Investment Law

(Laws 4042)
Addis Ababa University
Instructor: Mekdes Mezgebu
2021
Introduction
• Introduction with Students
• Course Objectives
• Teaching Methodology
• Assessment Methods
• Course Chapters
• Questions?
Chapter One: International Law On Foreign Investment
• Definition of Foreign Investment: the transfer of tangible or intangible assets
from one country to another for the creation of wealth under total or partial
control of the owner of the assets.
• Direct Investment – the use of money, assets and equipment in other
countries.
• Portfolio Investment – use of money to buy shares or stocks. There is a
separation between ownership and control.
• While direct investment is protected under customary international
law( diplomatic protection, state responsibility), portfolio investment is not.
• The evolution of the term demonstrates that investment only meant
physical investment as the law only tried to regulate the taking away
(expropriation) early on through disputes. It is only through time that other
intangible investments were also considered as investment.
Evolution of the Int’l law on FDI
• As far back as 1500s, there were some treaties among European
countries on protection of alien properties, seemingly on equal terms
and applying reciprocally.
• From 18th – 20th C (beginning) – investment was in the context of colonial
expansion. During Colonial Periods – there was no concerns and risks.
Foreign powers ruled through the power of the gun and dominance.
• Foreigners owned oil companies, plantations, manufacturing for exports
through long term concession agreements.
• Int’l norms that existed prior to that period were mostly developed by
non-colonialized nations (tho with high influence). E.g. Latin America.
• The Doctrine of State Responsibility: against protection of aliens
against injury and alien property.
Evolution of Int’l Investment Law – Cont
• 1917 Russian Revolution and 1927 Mexican Revolution saw the
nationalization of properties, equally to nationals and foreigners.
• Debate raged on the use of National Treatment v. International
Minimum Standards to examine the issue of nationalization and
expropriation.
• Developing countries argued that since foreign nationals voluntarily
invested in the nations, they should be subject to national laws
applicable to domestic investors.
• Developed countries, with significant investment interests, argued
international minimum standards should be invoked.
International Minimum Standard (IMS)
• As there were no international conventions or treaties addressing the issue,
those invoking IMS argued for its existence under customary international
law (practice of nations and opinion-juris) or laws of civilized nations
arguing:
• Foreign nationals should not be subject to local legislations if they are
inferior or offer less protection than IMS.
• National laws should only offer additional protections and not less
• Doctrine of state responsibility – in which alien persons and properties
should be protected.
• As the customary international law is dominated by western law and
philosophy, it was a roundabout way of invoking western law on national
laws of other countries.
International Minimum Standard
• Further attempts were made to define IMS based on international
human rights principles on the right to private property.
• Universality of human rights and applicability to all nations.
• States rights to regulate investment as part of their investment was
weighed against the principles of international human rights law. And
the evolving argument was that any taking of property by the State
must be:
- Non-discriminatory
- Done for public purpose/public interest
- Accompanied by payment of appropriate compensation
- Followed by due process of law.
Calvo Doctrine
•Carlos Calvo was a leading Argentinian scholar who argued for National Treatment and against using
investor country laws as international minimum standards.
•He argued that to the extent that nations did not act discriminatorily towards foreign
investors and acted consistently in accordance with their laws, it is within the
international principle of equality of nations. He stated “the notion that foreigners merit
more regards and privilege more marked and extended than those accorded even to the
nationals of the country where they reside is intrinsically contrary to the law of equality
of nations.”

•The Calvo Doctrine therefore stipulates:

- the territorial sovereignty of the state.
- Absolute equality of nationals and foreigners before the laws.
- Subjugation of foreigners to domestic laws and courts in which they reside or invest.
- Non-interference of investor countries in disputes arising over the treatment of foreigner
investors. (eg. Diplomatic Protection).
The Hull Formula
• Following the Mexican Agrarian Revolution and expropriation that
followed, a series of diplomatic exchanges between the US and Mexico
helped craft the current principles on FDI.
• Secretary Hull argued that the expropriation of American properties
without compensation constituted confiscation which is in violation of
international law and justice which is based on principles of reason,
equity and justice.
• He argued there must of a prompt, adequate and effective compensation.
• Mexico in turn objected stating that there is no universally accepted
international norm. the expropriation was not made discriminatorily,
rather in a general and impersonal manner, both to nationals and
foreigners. (Influenced by Calvo)
The Hull Formula
• While Mexico did not object to paying compensation, it stated that it
will do so based on its national laws and not based on US
prescriptions.
• Mexico went on another expropriation of oil companies in 1938
prompting another round of diplomatic exchanges. A commission was
set up and resolution was not achieved. However, these exchanges
contributed to the evolution of the protection of international
investment law.
• While developing countries adhered to the Calvo principle, developed
nations pushed for the Hull Formula especially in Bilateral Investment
Treaties. (BITs)
Sources of Int’l Law on FDI
1. Treaties: a legal instrument accepted by nations which are
party to the treaty. By the end of the second world war, there
was no such treaty on regulation of foreign investment.
2. Custom: shown through opinion-juris and as some argue
through resolutions of the General Assembly of the UN.
3. Judicial Decisions and General Principles of law: decision of
the ICJ are considered subsidiary sources of international
law. (the PCIJ v Barcelona) case on compensation is cited as
one source. Arbitral awards are sometimes also cited as
sources of law
Principles of International Law on Foreign Investment
1. National Treatment
• Has its origins on the Calvo principle in which aliens and property are only entitled to the
same treatment as nationals and no more favorable treatment.
• the most important principle yet the most difficult standard to achieve as it touches upon
economically and politically sensitive issues.
• It is considered as an important principle for the growth of international investment and
production as it concludes that access to foreign markets under non-discriminatory
conditions is necessary for effective functioning of the integrated world economy.
• However, due to the inequalities in size, scale and strength of countries and the need to
protect domestic industries, most developing nations seek exceptions and qualifications.
• National treatment is typically granted to post investment.
• Typical exceptions to national treatment include: public health, public policy, public
moral, national security.
Most Favored Nation Treatment (MFN) Treatment

- This is one of the oldest and most important principle of international trade
and investment.
- It evolved out of state practice and opinion juris as reflected in trade
agreements, but also came about as an important protection for investment.
- The idea of MFN is to ensure equality of competitiveness between foreign
investors. Investors seeks protection under MFN so not to be discriminated
against by other third countries.
- Basically, the MFN principle is that “a host country treats investors from one
foreign country no less favorably than investors from any other foreign
country.” Equality of all foreign investors.
- The MFN principle commits host countries to grant unilaterally to its treaty
partners any additional right it grants to third countries in future agreements.
Fair and Equitable Treatment
This principle says that protection of foreign investors should be based on fairness and equity.

The terms fairness and equity are defined and interpreted differently. Inclusion of F & E treatment is not
complex and states would generally seek to treat investors fairly and equitably. But care must be given on
how the term is defined. Plain and literal interpretation is one way and which is consistent with the
Vienna Convention on the interpretation of treaties.
• As per UNCATD, F & E could mean i) straightforward meaning or ii) beneficiaries are ensured
international minimum standard. In practice, we see different approaches in different BITs.

i. No mention of F & E
ii. States are recommended to offer F & E, but not as a matter of law.
iii.Legal requirement for states to offer F & E treatment, or “just and
equitable” or “equitable” treatment.
iv.Legal requirement for states to offer F & E, MFN and National treatment.
Protection Against Expropriation and Compensation
• This principle is now well embedded in international
investment law and can be seen in most BITs and National
legislations.
• While there are variations on some level, there is pretty
much a consensus that states are within their sovereign
rights to expropriate provided that:
i. It is for public purpose
ii. It is non-discriminatory
iii. It is in accordance with the law (Due Process)
iv. Compensation. ( The standard for this differs)
Regional & International Efforts to Regulate Foreign Investment
• The end of the second world war saw the establishment of the UN as a
supranational global entity.
• Developing countries were characterized by ultra-nationalism and
protectionist policies, whereas western states were confused at best.
There were some attempts to codify the law on international
investment:
The Havana Conference (1947) – ats early as 1947, the Havana Conference on Trade
and Employment states came together to draft a charter on international trade. A
chapter on Economic Development was added to the initial draft of the Charter
which included references to foreign investment and protection of investors.
The Charter never came into effect after the US abandoned it and only became a
document of historical interest. The members to the conference decided to form an
international trade organization (ITO) which also did not come to see the light of day.
The UN
- The UN became the catalyst for the independence of colonies in Asia, Africa and the Caribbean.
- Part of the independence was economic independence and the right to ownership of natural
resources held by colonial powers and subjects.
- Key Pillar – sovereignty and territorial integrity of nations and Permanent Sovereignty over
Natural Resources (PSNR).
- The UN GA adopted Resolution No. 1803, prepared by the Commission on PSNR, which became
the first international instrument that recognized state’s right to expropriation and investor’s right
to compensation.
- It tried to strike a balance between the interests of the host and home countries by containing
themes from both the Calvo principle and the Hull formula. The Resolution:
i. Allows countries to nationalize or expropriate when necessary.
ii. Endorses “appropriate compensation” instead of “prompt, just and effective” in accordance with
national and international law.
iii. Requires the exhaustion of domestic remedies, giving the possibility for both national and
international remedies.
Convention on the Settlement of Investment Disputes (ICSID) (1965)

- Under the auspices of the World Bank, a voluntary mechanism for dispute settlement was
designed involving investors and states. A Convention establishing a center for dispute
settlement, similar to other arbitration tribunal. This convention was restricted only to
investment disputes.
- A way of attracting investment and boosting investor confidence.
- Many African countries joined whereas a lot of Latin American countries abstained.
- Applicable laws were those as agreed by parties or that of the contracting authorities. If parties
agreed to ICSID for dispute settlement, it applies to exclusion of other remedies.
- ICSID has come under fire in the 2000s, esp in Latin America (Argentina, Bolivia, Ecuador, ..)
for its favorable treatment of foreign corporations against state interests. Ecuador and Bolivia
withdrew from ICSID although they may stills submit to it under BITs.
- More recently, South Africa has followed a similar approach of terminating its membership and
designing its own local laws, in lieu ICSID.
- African countries have faced various lawsuits under ICSID…
1960s - 1980s
• Developing countries within the UN led efforts to come up with laws that should
regulate foreign investment. While there were a series of discussion and attempts that
helped developed some norms, nothing of a concrete or definitive document was able
to be developed.
• Due to the economic hardships brought on by socialist policies, most
developing countries started abandoning their protectionist policies and
sought to clamor for foreign investment, offering attractive incentives.
There was no longer an appetite within the UN to push for international
instrument on foreign investment as the tide has gone in favor of foreign
investor countries.
• By the 1990s, leading developing countries (India, China and others) were
reversing their investment policies and submitting to BITs. After the fall of
communism, triumphant Western investors began receiving much favorable
investment protection than was available under international law.
OECD Guidelines on MAI (1998)
- When the developing countries were dominating the UN, European countries
tried to design investment treaties of their own.
- Were prepared by 43 OECD members countries to regulate their own investors.
- In1976, OECD adopted a declaration on international investment and later in
1998 developed a MAI. The inspiration for the guidelines were from the
number of liberalizations of 1990s and competition for foreign capital. OECD
countries were seeking to protect investment made due to liberalization and
adequate dispute settlement mechanisms were enshrined. The first draft came
under fire for its overly favorable treatment of investors and obligations on
host states. It was abandoned and revised a soft law” in 2000.
- In 2011, the guidelines were revised to include guidance to MNCs in their
investments in foreign countries including respect for human rights, labour and
industrial relations, due diligence processes etc…
WTO
• Due to the failure of the UN and OECD to come up with a codified law,
it was proposed in 2001 at the Doha Round of the WTO negotiations.
• Although some of the WTO agreements such as TRIMS, GATS and
TRIPS incorporate investment related provisions, though they only
deal with investment in relation to trade and trade distortions.
• The various WTO agreement do not deal with any substantive matters
of investments.
• The idea of adopting an international treaty regulating foreign
investment was once again, removed from the scope of action of the
WTO in 2004.
Regional Efforts: Draft Pan-African Investment
Code (PAIC)
• NAFTA and ASEAN agreement are examples of regional agreements that have been in
place.
• For Africa, the role of African countries in shaping International investment Law is
dismal. At best, it was reactionary. IIL has traditionally been the domain of Western or
North-South Investment relationships.
• At the African level, the various Regional Economic Cooperation (RECs) such as SADC,
ECOWAS, EAC and COMESA have regional instruments addressing investment treaties.
• Due to the scattered initiatives and failures of the regional instruments, the AU began
an effort for a continental Investment Code in 2012.
• There are lots of doctrinal and technical debates on the draft code. However, The
Draft, if approved, seeks to replace regional instruments and facilitate intra-Africa
trade.
• In the era of ACFTA and where there are efforts to boost intra-Africa trade, this code
will become an instrumental document.
Next Class: Regulation of Investment Under BITs
• Over 3,000 BITs are signed globally. At the Africa level, 335 intra-Africa
BITs exist.
• Ethiopia has more than 35 BITs signed with various countries.
• BITs have become a significant sources of regulation for international
investors in addition to local legislations.
• States are bound by the provisions of these treaties.
• For next class, read sample BITs found in:
• https://investmentpolicy.unctad.org/international-investment-
agreements/countries/67/ethiopia