOSU-AYANU, Ibironke T. Governments, Investors and Local Communities: analysis of a multi-
actor investment contract framework. Melbourne Journal of International Law. Vol. 15, 2014.
Available at: <http://law.unimelb.edu.au/__data/assets/pdf_file/0006/1586877/Odumosu-Ayanu1.pdf>,
p. 09.

2
 The past three decades consolidated the basis for the multilateral order, and along
with it, the raising of a broader interaction among private transnational actors and state and
interstate institutions.

These concomitant moves led to a certain level of fragmentation of the law – some
States created domestic legal regimes to protect their economies from the negative impacts
of investments (due to its excessive protections), while others have declined from the
framework offered by the International Centre for Settlement of Investment Disputes-ICSID,
within the World Bank Group5.

Likewise, in the recent decades, the lack of consensus on many issues concerning
the regulation of investments gave rise to a profusion of rules through bilateral, regional and,
more recently, mega-regional agreements. These issues have been associated with un-
negotiated topics in trade agenda – encompassing crossing themes and higher commitments
in services and intellectual property rights – that the WTO forum did not sufficiently
catalyzed.

Therefore, it is important to understand that the dynamics of this branch of

International Economic Law relates to two opposed movements. The first one is the
internationalization of capital flows and the aim to create a legal framework for its protection.

The second arises from the resistance against these foundations, either because of
the antagonism with other legal regimes (e.g. Cultural, Indigenous, Environmental and Labor
rights) or from the social conflicts represented by NGOs and social movements in both
domestic and international levels:

There is an evident clash of distinct forces arraigned on different sides.

One force, consisting of large multinational corporations, the law firms that
advise them, their home states, large financial institutions providing
investment funds, third-party funders of investment arbitration whose new
business depends on investment arbitration and arbitrators inclined
towards a policy of investment protection pulled the law towards inflexible
investment protection on the ground that it catered to the interests of all
concerned, including the developing host states, as foreign investment
generally promoted economic development. The other force, supported by
states affected by expansionary interpretation in arbitral awards, NGOs,
arbitrators not inclined towards interpretations based solely on the policy of
investment protection, and international lawyers opposing fragmentation of
their discipline pulled it towards the recognition of competing regulatory
interests of protection of the environment, human rights and other public
interests such as health and welfare.6

In fact, the debates regarding the relationship between development and

investment, as well as whether the International Law of Foreign Investment should
5
Currently, the Washington Convention, that established an investment framework under the World
Bank group, has 161 signatory and contracting States, and was recently denounced by Ecuador and
the Bolivarian Republic of Venezuela (two of the most demanded countries under its dispute
settlement system), preceded by Bolivia, Nicaragua and Cuba’s notifications (2007) – member States
of the Alternativa Bolivariana para la America Latina y El Caribe. In addition, among the BRICS
countries, only China is under its jurisdiction. Available: <icsid.worldbank.org>. Some of its countries,
namely South Africa and India, as well as Indonesia, announced that they will not conclude more
investment treaties.
6
SORNARAJAH, Muthucumaraswamy. Resistance and Change in the International Law on
Foreign Investment. 3rd Ed. Cambridge: Cambridge University Press, 2015. p. 29.

3
encompass other legal fields seem to increase in the past decades. Besides, the extent to
which the domestic laws are legitimately influenced by the international framework brings
about strong disagreements among development and investment academics in both
theoretical and pragmatic levels.

2. Development and investment: reciprocal influences from the legal perspective

The close relationship between development and investment, at least in the rhetoric
level, is assumed from different legal instruments on International Investment Law, among
which we can emphasize the Convention on the Settlement of Investment Disputes Between
States and Nationals of Other States.

The treaty, mostly known as the Washington Convention, establishes the

International Centre for Settlement of Investment Disputes and the administrative and legal
basis for its actuation.

In spite of the lack of definition for the investment itself along the treaty, its preamble
asserts that the contracting parties are taking into account the ”need for international
cooperation for economic development, and the role of private international investment
therein”7.

This reasoning recalls the Resolution No. 214, adopted by the Board of Governors
of the International Bank for Reconstruction and Development 8, stating that “in submitting
the attached Convention to governments, the Executive Directors are prompted by the desire
to strengthen the partnership between countries in the cause of economic development (…)”.

Some scholars have interpreted the provision in the Washington Convention as an

indicative feature to recognize the actual configuration of an investment, whilst other argue
that the principle of the autonomy of the will should be the ground for any conclusion,
regardless the eventual omission about the development goal.

Although in the jurisprudence of ICSID tribunals and commission this topic remains
controversial, as discussed below, it is also arguable that the contracting States should follow
the preamble when formalizing the legal instruments through which the investments are
settled.

Similarly, it might be claimed that the existing improvement of the economic

development for the host State represents an interpretation criterion for the arbitrators, when
appreciating disputes involving the Washington Convention’s parties.

Although the preamble does not necessarily carry obligations on the parties, in the
sense that it does not often contain directly operative provisions 9, it is essential to the
7
Excerpt from the first paragraph of the Preamble of the Convention on the Settlement
of Investment Disputes Between States and Nationals of Other States. Available: <
https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/partA.htm>.
8
Resolution No. 214, adopted by the Board of Governors of the International Bank for Reconstruction
and Development on September 10, 1964, that created the International Centre for Settlement of
Investment Disputes as an autonomous body of that institution. Consulted through the Appendix VII of
KRYVOY, Yaraslau. International Centre for Settlement of Investment Disputes(ICSID). The
Netherlands: Kluwer Law International, 2010.
9
FITZMAURICE. The Law and Procedure of the International Court of Justice 1951–54, BYBIL 33
(1957) 229. Apud. VILLINGER, Mark E. Commentary on the 1969 Convention on the Law of the
Treaties. Leiden: Brill, 2009. p. 43.

4
interpretation of its object and purpose, mainly through the application of the teleological
method.

In accordance with the Max Planck Encyclopedia of International Law10, the

preambular clauses may have four distinct functions - interpretative, supplementary,
incorporative, and binding (clauses-engagement), either simultaneously or alternatively.

While the entry points out that the interpretative function depends on the sufficient
precision, the WTO Appellate Body, in the US-Shrimp Case, had recognized the relevance of
sustainable development as an objective. Departing from it, the court stated that the generic
use of the term “natural resources” on Article XX(g) of GATT 1994 had a binding force,
because its content was dynamic11.

The binding role of a preamble would depart from a restatement or clarification of

the preamble’s statement in more specific terms (incorporation expressis verbis). The most
known precedents which authorized this conclusion correspond to the United States
Nationals in Morocco Case (France v United States), under the ICJ jurisdiction (1952, ICJ
Rep 183-4), as well as the Ethiopia v South Africa and Liberia v South Africa cases.

From this theoretic construction, and regarding the lack of clarification along the
Washington Convention, one can raise the argument that the courts may arise the economic
development criterion as a limitation for the parties’ consent in defining the scope of
investment in a certain context. Nevertheless, there is not a clear position from the analysis
of ICSID’s awards concerning whether this element is a condition sine qua non:

It does not necessarily follow that an activity that does not contribute to the
host State’s development cannot be an investment in the sense of Art. 25
and is hence outside the Centre’s jurisdiction (…) In some cases tribunals
examined and confirmed the project’s contribution to the host State’s
development as part of their application of the test.235 In Bayindir v.
Pakistan, the Tribunal added that this condition was often already included
in the other three conditions of the “Salini test”.236 In the two closely
related LESI cases the Tribunals rejected the relevance of a contribution to
the host State’s development as a separate criterion.12

As the quote revealed, the feature of contributing substantially to a State’s economic

development as a distinctive element to qualify a transaction as an investment was evoked
by some ICSID tribunals, such as the CSOB v. Slovakia 13 and Salini v. Morrocco14 Decisions
on Jurisdiction.

The latter case contributed to substantiate the “Salini criteria” – an ICSID’s

jurisprudence about the characteristics or criterion that may be useful to identify an
investment (under the ICSID’s scope of jurisdiction), namely the duration of the operation,
the risk for both parties in the transaction, a substantial contribution and the duration of
performance of the contract.
10
MAX PLANCK INSTITUTE FOR COMPARATIVE PUBLIC LAW AND INTERNATIONAL LAW. Max
Planck Encyclopedia of International Law. Heidelberg and Oxford University Press, 2013, p. 1-4.
Quoted precedents from the entry for “preamble” as well.
11
WTO United States: Import Prohibition of Certain Shrimp and Shrimp Products—Report of the
Appellate Body (12 October 1998) WT/DS58/AB/R, paras. 129-130.
12
SCHREUER, Christoph H.; MALINTOPPI, Loretta; REINISCH, August; SINCLAIR; Anthony. The
ICSID Convention: a commentary. 2nd Edition. Cambridge University Press, 2009. pp.125-131.
13
CSOB v. Slovakia, Decision on Jurisdiction, 24 May 1999, paras. 76–91.
14
Salini v. Morocco, Decision on Jurisdiction, 23 July 2001, para. 39.

5
 On the grounding precedent, the Tribunal also stated that the contribution to the
economic development of the host country may be added as and additional condition; still, in
both LESI cases, the tribunals asserted that this criterion was already embraced by the other
three ones that were mentioned in the Salini’s award15.

Schreuer16 emphasizes that, together with the preamble, the Report of the Executive
Directors would contribute to the mens legis understanding, when it comes to a definition of
investment:

The only possible indication of an objective meaning that can be gleaned

from the Convention is contained in the Preamble’s first sentence, which
speaks of “the need for international co-operation for economic
development and the role of private international investment therein”. This
declared purpose of the Convention is confirmed by the Report of the
Executive Directors which points out that the Convention was “prompted by
the desire to strengthen the partnership between countries in the cause of
economic development”.Therefore, it is arguable that the Convention’s
object and purpose indicate that there should be some positive impact on
development.

Finally, though, the scholar remarked that this is the most controversial criterion
among the jurisprudence and doctrine about the concept of investment. He emphasized that
the broad range of understandings embraced discrepant positions, from the LESI cases to
the CSOB v. Slovakia award, where the tribunal permitted an assumption that international
transactions that came up to promote the State’s economic development “may be deemed to
be an investment in the sense of the Convention”17.

Regardless this polemic, the concept of economic development itself remains

unclear – which may be lead to another realm of controversial issues on the application of
the criterion.

This notion and its attachment to the developing countries had first appeared in the
preamble of the Resolution n. 2020(XX) of the General Assembly of the United Nations
(1965), through which the United Nations Development Programme was established:

Recognizing that requests for assistance on the part of the developing

countries are steadily increasing in volume and in scope, (…) Being
convinced that the United Nations assistance programmes are designed to
support and supplement the national efforts of developing countries in
solving the most important problems of their economic development,
including industrial development (…).

Because of the Bandung Conference (1955), some documents recalled the

economic development scope of the partnerships among the States in the following decade,

15
SCHREUER, Christoph H.; MALINTOPPI, Loretta; REINISCH, August; SINCLAIR; Anthony. The
ICSID Convention: a commentary. 2nd Edition. Cambridge: Cambridge University Press, 2009. p.
207. The exemplified cases are LESI-DIPENTA v. Algeria, Award, 10 January 2005, para. 14(ii) and
LESI & Astaldi v. Algeria, Decision on Jurisdiction, 12 July 2006, para. 73(ii).
16
SCHREUER, Christoph H.; MALINTOPPI, Loretta; REINISCH, August; SINCLAIR; Anthony. The
ICSID Convention: a commentary. 2nd Edition. Cambridge: Cambridge University Press, 2009.
17
SCHREUER, Christoph H.; MALINTOPPI, Loretta; REINISCH, August; SINCLAIR; Anthony. The
ICSID Convention: a commentary. 2nd Edition. Cambridge: Cambridge University Press, 2009.
p.207.

6
such as the Declaration on Social Progress and Development18 and the ground deliberations
for the United Nations Conference on Trade and Development.

This emphasis on the developing world since its inception – either because of the
impacts of the decolonization or from de consequences of the II World War for the alliances –
suggests why there was a growing discursive concern about fomenting the host country`s
development through the investment transactions.

Even though there is not a uniform conception of economic development itself, its
differentiation from economic growth and the emphasis on the building and enhancement of
wellbeing, as well as domestic governance capabilities, are a common ground for many
definitions:

18
Proclaimed by General Assembly resolution 2542 (XXIV) of 11 December 1969.

7
Source: VASHCHYK;STIUDEK (compilation), 201419.

According to the latest report published by OECD 20, the flows of foreign direct
Investment (FDI) confirm the perspective that the eight non-OECD G20 countries correspond
to the most representative recipients:

Source: OCDE Data, 2014.

Since the institutional framework that the Washington Consensus created, the
international organizations guided the host states to domestic legal reforms that complied
with the normative construction of economic development in the developed world.

Hence, the strong tie between some conceptions of development under the
investment’s enhancement had substantial effects on numerous legal reforms led by the law
and development movements.
19
SIUDEK, T.; VASHCHYK, M. Economic Development of Rural Areas in European Union Member
States in 2000-2012. Oeconomia, Vol. 13, No. 3, 2014, pp.95-104.
20
OECD, OECD International Direct Investment Statistics 2014, OECD Publishing. Available:
<http://dx.doi.org/10.1787/idis-2014-en>.

8
 Departing very often from the conditionalities and technical assistance provided by
the International Monetary Fund and World Bank, many legal systems in Latina America,
Asia and Africa – and, in a second moment, ex-soviet countries – were restructured to boost
the investments and to show compliance domestic regimes with International Economic Law
standards, based on the European and US models21.

These standards were built and spread out not only at the domestic level, but also
through international conventions, bilateral treaties and recommendations, striving for the
reduction of transaction costs and institutional stability for investors from the premise that
harmonization would lead to an improvement of these variables internally.

[P]roposed standards often do not hold what they promise (…). [T]he quest
for developing an optimal set of legal rules ignores a central feature of
successful economic development, namely the constant change,
innovation, and adoption of institutions and organizations in a competitive
environment. (…) Without ensuring complementarities between the new
law and preexisting legal institutions, harmonization may distort rather than
improve the domestic legal framework22.

Although the consequences of this “transplantation” with respect to domestic

reforms from harmonization in domestic levels remain controversial in terms of legitimacy
and efficacy, some recent debates have widened to include other variables to assess
whether the legal framework for investment has promoted social justice as well.

Historically, the evolutionary process of International Law of Foreign Investment

rule-making has repeatedly been recognized as a mechanism to protect capital-exporting
States – developed Western countries – throughout the nineteen century. Accordingly, the
legal framework that was inherited by the following century focused on the protection of
investors, legitimizing practices as diplomatic protection to military intervention23.

However, the tradition has changed since the past century, from continuous political
events and shifts that happened during the past period. Some of them departed from the
plea to rebalance the foreign investments, to include the host states interests and foster their
development.

Some of them, such as the New International Economic Order agenda, though, did
not rebound on legal changes or in the international nor in the domestic laws of developing
countries. Other demands and consequent policies, for instance concerning the protection of
national resources and the agrarian reform, brought substantial consequences for the
International Law of Foreign Investment.

A first great wave happened in the first half of the past century, and pushed, for
example, agrarian reforms in Russia and Mexico, as well as later oil nationalizations, e.g., in
Iran, Iraq and Saudi Arabia, that ended up in expropriations of tangible and intangible foreign
properties. Some of them coincide with post-dictatorial or post-monarchical regimes, as well

21
BERKOWITZ, Daniel; PISTOR, Katharina; RICHARD, Jean-Francois. The Transplant Effect. The
American Journal of Comparative Law, Vol. 51, No. 1 (Winter, 2003), pp. 163-203.
22
PISTOR, Katharina. The Standardization of Law and Its Effect on Developing Economies. The
American Journal of Comparative Law, Vol. 50, No. 1 (Winter, 2002), pp. 97-130.
23
MILES, Kate. The Origins of Investment Law: empire, environment and safeguarding of
capital. Cambridge: Cambridge University Press, 2013. pp. 69-70.

9
as with the struggles between governments and transnational companies within the
extractive sector.

Another movement has recently emerged from the left governments that have been
elected throughout Latin America, and led to impacts on the International Law of Foreign
Investment framework that are even more direct. The denunciation of the Washington
Convention of 1965 by Ecuador, Bolivia and Venezuela in the past decade consists of a
good example of the close political relationship with International Investment Law.

The plea for legal justice in the foreign investment realm had also highlighted the
influences of other legal systems over its agenda, emphasizing the role of non-state actors,
such as social movements and NGOs, to push shifts under the developmental normative
order.

Despite the dismissive treatment of social movements by arbitral tribunals

in investment disputes, host state grassroots activism remains a source of
pressure to reform the unbalanced nature of international investment law,
to give a voice to those affected by the activities of foreign investors, and to
reflect the role of resistance in shaping the regulatory network of
investment protection. A particularly potent focus for this form of pressure
has been the environmentally harmful activities of foreign-owned
operations.24

Nevertheless, there is still a challenge to put together a transformative perspective

of International Law of Foreign Investment and the multiple levels of governance,
normalization and participation with regard to development issues. This arises not only from
the fore-mentioned controversies in both fields, but also the basis in which International Law
in normative and institutional aspects was itself constructed. Accordingly, some scholars
have advocated for an “International law from below” approach:

[The] discursive field of human rights – its symbols, apparatuses, and

doctrines–was significantly shaped during the inter-war transition from
colonialism to development, as well as by the apparatuses that were
developed to manage anti-colonial resistance movements. Similarly,
international economic law is presented as the law of international
economic institutions such as GATT/WTO and Bretton Woods, with no
connection either to the ‘old’ colonial international law, or, for that matter, to
development. (…) Instead of constructing the structure of international law
from ideas and intellectual strategies alone, one could imagine a history
from below leading to a theory of peoples, cultures, and power.25

3. Challenges to the multilevel governance on investment and the embracement of

development-related issues

24
MILES, Kate. The Origins of Investment Law: empire, environment and safeguarding of
capital. Cambridge: Cambridge University Press, 2013. p. 105.
25
RAJAGOPAL, Balakrishnan. International Law from Below: development, social movements,
and third world resistance. Cambridge: Cambridge University Press, 2003. pp.294-296.

10
 As argued, the uncertainty about the investment as a juridical category, along with
the multiple levels of governance regarding its operation, represents a challenge to
determine and consolidate a substantive legal framework for International Law of Foreign
Investment, as well as the boundaries and connections among its regime and other legal
systems.

Within the International Economic Law, the increasing gray zone between trade and
investment have pushed the countries to negotiate both agenda under regional and mega-
regional agreements.

This integration reflects, under the umbrella of broad arrangements a trend in

expanding the outline of negotiations as formerly covered by the World Trade Organization
agenda that became known as "WTO Plus".

The extension occurs essentially in two ways – by elevating the existing standards
as to the legal framework already established, or by engaging new issues to encompass.

As an example of the former, there was a widening of the trading scope that was
initially established under the GATT, when, in the nineties, related aspects regarding
intellectual property law were negotiated at the multilateral level in the same forum as trade
(Uruguay Round).

Despite being subject to the Annex on Aspects of Intellectual Property Rights

Related to Trade (TRIPs), as well as to the European system protected by the World
Intellectual Property Organization (WIPO), the IP standards have been constantly brought to
new negotiations, aiming to raise the existing protections.

Under new agreements, the States can also go further on the issues whose bargain
– although initiated or understood in successive rounds of negotiations in WTO – is
deadlocked in multilateral level, due to the discrepancy and lack of understanding of the
countries involved. This is the case of the exporting subsidies for agricultural products,
usually brought to discussion by Australia and New Zealand, which may find room for
interchanges outside the WTO.

With respect to the second aspect, the fact that the WTO members were not able to
come up with a minimum ballast on investment issues under the Uruguay Round has pushed
this regime’s outline for the bilateral and regional arena. Recently, the mega-regional trade
agreements, such as the recent Trans-Pacific Partnership (TPP) and the Transatlantic Trade
and Investment partnership (TTIP) – under negotiation between the U.S. and E.U. countries
– have embraced the ruling on investment as well.

The fore-mentioned initiatives can be understood from the intention to include the
International Economic Law provisions on a Rule of Law approach for the relationships
among private and public actors. The plea for legal security led to the incorporation of a
larger number of subjects, from the perspective of its potential influence on the realization of
commitments made by States in respect of trade and investment.

The discussions around development rely, under the legal perspective, on two
essential topics. The first one corresponds to this enlargement of the scope of the
agreement, once trade and investment aspects are put together with Labor Rights,
Environmental Law and Human Rights.

11
 Under the TPP, for example, there are critiques regarding its reference to the
sustainable development as a goal, once it collides with the duties to which the treaty had
subjected the parties concerning the trade liberalization and investment relations:

The TPPA measures intended to advance the environment are generally

contained in chapter 20, titled Environment. The weak objectives for the
chapter signal the poverty of serious disciplines to follow. Notably, the key
concept of sustainable development is addressed therein the following
terms: “the Parties recognize that enhanced cooperation to protect and
conserve the environment and sustainably manage their natural resources
brings benefits that can contribute to sustainable development” (emphasis
added).3 Sustainable development cannot even be a clear objective in its
own right. Implicitly, unsustainable development is permitted. 26

The second group of challenges involves the competition around the many
subsystems that are created by the emerging regional agreements, like TTP, TTIP and the
Trade in Services Agreement (TISA) – that encompass the most exponential effects,
although only the first one had its negotiations concluded.

These agreements lead to another wave of regionalization with regards to trade and
investment relations, and have been enhanced by uncertainties emerging from the WTO’s
Doha and Nairobi rounds.

Due to the deadlock of many topics in these negotiations, as was argued before, the
developing countries disagree on whether they should push a joint agendum at the
multilateral level or pursuit individual inclusions at these emerging agreements. It might
cause not only a new fragmentation of the system, with antagonist groups, but mainly an
effect over countries that may not be able to get included.

A possible effect of marginalization is correlated with the increase of costs to

become a party to these arrangements, once there will be higher standards to comply,
including preferences which bargain is limited within least-developed countries.

Although the negotiation power of developing nations such as India, Brazil and
China is not exactly at stake, there are some perspectives that the mega-regional
agreements had come to bind their influence in the multilateral scenario. Accordingly,
measures concerning open ratification processes, along with the enhancement of WTO,
have been claimed27.

4. Jurisdiction, governance and development

26
TERRY, Simon. The Environment Under TPPA Governance. The Law Foundation New Zealand.
Available at:
<http://www.sustainabilitynz.org/wp-content/uploads/2016/01/TheEnvironmentUnderTPPAGovernance
_2016.pdf>, p. 6.
27
BOHNENBERGER, Fabian. Acordos megarregionais e governança global do comércio: abertura e
inclusão em um sistema cada vez mais complexo. Pontes, Vol. 12, No. 5. 12 July 2016. Available at:
<http://www.ictsd.org/bridges-news/pontes/news/acordos-megarregionais-e-governan%C3%A7a-
global-do-com%C3%A9rcio-abertura-e-inclus%C3%A3o>.

12
 The matter of jurisdiction represents another critical aspect concerning the influence
of International Economic Law, as specifically relevant to investment and development is the
jurisdiction aspect, when it comes to disputes settlement.

Unlike the trade and service matters, and, to a certain extent, the intellectual
property issues, the raising investment controversies do not have a broad legal framework,
either in substantive rules or in adjective norms, including jurisdiction and competence.

The system embraced by the ICSID, as stated, is far from being as ample as the
one established by the Marrakesh Treaty and the World Trade Organization. Consequently,
the jurisdictional aspects of investment agreements often embrace ad hoc arbitral courts,
within or outside ICSID, International Chamber of Commerce, and other institutional spaces.

Under the trade-related framework of WTO, the initial contributions for development
from the jurisdictional perspective came along with the discussions around equality. In
procedural terms, the debates around the creation of the Dispute Settlement Understanding
have translated the idea of equity as a condition to the legitimacy of the organization, since
the GATT 194728.

The first ten years of WTO had evidenced the relevance of this mechanism, once
the scholars noted the insufficiency of the market inclusion speech. “In many of the
discussions on the issues of poor countries, the emphasis is on market access. Market
access without infrastructure capability is not market entry.”29

Scholars have been pointing out that participation in settlements and construction of
a more balanced trade scenario have a relationship of mutual influence. As the disputes
resolutions are essential to the establishment of WTO jurisprudence, by giving an
interpretation to treaties and commitments, they have a particular role in defining legality
boundaries for the members.

The awards very often address unclear concepts and legal gaps in the substantive
laws, by providing dynamics to their application under hermeneutics. This aspect also has a
systemic component related to the process of bargaining among countries in both domestic
and bilateral levels, since other litigations may influence the outcome of other potential
complaints30.

When included in the realm of larger cooperation agenda, such as in the regional
and mega-regional agreements, the eventually existing dispute settlement system includes
investment issues, as in the NAFTA Agreement. These multi-competence arbitration bodies
have been criticized for the lack of accountability and for ruling in the detriment of State
members as representatives of the public interest.

A remarkable example of this collision was the case between SD Myers and
Canada. The controversy involving the US Company SD Myers Inc. and the Government of

28
HUDEC, R. Developing countries in the GATT legal system. London: Gower, for the Trade Policy
Research Center, 1987.
29
OSTRY, Sylvia. The World Trade Organization: System under Stress. In: BERNSTEIN, Steven;
COLEMAN, W. (eds.). Unsettled Legitimacy: Political Community, Power and Authority in a
Global Era. Vancouver: University of British Columbia, 2009. p. 109.
30
SHAFFER, Gregory. Defending Interests: Public-Private Partnerships in WTO Litigation.
Washington DC: Brookings Institution Press, 2003.

13
Canada, concerned a regulation established the country as a public policy to comply with the
obligations under the Basel Convention31.

In the award, the ad hoc tribunal had summed up some social concerns that arise
from the collision of these interests:

Concerns have been expressed from many quarters - various advocacy

groups, academic commentators, even governments - about the extent to
which NAFTA already tips the balance too heavily in favour of freer trade
and against the ability of government to regulate in the public interest.
Similar concern has also been expressed about whether governments
should expand existing trade agreements or enter into new ones, like the
Multilateral Agreement on Investment (MAI). There is a real anxiety in
many quarters that there will be an increased and undue impairment of the
ability of governments to regulate. That impairment may prevent measures
from being taken that protect citizens or promote social justice.32

In contrast, the award also emphasized the concern that economic barriers may
hinder the economic development, as well as the environmental and social progress lead by
it (p. 4), by stating that “Environmental agreements have acknowledged the importance of
trade and economic development, just as trade treaties have affirmed the importance of
environmental protection” (p. 28).

The case is specifically illustrative amongst environmental and development

researchers because it demonstrates how principles and rules regarding investment
protection may be evoked by courts to prevent the national governments to rule against the
private actors:

In S.D. Myers the principle of proportionality was invoked by the tribunal as

a standard against which to evaluate the state’s argument that
discriminatory treatment should be excused as an unactionable by-product
of measures taken in pursuit environmental aims. It was only after
determining that there had been discriminatory treatment that the tribunal
turned to the principle of proportionality. Proportionality thus underscored
the tribunal’s (consequentialist) conception of the investor’s right to national
treatment and also signaled the tribunal’s tacit conclusions about the
commensurability of the investor’s right to national treatment and the
state’s justification of its measures to protect the environment33.

The debates around the extent to which the jurisdiction itself is a determinant factor
to undermine the agency of States to move back in certain negotiations, by recognizing that
a specific issue brings has consequences for their development is at stake within the
negotiations of mega-regional agreements. The core argument corresponds to a possible
trend by the arbitration bodies to decide to the detriment of the States within the traditional
investor-state dispute system (ISDS). It is important to state that the Global North countries
have been also including the agenda in the international fora.
31
For an elucidative case summary:
<http://www.iiapp.org/media/cases_pdfs/SD_Myers_v_Canada.rev.pdf>.
32
Award is provided at: <http://www.italaw.com/documents/SDPeyers-Concurringon1stAward.pdf>, p.
4-5.
33
BJORKLUND, Andrea (ed.). Yearbook on International Investment Law & Policy, 2013-2014.
Oxford: Oxford University Press, 2015. p.183.

14
 Some of the related issues concerning the lack of transparency of proceedings,
protection standards for governments and accountability had pushed Canada and the
European Union to create a new legal regime for investments disputes settlement under the
EU-Canada Comprehensive Economic and Trade Agreement (CETA).

The deal was negotiated until 2014, and has its investment dispute settlement
system appointed by both sides as a groundbreaking tool, that embraces the governments’
demands for further rights to regulate investments and provide more credibility to citizens.
The idea of a reformed mechanism was already brought up by the European Union in the
EU-Vietnam free trade agreement, as well as outlined in the bloc’s draft for the Transatlantic
Trade and Investment Partnership (TTIP), in November 2015.

The mentioned initiatives aim to provide a ground for deeper discussions around the
establishment of a permanent international court, with multilateral features, such as the trade
regime does34.

Nevertheless, the innovative distinctiveness is far from being uncontroversial

among scholars, who also underscore the possible normative conflicts between the proposed
shifts and the current International Investment Law legal framework.

Despite the acknowledged progresses in adjudicating the settlement competencies

from a more judicial approach (e.g. by limiting the power of parties to indicate arbitrators and
creating an appellate body), the system is still grounded in the traditional arbitration outline
and leaves out the jurisdictional implications on the control over policies by a transnational
forum, as mentioned above.

[S]ince the process is still very much one of arbitration, the removal of any
role for domestic courts in the set-aside of awards appears to be dissonant
with claims of increased public accountability made by the European
Commission. Further, the result of this provision is the removal of certain
ground of set-aside provided under the UNCITRAL Model Law, including
that the award is in conflict with the public policy of the state. (…) [N]ot as
much as the new system is really ‘new’ and much remains of the ‘old’
(although improved in many aspects). As to what is new – especially the
method of appointment, tenure and conduct of tribunal members, as well
as the creation of an appeal tribunal – questions were raised as to
compatibility with current international arbitration institutions and rules.35

One of the challenges that encompass both developed and developing word
corresponds to the extensive concept of jurisdiction over the disputes that tribunals have
given to themselves. In other words, when understood in a broader perspective, the
jurisdiction can adjudicate power to arbitrations, which were not necessarily under dispute.
Accordingly, consequences regarding the legitimacy of policies that were based on public
interest can simply be disregarded.

34
Information provided on the European Commission website: <trade.ec.europa.eu>. Last access: 08
Oct. 2016.
35
LÉVESQUE, Céline. The European Commission Proposal for an Investment Court System: What is
new? In: Investor-State Arbitration Series. Centre for International Governance Innovation. Paper n.
10 – September, 2016. p.12-18. Available at:
https://www.cigionline.org/sites/default/files/isa_paper_series_no.10_0.pdf.

15
 To illustrate this argument, one could examine the dispute between Mr. Tza Yap
Shum v. The Republic of Peru36, which had the China-Peru BIT as its background. The
agreement between the two countries had followed a former Chinese Model BIT framework,
typified as a state friendly agreement. The model was outlined when China used to be much
more a host state than an investor itself. Accordingly, among other provisions, it puts on
disputes around expropriation only in terms of compensation rights. It thus implies that the
host countries would have discretionary power to determine whether the expropriation is a
matter of public interest, leaving for the investor the right to discuss the terms of its
reimbursement through arbitration.

Among other aspects, the Tribunal faced the interpretation of the scope of the
arbitration clause, that exclusively covered “disputes involving the amount of compensation
for expropriation”, whenever the parties will not be able to settle the amount within six
months after the resort to negotiations (Article 8(3)).

Although Peru had argued that the expropriation itself could not be analyzed by the
court, the ICSID Tribunal stated that “A bona fide interpretation of these words indicate that
the only requirement established in the BIT is that the dispute must ‘include’ the
determination of the amount of a compensation, and not that the dispute must be restricted
thereto”37.

On the other hand, Herdegen points out that there is an International Customary
Law construction in benefit of the states. In accordance to him, the right to condition and
control the admission of foreign investors relies on the State’s sovereignty38.

Distinct countries have evoked this reasoning through different motives, either to
forbid or to limit foreign investments in the so-called “strategic sectors”. It includes from
telecommunication and civil aviation to energy and water supplies. Still, the argument loses
strength when contextualized in the contemporary demands for higher standards of
protection to investors, as was discussed above.

A clear example is the analysis of the current World Investment Report. The
document is annually provided by the United Nations Conference on Trade and Development
(UNCTAD), and had a special relevance in 2016 after the deliberations around the
Sustainable Development Goals (SDGs)39 and their finance. Before discussing, it, some
remarks about the SDGs and the private sector are important.

Among the seventeen SDGs there is an explicit reference to partnerships to achieve

the established goals. It was a call not only for intergovernmental alliances, including the
36
Mr. Tza Yap Shum v. The Republic of Peru, Decision on Jurisdiction and Competence, 19 June
2009 (ICSID Case No. ARB/07/6).
37
Mr. Tza Yap Shum v. The Republic of Peru, para. 221, apud ELIASSON, Nils. The Chinese
Investment Treaty Programme, Jurisdictional Challenges and Investment Planning. In:
WENHUA,Shan;SU, Jinyuan (orgs.). China and International Investment Law: twenty years of
ICSID. Leiden,Boston: Brill Nijhoff, 2014. pp. 246-247.
38
The scholar is also based on the theoretic grounds of DOLZER, R.; SCHREUER, C. Principles of
International Investment Law. Oxford: Oxford University Press: 2008; JOUBIN-BRET, A. Admission
and Establishment in the Context of Investment Protection. In.: REINISCH, A. (ed), Standards of
Investment Protection. Oxford: Oxford University Press, 2008.
39
The Sustainable Development Goals stemmed from a long process of revision of the Millennium
Development Goals, and, unlike the latter, claimed for many levels of participation in the deliberative
phases. Member States of the United Nations adopted them by the by resolution A/RES/70/1 of the
General Assembly of 25 September 2015.

16
third sector (foundations, NGOs, local communities), which stakeholders have engaged in
the Major Groups and other stakeholders (MGoS) and in annual discussions under the High-
Level Political Forum (only the 2016 edition happened already).

It also represented a demand for participation of the private sector in the discussions
around the costs to implement the SDGs, which happened in Addis Ababa, Ethiopia, under
the Third Financing for Development Conference (July/2015).

Even if there is a call for participation of the private sector in the post-2015
development agenda, the ways through which it would happen and pushed remained
unclear. It suggested, though, the enhancement of the licit financial flows, as well as
admitted the limited range of sectors covered by them:

5. Solutions can be found, including through strengthening public policies,

regulatory frameworks and finance at all levels, unlocking the
transformative potential of people and the private sector and incentivizing
changes in financing as well as consumption and production patterns to
support sustainable development.
(…)
35. (…) We welcome the significant growth in domestic private activity and
international investment since Monterrey. Private international capital flows,
particularly foreign direct investment, along with a stable international
financial system, are vital complements to national development efforts.
Nonetheless, we note that there are investment gaps in key sectors for
sustainable development. Foreign direct investment is concentrated in a
few sectors in many developing countries and often bypasses countries
most in need and international capital flows are often short-term oriented.40

The resolution authorizes an interpretation regarding the promotion of foreign

investment in sectors where it is not often existent. It might embrace the segments that are
typically recognized as public policies, such as infrastructure, education and health, once
public-private partnerships have been encouraged since other conferences.

Furthermore, the deliberations implied that policies regarding financial flows must be
focused on taxation. It implies, on the other side, that measures to prevent or limit the
investment themselves by the States are discouraged. At this point, it is important to recall
the fore-mentioned World Investment Report 2016.

As was suggested, the negotiations regarding the finance behind the SDGs seemed
to discourage States to promote policies that aim to control the foreign investment flows in
their territory. This argument knocks into the thesis presented by Herdegen and other
scholars that International Law recognizes a discretionary power by States to direct their
policies regarding investment. At least, it collides with the argument that customary
International Law has yet consolidated this perspective.

The contemporary discussions under the International Economic Law with respect to
the governance over investments focus on intergovernmental strategies to hinder illicit capital
40
Addis Ababa Action Agenda of the Third International Conference on Financing for Development
(Addis Ababa Action Agenda). Resolution A/RES/69/313, adopted by the General Assembly on 27
July 2015.

17
flows. Other domestic measures are suggested to be against the promotion of development
itself:

Regulations on the ownership and control of companies are essential in the

investment regime of most countries. But in an era of complex multinational
ownership structures, the rationale and effectiveness of this policy
instrument needs a comprehensive re-assessment. 41

When it comes to national security policies, the Report suggests that a review of the
established criteria is necessary, and should be balanced to avoid ambiguity for investors:

[M]any surveyed countries have elected to use more than one type of
foreign investment control mechanism for national security and related
reasons. These policies have their pros and cons. From a foreign investor’s
perspective, sector-specific investment restrictions have the advantage of
clarity and transparency. From a government perspective such methods
may lack flexibility. A cross-sectoral review mechanism, together with
general criteria defining the concept of “national security”, gives
governments more discretion in the investment screening process. This, in
turn, can lead to investor uncertainty as to the final outcome of the review.
Governments therefore need to find a balance between these two policy
approaches.42

Elsewhere, the Report stresses that reforms in the international investment

agreements (IAA) should be pushed at the multilateral level, aiming to “avoid fragmentation
and ensure that reform efforts deliver benefits to all stakeholders” 43. The multilateral
consultations and the observance of international frameworks, such as the UNCTAD Road
Map would foster the pursuit of the SDGs. Yet, the correlation between these variables will
remain uncertain until its measurability becomes possible.

Finally, it is important to underscore that some countries have pursued some

reforms under their Banking Law and Tax Law which effects remain unveiled. In the past
decade, Germany had proceeded to some restructuration under its 2006 Reorganisation Tax
Act, which, among other things, enhanced the domestic competence to include cross-border
EU transactions. Likewise, it pleaded to establish a common European economic
government with the power to coordinate economic and fiscal policies, which may be
superimposed with competences of the European Central Bank44.

Other scholars advocate that administrative governance may be more effective than
legal governance mechanisms in a short-term basis in transition economies. This ratio
comes from the analysis of countries that have emerging financial markets, but that still lack
the elements for entirely manage them from law, such as Russia and China.
41
BAN Ki-Moon, Secretary-General of the United Nations. Preface of the World Investment Report
2016. Available at: <unctad.org/en/PublicationsLibrary/wir2016_en.pdf>. This argument is further
discussed under the Section C (investment Facilitation: Filling a systemic Gap) of the Report, that
outlines strategies to foster investment on the grounds of the UNCTAD’s Global Action Menu for
Investment Facilitation.
42
UNCTAD. World Investment Report 2016. Available at:
<unctad.org/en/PublicationsLibrary/wir2016_en.pdf>, p. 98.
43
UNCTAD. World Investment Report 2016. Available at:
<unctad.org/en/PublicationsLibrary/wir2016_en.pdf>, p. 115.
44
WORLD FINANCE. Reforming Germany’s tax law. Available at:
<http://www.worldfinance.com/wealth-management/tax/reforming-germanys-tax-law>.

18
 Some of the reasons for that rely on an incipient judicial system (which has
impacted on a number of domestic legal cases, that are important to build predictability and
law enforcement by courts), as well as on the fragility of the financial regulations, which most
likely were transplanted from developed capitalist legal systems45.

Conclusions

This paper had sought to discuss some contemporary legal issues that emerge from
the intersections between the legal framework for the International Law of Foreign
Investment and the development agenda, departing from the aspects raised by the traditional
approach ofered by the International Economic Law scholars.

The challenges encompass at first the lack of substantive uniformity with respect to
the scope of investment itself and the lack of a broader legal regime for it, once there are
multiple levels of governance that have been enlarged with the increase of negotiations in
the bilateral and regional realms.

Furthermore, the embracement of investment regulations by such arrangements

brought a higher level of complexity for the understanding of the implications that involve
investment and development, since Human Rights, Environmental Law and other tangential
aspects have been often on the table as well.

Under the governance perspective, there is an increasing number of actors that

have pleaded for enhanced local capabilities regarding deliberation. In addition, they claimed
for internationalization of a State-investor decision-making regarding the International Law of
Foreign Investment in order to promote development remains controversial.

With respect to this matter, the recent Sustainable Development Goals and the
Addis Ababa’s conference warmed the debates concerning whether and to what extent
national policies should be refrained to keep the investment flows, as well as how they
connect to development in a causational or conditional relationship.

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