International

Investment
Law
 Structure
• Basics and History
• Customary International Law as Default Position
• Key ICJ Cases
• Bilateral Investment Treaties
• Including ICSID jurisdiction
• Standards of Treatment
• Taking of Foreign Property
• Defences for State Responsibility
 Basics: What is international investment law?
• International investment law is the field of international law that governs relationships
between states and foreign investors
• Unlike WTO law, the system of international investment law has no central treaty or
institution
• Built around customary international law, bilateral investment treaties, investment chapters in
some regional treaties (NAFTA, ASEAN, CETA), and domestic investment laws
• Investment treaties aim to attract foreign investment in order to promote economic
development, by providing foreign investors and their investments with certain
protections
• Investment treaties frequently permit foreign investors to directly bring legal challenges
against the government of the state in which their investment is held
• Investor-state dispute settlement (ISDS)
• Most common: ICSID (World Bank)
 A brief history of international investment law 1
• In the colonial era the need for investment protection was minimal because the
colonial legal systems were integrated with the imperial system
• But investment became relevant in relations between USA and Latin American countries
• Should the investors be confined to local remedies or should they have recourse to international
standards?
• USA: international standard which required that compensation to an injury should be ”prompt, adequate
and effective”
• Adopted also by European states after decolonization
• Latin American states: Foreign investors entered the host state voluntarily so they should have the same
level of protection as any other person (citizen) within that state (Calvo doctrine)
• Adopted also by African states after decolonization
• Eventually the USA/European view started to have priority
• But key difference to contemporary situation: Latin American expropriations were not about economic reforms
but about mobs taking property or military juntas engaging in revenge
 A brief history of international investment law 2
• End of colonialism made investment protection a key issue for former imperial powers which
became exporters of capital to former colonies
1. At first newly decolonized states had an antagonistic relation to foreign investment
• Colonial experience, need to gain control of vital sectors of their economies  wave of nationalizations
2. Then decolonized state became more selective (need to control natural resources)
• Economic reform or reorganization came to be seen as a legitimate reason for nationalisation under IL
• Although decolonized states may have supported NIEO collectively, many of them still engaged in BITs
3. After the fall of NIEO, and especially after the collapse of the Soviet Union, the circumstances became
very pro-investment
• Both ideological reasons (neoliberalism) and competition over the limited amount of foreign investment that could flow
into states
• Structural adjustment programs of World Bank and IMF also demanded liberalisation and signing of BITs
• Developed states, including USA and EU, became also important recipients of foreign investment
4. Economic crises, growing inequality and outflow of money from developing countries as a consequence
of economic crises have created a backlash against foreign investment
• Even developed states have become more cautious as large multinational companies from Brazil, China and India have
become important investors in European and American markets
Customary
international law on
foreign investment
Default rules that are applicable for issues not
covered by investment treaties
 Customary definition of foreign investment
• Transfer of tangible or intangible assets from one country to another for the purpose of their use in
that country for the creation of wealth under the total or partial control of the owner of the assets
• Customary international law does not include ”portfolio investment” (buying shares in a company)
• Separation between ownership of shares and management/control of company
• Shares can be bought from anywhere in the world  no real link between host state and investor
• Portfolio investor takes upon herself the risk  cannot sue the foreing government

• Extension of the scope of investment

• First only physical property or bodily integrity in a foreign country
• Then also intangible assets
• Rights associated with the holding of property, such as leases and mortgages came to be included
• Problem of shares in companies: Barcelona Traction case
• Shares in companies that operate as a vehicle of the investment started to be protected in treaties
• Inclusion of intellectual property (to prevent copying when production was moved abroad)
• Contractual rights that the investor acquires as a result of its relationship with the state
• Administrative rights that the investor acquires in the host state
 State sovereignty and national laws
• State sovereignty as starting point: by default, states can limit and control the entry of
foreign investment as they wish
• However, states can limit this right by concluding treaties
• Many regional and bilateral investment treaties indeed include the right of entry and establishment of
investment, as well as national treatment
• Once an alien is granted entry, they and their property are subject to the laws of the
host state
• National investment laws can include, among other things:
• Guarantees against expropriation of foreing investment without compensation
• Guarantees of dispute settlement in a neutral tribunal abroad
• Tax and non-tax incentives for foreign investors
• Screening of foreign investment
• Requirements of local collaboration, bringing certain percentage of capital to host state,
environmental protection, export targets etc
 Customary constraints on national control?
• State responsibility for injuries to aliens
• Host state is responsible for failure to follow prescribed rules on treatment of aliens
• Obligation owed to the home state of the alien
• Home state can exercise diplomatic protection
• Although there is agreement on the responsibility of the host state, there is disagreement on what
is required standard of treatment
• Developing states: At most the same treatment as that given to citizens
• Started in Latin America, at its strongest at the heyday of NIEO
• Linked to Calvo doctrine (enforcement of the right only before national courts)
• Developed states: International minimum standard which can be higher than that given to citizens of the host (the
standard is dynamic and developing)
• Hull standard included: prompt, adequate (full) and effective compensation
• International dispute settlement (after exhaustion of local remedies)
• “Noble synthesis” as a new approach?
• Human rights determine the minimum standard  but this mostly ignores the issue of investments
• Is right to property really a human right?
 Based mostly on
custom

Key ICJ cases

 1926 - 1928 Chorzow Factory cases (Germany v.
Poland) (PCIJ)
• Facts
• A German company established a factory in Upper Silesia in 1915. In 1919 Germany sold the factory
to another company but the first company still managed the factory. Upper Silesia passed into
Polish hands after the Treaty of Versailles
• In 1921 a Polish court declared that the registration of the second company was void and the land
where the factory stood should be transferred to the Polish treasury
• Germany claimed a violation of a 1922 treaty which stated that Poland may expropriate major
industries in Upper Silesia but cannot liquidate the rights of individual German nationals or
companies
• Court: Unlawful taking because it was a breach of a very specific treaty provision
Deals with unlawful taking, not modern expropriation
• Because the case was a treaty violation, the Court ordered restitution, which in this case
turned to compensation for damages (because returning the property was not an option)
 1970 Barcelona Traction case (Belgium v. Spain)

• Facts:
• Canadian company with Belgian shareholders, operating in Spain had issued a series of bonds. After the
Spanish civil was broke out in 1936 the Spanish authorities refused to authorize the transfer of the
foreign currency necessary to pay interest to bondholders
 Belgium brought the case to ICJ
• Diplomatic protections:
• Nationality of companies determined by headquarters (seat of management) or state of registration, not
by nationality of shareholders  Belgium did not have standing to exercise diplomatic protection
• ILC 2006 draft articles on diplomatic protection: usually state of registration; seat of management exceptional
• The state of nationality of shareholders may however be able to exercise diplomatic protection if the
corporation is dissolving or has otherwise lost its capacity to act
• Corporation can no longer feasibly approach its national state for protection
 1989 ELSI case (USA v. Italy)
• Facts:
• Italian electronic component company, owned 99% by American shareholders decided to liquidate assets and fire most of
employees. Italy decided on take over the plant for 6 months on the basis of public necessity. Company decided to file for
bankruptcy, arguing that it was forced to do so by Italy’s actions. During bankruptcy process an Italian company bought ELSI. USA
argued that Italy had acted in a way that scared off other potential buyers and had caused damage to shareholders, in violation of
a FCN Treaty.
• Diplomatic protection
• Exhaustion of local remedies is necessary even if a treaty (the FCN) does not mention them. However, ELSI had exhausted them
through its communication with authorities
• Nationality of shareholders may matter in deciding on diplomatic protection if a treaty specifically protects the rights of
shareholders
• Taking and forced sale of property
• Taking and forced sale of the company did not lead to compensation because the domestic laws required dissolving of the
company in the case of bankruptcy, the state had not caused the bankruptcy and it had its own interests to protect in the
bankruptcy situation
• Treatment of ELSI was not less favourable than that which had been accorded Italy’s own nationals in similar situations
• In order for an action to be arbitrary, it is not enough that it be against a rule of law; it must be against “the rule of
law.” 
 2007 Diallo case (Republic of Guinea v. Democratic Republic of the
Congo)

• Facts:
• Guinea alleged that the DRC had violated the rights of Mr Diallo’s rights as an individual and as a shareholder in a
Congolese company by arresting and subsequently expelling him from its territory
• ICJ did not accept exercise diplomatic protection on behalf of foreign investors that are minority
shareholders
• Company incorporated in DRC
• ICJ also rejected Guinea’s claim of “substitution”
• Guinea claimed that the company structure was such that it could not be clearly separated from the
shareholder(s) and that there had emerged custom to allow the state of the shareholder exercise diplomatic
protection in these situations
• Guinea argued that this could happen especially in the exception established in Barcelona Traction (company has
lost its capacity to act)
• But ICJ did accept diplomatic protection with regard to human rights violations
• Actions directly against Mr. Diallo (shareholder), not against the company
• Burden of proof of exhaustion of local remedies on the host state
Bilateral Investment
Treaties (BITs)
 BITs: Backround
• Concluded to clarify investment relations (because custom is so blurry) or deviate
from general rules
• Friendship, Commerce, and Navigation (FCN) Treaties as prototypes
• ELSI case based on an FCN treaties
• Very broad  have served as basis of jursidiction even in Nicaragua and Oil Platforms
• Early BIT’s were in practice one-way streets: only one state exports capital
• There is the idea of flow of investments but no actual obligation on the part of the
exporting country to ensure that it actually happens  surrender of sovereignty for often
little gain
• Later developments in world economy have made even North American and
European states more careful (for example the rise of Japan)
 BITs: Common features 1
1. Statement of the purpose of the treaty
• Reciprocal encouragement and protection of investment
• But in reality it’s usually a one-way street (only one state limits their sovereignty)
2. Definitions
• Investments
• Usually defined as broadly as possible, including intangible assets  contributes to development of the
concept of property under international law
• Some treaties allow the home state to screen and then accept or not accept investments
• Some treaties include portfolio investment
• Nationality of corporations
• Usually differs from customary understanding in international law
• Barcelona Traction case, ILC draft articles: Nationality of the state in which it is incorporated
• But BITs also grant nationality to contracting parties a) where there is control or a substantial interest in the
company, or b) where over 50 % of shares is owned and where the corporation is controlled by those nationals
 BITs: Common features 2
3. Standard of Treatment
• Varies from treaty to treaty
• National treatment, fair and equitable standard (international minimum standard) etc
• Also MFN, but it is difficult to apply in investment law and has caused controversy
• Full protection and security: protection from violence or stability of investment?
4. Performance requirements
• Demand that the investor export a certain percentage of production, buys local products,
employs local labor etc
• Developed countries try to do away, referring to distortion of foreign trade
5. Repatriation of profits
• Protects the right of investor to repatriate profit from host state to home state
• Problem in crisis situation (can home state refer to necessity?)
 BITs: Common features 3
6. Nationalisation and compensation
• Almost all BITs: Nationalisation legal if it is not discriminatory and serves a public purpose
• Commonly apply “prompt, adequate, and effective” compensation standard
• But also other standards such as “just”, “commercial value”, “market value” etc
• National treatment in case of war, civil unrest or national emergencies
7. Protection of commitments (to each other’s nationals)
8. Dispute resolution
• Sometimes says only “arbitration”
• Other times specifies more precisely (usually ICSID)
• Sometimes conciliation period before arbitration
9. Exhaustion of local remedies (needed or not?)
10. Safeguards and exceptions (HR, environment etc) in many new BITs
 Multilateral instruments on foreign investment
• There is no multilateral instrument on foreign investments
• Disagreement between capital exporting and importing countries (and NGOs)
• Several failed attempts, most importantly the Multilateral Agreement on Investment (MAI),
which was attempted by the OECD starting from 1994
• Didn’t include developing countries in negotiations
• Most recently attempts within the WTO framework
• There is already TRIMS but it only deals with investment measures which affect trade in goods
• GATS covers investment in services by including “commercial presence” (branches etc)
• MFN and NT
• TRIPS is linked to investment but is aimed more at tackling piracy than at investment protection
• Regionally NAFTA includes investment rules (Ch. 11) and ASEAN has agreements
too. Furthermore, the new CETA treaty also regulates investment
 Treaty-based arbitration: jurisdiction of
ICSID
• State consent as the basis  but it is given in respect of all current and future
investors which fall within the scope of the treaty when the treaty is ratified
• Investors bring cases against states  Act has to be attributable to the state
• Expensive proceedings and potentially huge compensations allow companies to
coerce smaller states into adopting certain policies etc
• ICSID tribunal has jurisdiction if the following criteria are met:
• There is jurisdiction as the the subject material (jurisdictio ratione materiae)
• There is jurisdiction on the basis of the standing of the claimant (jurisdictio ratione personae)
• There is jurisdiction based on the consent of the parties (jurisdictio voluntatis)
• Time limits set in the treaty are met (jurisdictio temporis)
• The first two criteria are most important and will be discussed in the next slides
 Jurisdictio ratione materiae
• Article 25 ICSID: Dispute has to arise from an investment
• Has to be an investment both under ICSID Convention and the treaty in question
• But Art. 25 does not define investment and usually jurisdiction is contested precisely because that definition is
not clear in the treaty either
Tribunals have sough to clarify
• Salini Costruttori SpA v. Morocco: Investment involves:
1. Contributions in money
2. Long duration
3. Presence of risk (of government intervention)
4. Promotion of economic development
• The Salini criteria are rather vague and broad but generally accepted
• But there are problems:
• New investment treaties do not for example require long duration
• Some tribunals have not required promotion of economic development (e.g. Malaysian Historical Salvors v. Malaysia)
• Portfolio investment? (Can be withdrawn any time and have no real connection to host state but accepted for example in Fedax v.
Venezuela)
• Generally, there is an ongoing battle between objective understanding of investment and the expansive definition in many
treaties
 Jurisdictio ratione personae
• Claims brought by natural persons or corporations
• Natural persons:
• National of the home state party to the BIT
• Dominant/effective nationality in case of dual nationality
• Nationals of the host state cannot bring cases (even if dual nationals)
• Corporations:
• Incorporation is the test used in ICSID Convention to determine nationality
• But the corporation has to meet also the test set in the BIT
• Sometimes BITs require local incorporation  does this make the company national and thus outside the scope of investment arbitration?
• Many treaties state that the corporation is protectd if it is controlled from abroad by the parent company
• Óthers protect shareholding in the locally incorporated company
• ICSID Convention: Host state can, by agreement, regard the locally incorporated company as foreign if it is controlled from abroad
• Sometimes companies try to gain investment protection by migrating to another state (e.g. Aguas del Tunari v. Bolivia)
or by transferring funds abroad and then redirecting them to home state (e.g. Tokios Tokeles v. Ukraine)
• Some tribunals have allowed, others not. It is overall a very questionable practice
• Some new BITs include a denial-of-benefits clause to prevent this kind of jurisdiction shopping
• BITs allow shareholders to make claims (unlike custom or general international law)
Standard of Treatment
 National Treatment 1
• Pre-entry: Right of entry unhindered by screening laws and a right of establishment of
business
• Some treaties do not include pre-entry NT (for example many European BITs)
• Usually some sectors are also extempted
• Post-entry: Right to be treated equally with domestic enterpreneurs
• Criterion: ”Like” circumstances
• Sectoral and market classification plays an important role in assesment but there is much discretion
• For example in a controversial Occidental v. Ecuador decision oil exporter was found in like circumstances with flower
and seafood enterpreneurs with regard to tax concessions
• Some tribunals have argued that only impact, not purpose/intent matters (limits state’s policy options)
• But in Methanex v. USA, petroleum made from methanol was not ”like” petroleum made from other chemicals because
methanol is a pollutive substance
• Does national treatment make performance requirements unlawful?
• In ADF Groups Inc. v. USA there was no violation but (only?) because also domestic enterpreneurs had to ”buy
American” when engaging in government projects
 National Treatment 2
• Some examples:
• S.D. Myers v. Canada: NT violated when claimant couldn’t use its waste disposal system in USA but
had to dispose waste in Canada (far from the origin)
• UPS v. Canada: CanadaPost allowed its subsidiary collect parcels from post offices whereas UPS and
other courier services couldn’t do so (no jurisdiction in the end)
• Occidental v. Ecuador: Violation when an oil entrepreneur didn’t have the same tax concessions and
entrepreneurs in some other sectors
• Marvin Feldman v. Mexico: Not providing tax rebates was not a violation because the foreign investor
was not able to provide necessary invoices
• Investors can be seen to be better protected than domestic actors in that they are
protected by both internal and external standards and have recourse to both domestic and
international courts and tribunals
• Problem in developing states: All measures seem to target mainly foreign companies
because they are so much larger than domestic ones
 International Minimum Standard of Treatment
(IMST)
• Although customary status of IMS is debated, it is common in BITs
• Problem: IMST was historically included in older treaties to protect from arbitrary acts of
military juntas or mobs  can they be interpreted similarly to newer IMST provisions which
are supposed to have a much larger scope
• Some tribunals have adopted a “dynamic” interpretation
• For example Mondev v. USA and Metaclad v. Mexico
• It is for example argued that there is no longer need for high level of denial of justice (but not why is
that)
• USA: What is required for IMST to become applicable is a violation of some customary right
 Fair and Equitable Standard of Treatment (FEST)
• Many BITs provide investors FEST in addition to IMST
• Two competing views:
1. FEST does not add anything to IMST but merely reaffirms it
2. FEST allows dynamic extension of IMST in case that IMST does not lead to fair results from the investor’s perspective
• Basically any kind of discrimination could be seen as a violation
• Applied in many cases deriving from NAFTA
• Metaclad v. Mexico: Canadian Court rejected ICSID tribunal’s claim that lack of transparency related to licensing constituted violation
on the basis of FEST
• S.D. Myers v. Canada: Tribunal found that forcing the claimant to do waste disposal in Canada violated FEST (and NT) but limited FEST
to ”arbitrary treatment unacceptable from an international perspective”
• Pope and Talbot v. Canada: The tribunal found that the regulation of a softwood lumber agreement through allocation of quotas
violated FEST even though it did not violate any international rule per se, except by being ”unfair” more expansive than in S.D.Myers
• Genin v. Estonia (not NAFTA): Standard is the same as in IMST
• Sometimes tribunals have argued that FEST protects legitimate expectations (deriving from host assurances) but states
have widely disagreed
• FEST is also seen to protect from denial of justice
• Not any normal misappilication but something bigger (denial of the rule of law) although tribunals have tried to broaden
• Also denial of due process and administrative irregularities have been suggested as violations of FEST
 Full protection and security
• Custom: Failure to provide protection to an alien threatened with violence
creates responsibility of host state
• Many cases for example in Iran-US Claims tribunal
• Saluka v. Czech Republic: Also physical security of investment
• Some more recent awards have sought to extend protection to stability of
investment (even when there is no damage to assets)
Taking of foreign
property
 The taking of foreign property
• Lawful taking  compensation
• Unlawful taking  restitutionary damages
• Three types of taking, in different contexts
• Confiscation: Ruler or ruling coterie takes property for personal gain
• Cases especially in Latin America before decolonization
• Nationalisation: States embarks on wholsesale taking of foreing property in order to end economic domination of the entire
domestic economy or some sectors of it
• Cases especially in Africa at the time of decolonization
• Expropriation: Targeting of individual businesses due to specific economic or policy reasons
• Almost all cases now are about expropriation
• Usually no loss of possession but property rights are infringed on in one way or another
• American, very wide understanding of property extended to international level
• Ethyl v. Canada: Canadian minister publicly considered ban of a petroleum additive since it is a pollutant  value of company’s shares diminished (settled
in the end)
• Methanex v. USA: Ban on pollutant caused economic losses for company
• But lately there has been a stricter approach

• Ordinary taxation or imposition of criminal penalties is sometimes called ”regulatory taking” but it does not
cause compensation, unless they are dicriminatory
 Types of expropriation
• Different types of expropriation include
• Forced sale of property
• Might not be compensable if law demands that company facing bankruptcy is dissolved and allows state intefernce in
failing companies (ELSI case)
• Forced sale of shares
• Indigenisation measures
• Taking over management control of the investment
• Again allowed in ELSI for the aforementioned reasons and because state had a compelling reason to make sure that the
effect on economy and employment were mitigated
• Inducing others to take over the property physically
• Failure to provide protection
• Administrative decisions which cancel licenses which allow the business to function
• Regulatory takings can lead to compensation if due process isn’t followed (Amco v. Indonesia, Middle Eastern Cement
Shipping v. Egypt, Metaclad v. Mexico)
• Expulsion of foreign investor
• Acts of harrasment such as freezing of bank accounts or promotion of strikes
 Compensation for nationalisation
• Controversial topic
• Opinions differ from no compensation to full compensation (including future losses)
• It is important to analyse the nationalisation carefully
• Unlawful if motivated for example by racial discrimination or reprisal
• Easiest if the BIT addresses the issue in detail
 Defences against
state responsibility
 National Security
• Many FCN treaties and BITs include national security clauses
• Entry can be denied on national security grounds and an investment that becomes a threat
after entry can be denied protection
• Can become applicable for example when sovereign wealth funds enter sensitive sectors
• In LG&E v. Argentina the tribunal held that when economic foundations are ”under siege,
the severity of the problem can equal that of any military invasion”
• But whether economic reasons can be sued depends on whether the BIT includes an exhaustive list or
not
• Objective determination unless the treaty says otherwise (Sempra v. Argentina, Enron v.
Argentina, CMS v. Argentina)
• But the treaty provision has to be spearated from customary necessity  not as strict?
• IF treaty has subjective criteria, state still has to use in good faith? (LG&E v. Argentina)
 Necessity
• Can be a treaty provision or custom
• Custom:
• ARSIWA Art. 25: Only way for the State to safeguard an essential interest against a grave and
imminent peril, does not seriously impair the interests of the state to which the obligation is
owed or of international community, and has not contributed to the situation
• Seriously impairing the interests of another state does not fit well within the BIT context
• Example: Argentina’s economic crisis in 2001
• Fall of 7 governments, rioting on the streets, currency in jeopardy
• In CMS, Enron and Sempra necessity not found but in LG&E and Continental Casualty Company it
was found
• CMS, Enron and Sempra: Argentina had other methods available (IMF loans)  could not choose the path
freely. Argentina had also contributed to the situation
• LG&E: It is not appropriate for the tribunal to choose which policy the country should choose
• Continental Casualty Company: State has a margin of appreciation
Force majeure
• Custom or treaty
• Art. 23 ARSIWA: Occurrence of an irresistible force or of an unforeseen event,
beyond the control of the State, making it materially impossible in the
circumstances to perform the obligation; state didn’t contribute or assume
risk
• Unlike in necessity, state cannot deliberate (has no alternative)
• Example: Indonesian political and economic crisis following the
overthrow of the Suharto regime  suspended project contracts
• Karaha Bodas: There was a clause in the contract anticipating the event and
stipulating that the state assumed the risk
• Himpurna: Requirements were not met
 Violation of the FETS by the investor
• It has been argued that fairness/equity is a two-way street and it is therfore
necessary to assess also whether the claimant was at fault
• The argument is that fault of the claimant may relieve the state of its responsibility or at
least grant it a wider margin of appreciation
• Fairness taken into consideration more generally for example in Genin v. Estonia
• Revocation of a banking license
• The tribunal found that it was necessary to consider the fact that Estonia was a nascent
economy at the time
• Furthermore, it held that the claim was made in bad faith
• It was also held in Generation Ukraine v. Ukraine that the circumstances of the
host state were relevant in determining the legitimate expectations of the
investor
 Jus cogens and competing obligations
• Art 53 VCLT: A treaty is void if it conflicts with peremptory norms (jus cogens)
• Phoenix v. Czech Republic: Protection ”should not be given to incestments made in violation
of the most fundamental rules of human rights”
• Do more investment related issues such as self-determination, sovereignty over natural
resources or even right to indigenous lands count as jus cogens?
• In the Urenco case South Africa had made contracts regarding mining of uranium on behalf
its mandate Namibia. South-Africa’s regime was condemned. Did the treaty bind Namibia
after regime change?