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Published by Enhelion, 2019-11-24 05:22:04

Module_12 (Pubic International Law)

Module_12 (Pubic International Law)




Foreign investment has grown exponentially in the modern times. National laws opened up their
economic borders for foreign investment initially, in the absence of specific agreements on
foreign investment. Subsequently, new rules led to a slowdown in foreign investment followed
by a period of instability due to the two World Wars. Due to reduced transportation costs and
improvement of technology, foreign investment reached a new high during the 1990s.

The rules that govern foreign investment law have their source in both; private law and public
law. The lines between local laws and international law have been reduced due to the modern
system of foreign investment law. As a result of all these reasons, international investment law
has become a separate branch of law itself, something that needs to be studied separately.


It needs to be observed that investment in a foreign country starts a relationship between the
investor state and the host state that is long term in nature. This varies from the usual trade deals
which is only a single deal between these two countries. In a normal scenario, the investor state
tends to invest substantially into a project with the plan that the former would be able to recover
the initial investment amount along with a reasonable amount of profit. As a result, this becomes
risky because of the changing nature of governments in a country. Before attempting to
understand international investment law, it is essential that the rules that are based on treaties on
investment have to be understood first. These rules include both, customary international law as
well as the general principles of law. In the former category, it is the principle of good faith that
is the most relevant. Without the application of this principle, investment flows would be


It is a fact that no state can be forced to permit foreign investment within its territory. However,
even as the right not to permit foreign investment can be seen as a symbol of state sovereignty,
similarly, the right to permit foreign investment can also be seen as a symbol of state
sovereignty. After the foreign investment has been permitted, customary international law solely
governs certain minimum standards which will be made applicable to the host country. In fact,
the present-day treaties go way beyond these minimum standards for fulfilling the host state’s
obligations towards the investor state. It is up to each state to ruminate upon the fact as to
whether such a treaty is beneficial to it or not. If one were to think based on the traditional lines
of state sovereignty, then it would seem that the present-day rules of foreign investment law tend
to encroach upon this sovereignty. As a result, the principle of good governance plays an
important to bridge this apparent paradox. This is what the treaties need to be based upon.


There have been multiple proposals posed for dealing with investment treaties. But there was a
formulate a foreign investment multilateral treaty. Even in the U.N., there was a failure to agree
to non-binding investment rules as well. Subsequently, an initiative was launched by certain
international banks to initiate a framework for dealing with social and environmental risks for
project financing. These principles were called ‘Equator Principles’ and incorporated World
Bank and IFC guidelines.

The traditional Bilateral Investment Treaties between states tended to only look after foreign
investment. However, in recent years, the nature of bilateral investment treaties has been
reconsidered. They now deal with trade issues as well. But developing countries were not ready
to accept a WTO-based multilateral treaty. This led to regional agreements instead.


NAFTA was entered into between the U.S., Mexico and Canada. It linked Mexico, a developing
country with two developed countries; America and Canada. It built upon the treaty of the U.S.
with Canada. It contained provisions to deal with dispute resolution, certain obligations and
multiple definitions relevant to the treaty. The provisions cover traditional clauses to deal with
national treatment, requirement of performance, MFN clauses, etc. There have been a lot of legal

battles regarding the rules of expropriation and the MFN clauses. The best part about the dispute
resolution of NAFTA is that it deals with both, trade and investment matters.


These investment treaties are usually done by ad hoc tribunals. The latter vary on a case to case


It is clear that even though, a certain Tribunal would tend to prefer a particular method for the
resolution of the dispute, the same is not always reflected in the decision. It is important to note
that the decision of the Tribunal is important, as opposed to what it claims is its preference. Also,
most Tribunals have preferred a balanced approach as opposed to a specific approach.


This aspect is dependent upon the availability of material that deals with the same. In some
cases, material is available regarding the drafting of provisions, while in others, the same is not
available. There is no hard and fast rule mandating the same.


Statements made by disputing states are usually not accorded importance as they are perceived to
be self serving. If a Tribunal asks a state for its interpretation, it does not mean that the latter’s
interpretation will be accepted. But tribunals rely on the interpretations made by other Tribunals
in a lot of cases. It is very difficult to develop precedents by Tribunals that are not ICJ or the
ECHR. But the Tribunals have repeatedly stated that they are not bound by the decisions of the
other Tribunals even though they might resort to the latter’s interpretations from time to time.


Due to multiple interpretations, it was perceived to be a problem by various states. A uniform
appeals mechanism could be seen as the solution for this perceived this problem. This was hoped
that this appeals mechanism would enable to uniformity of case laws. The appeals mechanism is
not without its flaws because the former only deals with the assumption that there was a flaw

which needs to be dealt with. This is because of the fact that appeal bodies only look at
questions of law.



The activities of private foreign investors are promoted and protected by international investment
law. However, it does not mean that government corporations will not be accorded protection.
They will also be accorded protection by international investment law as long as they behave in a
commercial manner as opposed to a governmental manner. Private foreign investors are natural
individuals or corporations (juridical persons). To understand whether foreign investment exists
or not, the place of origin is not relevant. The nationality of private foreign investors is relevant
for the application of substantive standards of a treaty to a particular national.


The law of an individual’s claimed state determines the question of nationality. Even though not
conclusive by itself, a certificate of nationality that a country issues is strong evidence. It was
viewed that the rule of continuous nationality should not be made a standard as it was only
nationality on the date of the claim. In a lot of ICSID decisions, a claimant holding dual
nationality was excluded from protection due to holding nationality of another state.


This is a much more complicated issue than that of an individual’s legal personality. There are
multiple criteria that are resorted to for the determination of this question. The criteria that are
the most common are the criteria of incorporation and the main seat of business. Either one of
these criteria are followed by most treaties.


It is of utmost importance to invest in such a manner so as to maximise the protection that is
accorded under a state’s foreign investment rules. Usually, this practise is done in such a manner
that a company is established in a state which has good relations with the intended host state.

This type of planning is not illegal per se. But states look down upon such practices. Countries
have devised means to counter this nationality planning.


This issue is very rampant where a local company is the investor while the company is
incorporated in the host. The only way most treaties deal with this is by including shareholding
as investment. It is evident that the locally incorporated company is not the foreign investor.
However, it is the shareholding in the company which is treated as a foreign investor. This has
also been made applicable to indirect shareholding through intermediate companies. So, even if
the company does not fulfil the nationality requirements under that particular treaty, due to the
shareholders, remedies will be made available to the company.


The classical definition of investment meant, “property, rights and interests”. BITs which
provide for ICSID’s jurisdiction tend to provide their own elaborate definitions for the term
investment. It has become a general practise in all BITs to provide for a generic definition to
cover investment, and include various illustrative categories to cover the same. ICSID
jurisprudence has played a major role in the determination of the definition of ‘investment’.
There are multiple interrelated activities of an economic nature which should not be seen in
isolation. They should, instead, be viewed together.


Foreign investors have always been vary of the rules of international investment law that govern
expropriation. Expropriation destroys the hopes of a foreign country when the investment is
taken control of by the host state without granting appropriate compensation for the same. It is a
form of an extreme interference with the property of an investor.


This needs to be read with the rules of territorial sovereignty. It has been regarded as being very
integral because even the present-day investment treaties have accepted this. In fact, treaties look
at the conditions and the result of the expropriation. They never question the expropriation itself.
International investment law developed three branches to deal with the question of expropriation

question. The first branch looks into the interests of the investor state that need to be protected. It
generally deals with investment matters. The second branch provides the definition of the term
expropriation. The situation is complicated because of the fact that the host state begins to
interfere with the rights of the investor state without formally taking over the investment in a lot
of instances. This has also led to the defining of the term ‘indirect expropriation’. The last branch
deals with the condition only during which a host state may go ahead with the expropriation of
foreign investment. As per the classical interpretation, a lawful expropriation is done only for the
following purposes;

➢ Public Purpose
➢ Non-discrimination
➢ Prompt, adequate and effective compensation

In the present context, the question of legality of expropriation includes the above-mentioned
conditions as well as an additional condition that the procedure adopted for expropriation must
comply with the due process of law. Of these four conditions, the maximum number of disputes
have dealt with the question of compensation. It was the view of one school of thought that
lawful expropriation or unlawful expropriation, the calculating of damages should be regarded in
a similar manner. But, the more accepted view is that illegal expropriation falls under the ambit
of state responsibility, while the same is not applicable to lawful expropriation after which
compensation is provided to the investor state. THE CALCULATION OF COMPENSATION

The damages that are provided, in case of an illegal expropriation, should seek to restore the
situation that would have been possible to the greatest extent possible, had such an expropriation
not been done. The compensation for a lawful expropriation is calculated in a different manner.
The compensation must be calculated based on the market value at the time of expropriation. The
difference between these two approaches can be seen from the angle of lost profits in the former
as opposed to the latter.


The major difference between direct expropriation and indirect expropriation is regarding the
legal title of the foreign investor. It needs to be seen as to whether the legal title of the foreign
investor is affected or not. Even so, in the present context, direct expropriations have become
quite rare. No state wants to incur the wrath of another state by openly taking over the property
of the latter. This would be seen as an extreme measure. Such a move would work against the
interests of the host state & attract heaps of negativity. Therefore, indirect expropriations have
increased greatly in number. In case of an indirect expropriation, the title remains with the
foreign investor. However, the investor is crippled in such a manner that the investment has no
further utility. In a lot of instances, the host state tends to deny that an indirect expropriation has
taken place & will try its best to avoid paying compensation to the investor.

It is quite difficult to define ‘indirect investment’ in a precise manner. An increase in the number
of arbitration decisions along with literature on the topic have shed some amount of light on the
topic, but the quest has not ended. These days, most of these BITs and multilateral investment
treaties contain some reference to indirect expropriation. It was seen by some scholars that the
origin of expropriation lay with domestic law wherein similar measures adopted by the
government would only amount to a regulatory measure thereby precluding any form of
compensation to the owners of the entity. Case laws that have been decided by the Tribunals
have helped shed light upon the various scenarios through which indirect expropriation can take


It so happens that, during expropriation the investor has the control of the entity, but the entity is
no longer economically viable. The profitability of the investor is no longer possible. Since the
requirement for proving expropriation is loss of control, partial or total. As a result, Tribunals
tended to deny the existence of overall control, but loss of one aspect of the entity. By this, it is
clear that there needs to be in existence a separate test, one which does not factor only control,
for checking whether expropriation has taken place or not. An attempt to define indirect
expropriation on the basis of purely control will not succeed in all the cases. Thus, as a result of
the understanding, Arbitral Tribunals have accepted this & held that the taking away of specific
rights of the investor would amount to expropriation, even when there is overall control over the
basic investment.


Host countries try to innovate by splitting up an indirect expropriation measure into a series of
steps which would have the same effect. This is known as creeping expropriation. These acts
tend to be discrete in nature. On the face of it, it is not clear that they are expropriatory in nature.
However, retrospectively, it becomes evident that there is a link between all the acts. It becomes
very difficult to identify one particular act as the moment of expropriation due to its gradual and
cumulative nature.



Most of the BITs generally provide for these clauses. This clause seeks to plug the holes that
may be left by particular standards, in order to maximise the protection of investors. It is
generally assumed that fair & equitable standards are one concept, not separate independent
concepts. This is a rule of international investment law, not the law of a particular state. A lot of
Tribunal decisions have attempted to provide a specific definition to this concept. However, wide
definitions and interpretations of this concept are not the only way to comprehend this concept.
The definitions provided by the Tribunals are not exhaustive in nature. The consensus for this
treatment’s understanding is that there should be no inconsistency between the interests of the
investor state and the host state. The investor and the host states need to work jointly in order to
ensure that the standard affords some degree of freedom while ensuring that there will still be
some scope for governmental regulation. Though this standard reduces the discretionary power
of the host state to a certain extent, this is necessary to encourage foreign investment.


The original aim of this protection was to protect the investor and its premises from various
forms of physical violence, including intrusions into the premises of the investor. This is not an
absolute protection from intrusions though. But, the state is also obligated to provide protection
from infringements of the investor’s rights. Some states accepted that they needed to grant the
investor access to its judiciary.


This clause seeks to ensure that the states fulfil their obligations towards each other while
entering into investment agreements. There is absence of uniformity while drafting umbrella
clauses. Due to the constantly changing nature of the interpretation of these umbrella clauses, it
is now the accepted practise that states are free to draft the clause as they deem fit. The
distinction between commercial acts & sovereign acts of the states for the initial understanding
of the scope of the clause is not practically possible.


These clauses state that, at the minimum, the foreign investor needs to be treated no less
favourably than that of the local investors of the host state. These clauses apply only after a
business has been started. The application of this clause depends upon the circumstances & facts
of the case. It is a misconception that this treatment is easier to apply than the other standards.
This is evident from the fact that there are no hard & fast rules that are applicable for the
interpretation of this clause.


MFN clauses have been on the economic horizon since a very long while. The aim of the MFN
clause is to make sure that the parties to an investment agreement treat each other in a favourable
manner, at least as favourable as their dealings with other third-party countries. This clause may
not carry any form of significance if there are no third-party dealings. But, the moment a benefit
is accorded to a third-party state, the same benefit will have to be made applicable to the other
state with whom the host state has signed an MFN clause. This is applicable only to those
matters that fall under the ambit of the MFN clause. The same is clearly specified.



One such way initially was through diplomatic immunity initially. These days, BITs provide two
ways of dispute settlement. The first way is through arbitration between the two states, the
second is through arbitration between the contracting parties of the treaty. (here, multilateral


The following are the ways through which these disputes are settled;
➢ Domestic Courts of the Host state, in some cases.
➢ Arbitration & conciliation between the host state & the investor.
➢ Referrals to Arbitral Institutions

‘Economic globalization’ has been a term that has been rampant in conversation since more than
a decade now. Joseph Stiglitz, former Chief Economist of the World Bank and winner of the
Nobel Prize for Economics in 2001, described the concept of globalisation, in his 2002 book,
Globalization and Its Discontents, as:
“The closer integration of the countries and peoples of the world which has been brought about
by the enormous reduction of costs of transportation and communication, and the breaking down
of artificial barriers to the flow of goods, services, capital, knowledge, and (to a lesser extent)
people across borders.”1

In essence, economic globalization can be said to be the gradual integration of national
economies into one borderless global economy. It encompasses of both free international trade
and unrestricted foreign direct investment.


International trade helps in many manners. From providing competition in the market, thus
making domestic producers lower their prices to competitive rates, to providing greater quality
goods to consumers, to generating jobs for people, international trade has proven to be a boon for
mankind. However, they are to be properly managed if it were to serve as a benefit, for which
there are a set of rules and regulations required.

12.15.1 Need for international rules

As former GATT and WTO Director-General Peter Sutherland once said,

1 J. Stiglitz, Globalization and Its Discontents (Penguin, 2002), 9.

“The greatest economic challenge facing the world is the need to create an international system
that not only maximizes global growth but also achieves a greater measure of equity, a system
that both integrates emerging powers and assists currently marginalized countries in their efforts
to participate in worldwide economic expansion . . . The most important means available to
secure peace and prosperity into the future is to develop effective multilateral approaches and

There are four reasons for which international rules for trade are needed. First of all, countries
must be prevented from taking measures and adopting policies that restrict free trade amongst
nations, both for the health of their own economy as well as for that of the global economy. It is
but natural that national policy-makers may be influenced and even pressurized to adopt trade-
restrictive measures, owing to the domestic players and to protect the domestic industry from
import competition. This may work efficiently for a short term, but the long-term effects are
nothing short of disastrous. Countries must realize that, by closing off their market to the other
countries, it is plausible that the other countries would also close off their market, which would
cause a serious dip in the exports. International trade rules help avoiding such escalations.

Another reason for such rules to exist is the need of the traders and investors for a degree of
security and predictability. International traders who are operating, or looking to operate, in a
country that is bound by such rules will be able to predict better as to how that country will
operate or create policies in the future on matters affecting their operations in that country. The
predictability will encourage investors to invest into that country, which eventually help in the
global economic welfare.

The third reason as to why such rules are necessary is that national governments alone simply
cannot cope with the challenges presented by economic globalisation. The protection of
important societal values such as public health, a clean environment, consumer safety, cultural
identity and minimum labour standards is, as a result of the greatly increased levels of trade in
goods and services, no longer a purely national matter but ever more a matter with significant
international ramifications. Attempts to ensure the protection of these values at the national level
alone are doomed to be ineffective and futile. Also, certain domestic laws and compliances, such

2 P. Sutherland, ‘Beyond the Market, a Different Kind of Equity’, International Herald Tribune, 20 February 1997.

as safety marks, may constitute barriers to trade. Such factors (such as competition laws, labour
regulations, etc.) need not necessarily be hostile, but the fact that they differ from country to
country is what acts as a significant constraint to trade. International trade rules serve to ensure
that countries only maintain national regulatory measures that are necessary for the protection of
the key societal values. It is also to be noted that the international trade rules may also help in
harmonizing regulatory domestic measures and thus ensure an effective, international protection
of these societal values.

The final reason for these rules to be necessary is the need to achieve a greater sense of equity in
international economic relations. Without international trade rules, binding and enforceable on
the rich as well as the poor, and rules recognizing the special needs of developing countries,
many of these countries would not be able to integrate fully in the world trading system and
derive an equitable share of the gains of international trade.

12.15.2 International economic law and the WTO

International economic law can be defined, broadly, as covering all those international rules
pertaining to economic transactions and relations, as well as those pertaining to governmental
regulation of economic matters. As such, international economic law includes international rules
on trade in goods and services, economic development, intellectual property rights, foreign direct
investment, international finance and monetary matters, commodities, food, health, transport,
communications, natural resources, private commercial transactions, nuclear energy, etc.
International rules on international trade in goods and services, i.e. international trade law,
constitute the ‘hard core’ of international economic law.

There are two facets to international law. On one hand, it consists of several bilateral or regional
trade agreements. On the other hand, there are multilateral trade agreements. The Trade
Agreement between the United States and Israel or the Agreement on Trade on Wine between
the European Community and Australia are examples of bilateral trade agreements. The number
of multilateral trade agreements is more limited. This group includes, for example, the 1983
International Convention on the Harmonized Commodity Description and Coding System (the
‘Brussels Convention’) and the 1973 International Convention on the Simplification and
Harmonization of Customs Procedures, as revised in 2000 (the ‘Kyoto Convention’). The most

important and broadest of all multilateral trade agreements is the Marrakesh Agreement
Establishing the World Trade Organization, concluded on 15 April 1994. It is the law of this
Agreement, and the law of the WTO.

12.15.3 Rule of market access

WTO law contains four groups of rules regarding market access:

• rules on customs duties (i.e. tariffs);

• rules on other duties and financial charges;

• rules on quantitative restrictions; and
• rules on other ‘non-tariff barriers’, such as rules on transparency of trade regulations;

technical regulations; standards; sanitary and phytosanitary measures; customs

formalities; and government procurement practices.

While customs duty is imposed by various countries, the WTO calls upon its members to
negotiate mutually beneficial reductions of customs duties. These negotiations result in tariff
concessions or bindings, set out in a Member’s Schedule of Concessions. For those products for
which a tariff concession or binding exists, the customs duties may no longer exceed the
maximum level of duty agreed to.3

While customs duties are, in principle, not prohibited, quantitative restrictions on trade in goods
are, as a general rule, forbidden.4 Minus the exceptions already listed before, WTO Members are
not allowed to ban the importation or exportation of goods or to subject them to quotas. With
respect to trade in services, quantitative restrictions are, in principle, prohibited in service sectors
for which specific market-access commitments have been undertaken.5

Under the heading of “non-tariff barriers”, the lack of transparency of national trade regulations
is one of the prominent barriers in international trade. Uncertainty and confusion regarding the

3 Article II of the GATT 1994.
4 Article XI of the GATT 1994.
5 Article XVI of the GATS. In fact, the prohibition of Article XVI of the GATS applies more broadly to ‘market access
barriers’ as defined in Article XVI:2.

trade rules applicable in other countries has a negative effect on trade. Likewise, the arbitrary
application of these rules also discourages traders and hampers trade. Therefore, transparency in
application of trade regulations is part of the basic rules of market access.

12.15.4 Rule on unfair trade

In the current scenario, there is no specific law regarding the term ‘unfair trade practices’.
However, it does have certain complex, specific and highly technical rules for concepts that
eventually amount to unfair trade practices. In particular, there are 2 terms, i. e dumping and
subsidized trade.

1) Dumping-

Dumping is basically bringing a product onto the market of another country at a price less
than the normal value of that product. Such a practice is condemned but not prohibited in
WTO law. However, there is a catch. Whenever such an act amounts to a material injury for
the domestic country of a member, WTO law permits that Member to impose anti-dumping
duties on the dumped products in order to offset the dumping.6

2) Subsidies-

Subsidies are financial contributions by a government or public body that confers a benefit. Such
acts are subject to an intricate set of rules.7 Some subsidies, such as export subsidies, are, as a
rule, prohibited. Other subsidies are not prohibited but, when they cause adverse effects to the
interests of other Members, the subsidizing Member should withdraw the subsidy or take
appropriate steps to remove the adverse effects. If the subsidizing Member fails to do so, counter
measures commensurate with the degree and nature of the adverse effect may be authorized.8
Again, If a prohibited or other subsidy causes or threatens to cause material injury to the
domestic industry of a Member producing a ‘like’ product, that Member is authorized to impose
countervailing duties on the subsidized products to offset the subsidization.

6 Article VI of the GATT 1994 and the Anti-Dumping Agreement
7 Articles VI and XVI of the GATT 1994 and the Agreement on Subsidies and Countervailing Measures
8 Until 1 January 2000, there was a third category of so-called ‘non-actionable subsidies’ regulated in Articles 8 and
9 of the SCM Agreement. However, the WTO Members failed to agree on the extension of the application of these
provisions and they therefore lapsed (see Article 31 of the SCM Agreement).

12.15.5 Differential Treatment of developing countries

Recognizing the need for a differential treatment for the developing and under-developed
countries and in an attempt to encourage participation of such countries and to ensure they are
integrated into the multilateral trading system, WTO law includes many provisions granting a
degree of special and differential treatment to developing-country Members. In many areas, they
provide for higher lenience in rule-following, fewer obligations and technical assistance. This is
done to assist the nations to developing an integrated global market.

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