The seeds of international investment law were sewn at the same time as that of general

international law. International investment law is the application, in a particular economic

sector, of rules and legal mechanisms that have been in place for a long time.
International laws stress on the protection of rights of individuals both from their native State
and alien States. The commitment to protect foreign individuals is kept at par with the State’s
own nationals.
The development of International Investment Law can be charted through three phases. At
the very first instance, the property rights of foreign nationals were protected through
mechanisms prevalent under the then contemporary system of international law. International
Investment Law owes its origin much to the contracts inter-States which resulted in
“internationalisation of the legal relationship between the State and the investors”. Recent
developments to the body of International Investment Law comes from the Investment
Protection Treaties.

A. The first phase of protection to foreign assets and investors included:

a. Diplomatic protection for investors

Yet, the International Court of Justice (ICJ) has recently heard cases related to this
mechanism, in particular the LaGrand1 and the Avena2 cases, or more recently the Diallo3
case. Even if
those cases did not involve only diplomatic protection requests, it still shows us that this
institution remains relevant in contemporary international disputes.
In the international community, State actions are expected to be in conformity with the
international law. Any contrary action calls for redressal, one of them being diplomatic
protection.
Diplomatic protection ensures the claims made by an individual is considered upon even if
made against the acts of another State. In such cases of infringement of individual rights by
State action, the need for protection arises on two counts: violation suffered by individual and
violation suffered by his Parent State.

3
Attempts made over codifying the conditions for grant of diplomatic protection resulted in
adoption of Draft articles by the International Law Commission of the United Nations in
2006.
Diplomatic protection is the not a viable option due to drawbacks associated with the grant
of protection due to the following reasons:
1. Its exercise falls within discretionary power of the State.
2. Diplomatic protection can be granted only if the individual claims as the national of
the State.
Nationality of individual or nationality of company: The position of law stands as
Barcelona Traction case recognised the right of a national of a State to seek diplomatic
protection for themselves. However, for ICJ the nationality of the company is the key
consideration instead of the nationality of the majority shareholders. Carving out two
exceptions where the shareholders as the nationals of the State could exercise diplomatic
protection:
1. Where the society would have ceased to exist;
2. When the State whose national is the company is precluded from acting on its behalf,
under international law on the nationality of legal persons. (Limits to exception: State
cannot exercise diplomatic protection for the shareholders when the company is a
national of the State against which the claim is made4)
The limitations on the effectiveness of diplomatic protection, arbitration appears to an
appropriate course. In Diallo case, the ICJ favoured such protection to foreign investors.
However diplomatic protection has not lost its relevance till today and has been revived in a
dispute between investors from Italy and Cuba despite the legal basis set on BIT.

b. Mixed Commissions
Mixed commissions were installed by the States as one stop to settle the claims filed by
nationals of another State rather than filing of the claims at different courts. Todays’ arbitral
tribunals owe their birth to such mixed commissions.
The first batch of three Mixed Commissions (out of the three, second and third commissions
exclusively dealt with sums of money and compensation to goods) were established under the
Jay treaties5. The commission composed of commissioners from the two countries and an

4
Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of Congo), Preliminary objections, 24
May 2007, ICJ Rep., p. 582, para. 89.
5
Signed in 1794 between Great Britain and United States to settle the claims arising post-US independence.
Umpire from a country other than those of commissioners. Umpire acted as the arbitrator and
possessed judicial power to decide on the basis of law. Despite the mandate, the Commission
was not considered as a judicial body for the decisions could only be arrived at after
consensus from both the States.

More such commissions were installed in the second half of the 19 th century. For example:
Between the US and Mexico under the 1839 treaty to decide the claims against Mexican
Government over confiscation of property belonging to US citizens.

The commissions held the ground till the Second World War, post which they gradually lost
the relevance as other contemporary dispute settlement mechanisms emerged. Undoubtedly,
international law on investment draws the rules and principles from the settlements arrived at
by these commissions some of them mentioned hereinafter:
 Rules on compensation. The third Jay Treaty Commission decided on matters
involving monetary compensation. The principles applied by the commission
to arrive at the settlement ranged from the obligation of the State to provide
reasonable compensation for the losses suffered it caused; responsibility of the
State in case of civil unrest for damage to foreigner’s property etc.
 Minimum standard of treatment: The obligation on the State to safeguard
physical integrity of the body of individual, protection to property and ensure
justice. Not only this, an individual also has the right to move to commissions
for their claims.

Criticism of Mixed Commissions: Mixed commissions suffered from drawbacks rendering

their effectiveness in toto.
1. The proceedings are in nature of conciliation or meditation.
2. The decision would be binding only when the States agree for the same.
Mixed commissions streamlined the complaints for systematic settlement. Over the years,
arbitration developed to deal with individual rights of foreigners/aliens. They became
relevant on matters involving compensation claims of foreigners affected by the State’s
action.
Due to lack of centralised authority in international law, arbitration grew as a dispute
resolution tool during the 19th and the early 20th centuries. The establishment of the
Permanent Court of Arbitration (PCA) to settle trans-national disputes was a watershed
moment. Among other organs, the Court also comprises of arbitral tribunals and facilitates
arbitration between contesting parties. The contribution of PCA can be viewed from the fact
that the Norwegian Shipowners6 judgment is still relevant as a landmark in the protection of
foreign assets.

Post 1945, the landscape changed when the International Centre for Settlement of Investment
Disputes (ICSID) was established under the aegis of Washington Convention in 1965 so as to
resolve disputes inter se foreign investors and respective States on the basis of State
contracts.
The convention is instrumental in giving private individuals to set in the judicial process in
motion under Article 36(1) of the Washington Convention: “The request for arbitration may
be addressed to the Secretariat by a State Party as well as its nationals”.
Other bodies joined ICSID in empowering private individuals to claim against the State like
Arbitration Rules of the United Nations Commission on International Trade Law
(UNCITRAL), adopted in 1976 to provide the legal framework for international arbitration.
The UNCITRAL plays a key role in facilitating the process of arbitration for the settlement of
investment disputes.
Thus, one can conclude that the need of safeguarding the economic interests of foreign
investors had a long history and the institutions for the same have been in place from long
time.

B. State Contracts
Historical background:
The route of arbitration through Mixed commissions was flawed enough to render them
ineffective:
1. The establishment of mixed commissions depended on discretion of the State.
2. Low deterrent effect which led to investors to enter into agreements containing
arbitration clause with the States.
What are State Contracts?
Agreements to which international law is applicable and entered into between a State and a
foreign individual is regarded as State Contracts. Such contracts were in common usage
during 19th century, when contracts were entered into specifying the rights and obligations of
6
Norway v. United States, August 13, 1922, I UNRIAA 309.
parties irrespective of their nationality. With time, contracts for construction of infrastructure
were handed over to foreign companies, the State contracts determined the economic
relationships and rights of the parties.
Domestic law vis-à-vis State contracts:
At the outset, State contracts were subjected to domestic laws of the host State thus
empowering the domestic courts to try the disputes. Adding to the instability of the host State
and the possibility of impartiality of domestic judges triggered the need for having arbitration
clause in State contracts. Gradually arbitration became the norm of the day however the
question of law applicable on the issue remained elusive.
Involvement of International law in the State contracts
There might arise a case where the domestic law of the host State is underdeveloped to tackle
the disputes. In such scenario the arbitrators have no specific rules to refer to, leaving behind
a legal vacuum. To fill this vacuum, arbitrators’ resort to their subjective judgment, which
again places investors in doubt over their rights.
Another case which calls for application of international law in the State contracts is the
prerogative of the host State to amend, modify or vary the domestic rules to the disadvantage
of the investors.
The way forward lies in opting for application of a neutral law to ensure a playing level field.
International law comes as a panacea for all these issues thereby establishing itself as a
governing law on contracts between investor and the State known as State contracts.

The internationalization of State contracts through contractual practices

As the number of State Contracts assumed importance, the movement towards
internationalisation of State contracts gathered speed. It occurred in two phases:
1. Direct internationalisation: The basis of contract lies on contractual freedom of the
parties which are free to decide the applicable law to protect their interests. This has
an additional benefit of “neutralising the political risk” 7. International law derives its
legal strength from the consensus of the States thus binding on the States.
Nonetheless, there is stark difference between the theory and practical application of
international law, as the arbitral tribunals favour domestic law in conformity with
international law in application. This can be illustrated from following example:
Automatic application of international law on default: ICSID make a provision when
parties fail to arrive at a consensus on the applicable law. As per Article 42 of the ICSID
7
Convention: “The tribunal shall enforce the law of the host State and such rules of
international law as may be applicable”.
2. Indirect internalization:
Indirect internationalization can be achieved through following ways:
a. Stabilization clause: On occasions when the parties to the contract do not choose the
applicable law, the law of the host State applies. The stabilization clause generally
freezes the applicable domestic law of the host State as it existed at the time of
entering into the contract. The objective is to safeguard the parties at the hands of host
State modifying the domestic law.
b. Equilibrium clause: The equilibrium clause holds that the State having the power to
amend, vary the law yet they shall be inapplicable to the alleged contract. Otherwise,
the moment the status is altered, the other party becomes entitled to the compensation.
Problems and Prospects of clauses: The clauses are fraught with controversy regarding
their nature and validity.8 Stabilization clause intends at rendering void the alterations made
in domestic law of the host State, thereby leaving a vacuum which is subsequently filled by
the “frozen” domestic law of the host State. At this juncture, it is important to note that State
commitments having place in international legal order cannot be modified by the State at the
domestic level.9 The presence of stabilization clause in contracts exposes the foreign
investors to political risks posed by the change of laws.
Applicability of domestic or international law: Since the stabilization clause, freezes the
domestic law as of the date on which contract is entered into between the parties, it cannot be
modified by the host State. This places the contract in the domain of international law, even
though this situation does not formally fall within the international law.
Conclusion: Through various instruments and rules encapsulated therein, the States and
investors have internationalized their contractual relationship. Such practices have led to
development and growth of a distinct branch of international law: International Investment
Law.
Internationalization of State Contracts through arbitration
In cases where the parties to the contract do not decide upon the applicability of international
law to the contract, the burden falls on the adjudicator in event of dispute to decide on the

8
P. Mayer, ‘La neutralisation du pouvoir normatif de l’Etat en matière de contrats d’État’, 113 J.D.I (Clunet),
5–78 (1986); P. Weil, ‘Les clauses de stabilisation ou d’intangibilité insérées dans les accords de développement
économique’, Mélanges Ch. Rousseau, 1974, 301–28.
9
Supra 6
applicability to the contract. Such practices were responsible for internationalization of State
contracts through arbitration. The rules have been elucidated in detail below mentioned:
i. Express choice of domestic law: Even if the parties have expressed their
intention to include the applicable law (domestic) in their contract, arbitral
tribunals are free to apply international law (domestic law in compliance with
international law) to decide the disputes arising from the contract.
In most of the legal systems, domestic law is in the lines of international law. Specifically in
the case of international investment, such trans-national rules on foreign investment holds the
ground.10
Need for application of international law also stems from the argument that domestic laws on
the issue may be vague or underdeveloped. In Petroleum Development (Trucial Coast) Ltd. v.
Sheikh of Abu Dhabi11 case, the arbitral tribunal refused to apply domestic law of the host
State due to lack of settled body of law on contemporary commercial instruments.12
On the other hand, in ARAMCO v. Saudi Arabia13, the tribunal regarded the failure of
domestic law of the host State to provided sufficient protection to the foreign investor a
cogent ground for supplementing it with international law.14
ii. Express choice of international law: When it is pre-decided as to application
of international law in case of dispute arising out of contract, the main issue
lies in locating it within the domestic rules.
iii. No choice of applicable law: In cases where parties fail to express their
choice of law applicable, the general way forward is to settle the dispute
through arbitration mechanism (in exceptional cases the dispute has been
settled otherwise).

It is observed that the arbitrators tend to call into action the rules of private international law
which in turn results in application of domestic laws prevalent in the host State. Application
of Private international law does not preclude the application of Public international law. This

10
Inceysa Vallisoletana, SL v. Republic of El Salvador, No. ARB/03/26, 2 August 2006, para. 220.
11

12
International and Comparative Law Quarterly 1952, 247.
13

14
23 August 1958, 27 ILR 117.
position can be marshalled from the judgment in Sapphire v. National Iranian Oil Co.15,
where the tribunal in absence of choice of law, opined that, “….The absence of agreement on
application of the laws of the host State i.e. Iran renders the domestic law inapplicable to
the dispute. Nonetheless, the contract contains reference to the principle of good faith, which
must be interpreted as a reference to the general principles of law, within the meaning of
Article 38 of the Statute of the International Court of Justice…..”.
It must be noted that a State contract formed for the realization of sovereign actions or offers
public services to the host State essentially possess features having international relevance.
Thus, the subject matter needs to be governed by international law.

Identifying which international law norms are applicable to State contracts: a general
overview
Lack of clarity in meaning and content of the law:
1. Interaction of Private persons within Public international law: It has been
established that public international law is applicable to private individuals. The PCIJ
in its opinion has recognized that, “……a treaty may directly create individual rights
or obligations as long as this stems from its subject-matter or from the will of the
parties….”.16
Since individuals are subjected to both rights and obligations under international law, there
seems no reason to preclude application of international law to an agreement entered into
between host State and foreign investor.
2. The application of “lex mercatoria”:
Lex mercatoria comprises of principles applicable to commercial transactions between
merchants. The issue with lex mercatoria lies in the application of the same to State contracts.
This body of law arising out of practice and customs, seems to be inadequate. Lex mercatoria
does not fall in the domain of public international law, thereby it cannot be applied to a
contract between a State party and foreign individual. Only international law can bind the
State to compensate in case it exercises power to push the other party to a disadvantageous
position.
Current status of State contracts: With multiplication of International Investment treaties
that codified the law on the position, State contracts have been overshadowed.
15
Sapphire International Petroleum Ltd. v. National Iranian Oil Company, 15 March 1963, Annuaire Suisse de
droit
international, 1962, 287.
16
Jurisdiction of the Courts of Danzig, Advisory Opinion, 3 March 1928, Series B, No. 15, p. 17.
C. Emergence of Bilateral Investment Treaties and International Investment Law
It would come as a surprise to understand the development of investment treaties overlapped
with the other existing methods of investment dispute resolution earlier mentioned i.e. State
Contracts and mixed commissions.
Genesis of BITs:
The first of its kind “Bilateral investment protection and promotion treaty” (BIT, 1959) was
concluded between Germany and Pakistan, guaranteeing some protection to each other’s
investors. What makes it unique is the objective it aimed at securing i.e. protection of national
investors of the two nations, facilitating technology transfer between nations.
.
At the outset, the primary objective behind BITs was to secure the application of relevant rule
of international law to the State contracts. The BITs were backed by the host States as a way
of securing their control which had been diminished due to over-internationalization of State
contracts. It was only by 990s that BITs became the norm of the day.
Reasons behind negotiations of BITs:
1. Establishment of treaties on commerce and navigation in the 19th century.
2. Transcending to a trans-national level in terms of geography.
France is now bound by more than 100 bilateral investment protection treaties.

Multilateralization of investment treaties:

Experience with BITs has led to multilateralization of investment treaties which offer a better
engagement of the parties to the contract. There are multilateral treaties in place in several
States dealing with the issue of investment protection. Usually, such treaties are restricted to
the jurisdiction of respective countries, for example, NAFTA is applicable only in the USA,
Canada and Mexico, being the parties to the treaty.

Importance of BITs in safeguarding investor’s rights:

The UNCTAD has observed the pivotal role played by BITs in protection of foreign
investments and providing impetus to cross-border investment 17. BITs play a prominent role
in securing protection to investors by comprehensively providing for the following:
1. General guarantee of fair and equitable treatment;

17
UNCTAD BIT, 1959-1999 UNCTAD/ITE/IIA2 UN (2000) available at
http://www.unctad.org/en/docs/poiteiiad2.en.pdf
 2. Protection against direct or indirect expropriation (by making it subject to the
payment of adequate compensation);
3. Most-favoured-nation treatment;
4. Guarantee of free transfer of funds, etc.

BITs and State Contracts:

BITs developed as a response to the want of clarity in international law as applied to State
contracts. They aimed to define the content for respective State contracts. Thus, BITs came to
be known as “Umbrella Treaties” as they covered within their ambit the contractual
relationships established through State contracts. The importance of BIT can be understood
as only on its breach, it was possible for the investor to call upon arbitration and claim
compensation from State. The basis of such treaties lies in “Friendship, Commerce and
Navigation”.
Role of arbitration in International Investment Law:
The modern International Investment Law owes its existence and strength to the awards
delivered in disputes filed before arbitration tribunals. A major chunk of its body comes from
the decisions passed by the tribunals.
The procedural complexities in deciding the investment disputes along with interpretation of
provisions of BITs calls for specialised bodies like ICSID.
One can understand the key role of arbitral awards from the below-mentioned case law:
 AAPL vs Republic of Sri Lanka 18:AAPL was a British company having its seat in
Hong Kong (since at that time latter was under the sovereignty of former). The
company owned a shrimp factory in Sri Lanka which was witnessing violent civil
unrest back then. Due to the unrest, the factory was destroyed which led to the claim
of the company from the Sri Lankan State based on the contractual relationship
between the company and the Sri Lankan companies. In the absence of contract with
the State, the company was precluded from taking recourse to arbitration. Despite the
absence of governing contract, the company proceeded to claim on the basis of the
arbitration clause of the BIT signed between the UK and Sri Lanka.
The arbitration clause contained in the treaty provide, “Each Contracting Party hereby
consents to submit to the ICSID any legal dispute arising between the Contracting Party and
a national or company of the other Contracting Party concerning an investment of the latter
in the territory of the former.”
18
Asian Agricultural Products Ltd. (APPL) v. Republic of Sri Lanka, 27 June 1990, I.L.M. 1990, 580.
Outcome of the case: In tribunal’s view, presence of the provision clearly indicates the
consent of the Sate to go for arbitration when the foreign investor exercises his right to go
before arbitration tribunal. This recognition of the right of the foreign investors stemming
from treaty was a watershed moment in shaping investment law. The law now stands as even
is the right to seek arbitration is not expressly provided for in the treaty, it is not excluded
completely and the investor can bring a claim before arbitral tribunal. Thus, the issue of
consent as a basis of arbitration proceeding has been settled; since the AAPL award State
consents to recognise the right of foreign investor to seek arbitration the moment the BIT
(containing arbitration provision) is signed. The AAPL award was instrumental in evolution
of contemporary investment law. Since the award, BITs were favoured as they ensure
“substantive protection” of the parties.
Apart from BITs, consent of the State to go for arbitration can be contained in domestic law
creating a ecosystem where the investor can file claim before arbitration tribunal for
reparation of loss.19
Increased engagement of sectors and Investment Law:
The emergence of global economy has led to diversification of investment in various sectors.
Given the paradigm shift in investment from traditional sectors like oil, natural gas, transport
to emerging sectors relating to public service in a modern welfare State and service economy,
the body of investment law holds relevance for all varieties of investment transactions.

Recent challenges:
1. Unilateral character of investment law and then start to reconsider their commitment
in ICSID: the denunciation of the Washington Convention by Bolivia (2007), Ecuador
(2009) and then Venezuela (2012) is certainly indicative of a hostility towards the
existing system.
2. investment law does not lie exclusively in BITs or in ICSID tribunals. The vast
majority of transactions take place without litigation, or may give rise to domestic
procedures.

We should highlight that international arbitration is first and foremost a last recourse, which
will not be used by all the investors who experience troubles with States. It is therefore
essential to understand that the international investment law described here is only a small
part of the economic reality.
19
Southern Pacific Properties (SPP) v. Egypt, April 14, 1988, JDI 1994, 220.
Clauses incorporated in BITs determining the Substantive Rights of the investors:
The substantive rights are guaranteed under the investment treaties can be categorised into:
1. Treatment of investors;
2. Compensation;
3. Expropriation

TREATMENT OF INVESTORS
“Treatment of investors” imposes obligations on the Host State to treat foreign investors at
par with their national investors in like situations. It keeps in place a standard to compare the
treatment accorded to investors both national as well as foreign.20
BITs as “reciprocal promise to promote and protect investments of investors” contain
following provisions on treatment of investors:

1. Fair & Equitable Treatment (FET) to investors:

Fair treatment based on equity were in existence even prior to modern investment
agreements. Contemporary FET clauses appeared only in early international agreements i.e.
Havana Charter (1948)21, Economic Agreement of Bogotá at regional level (1948) 22, and
United States Friendship, Commerce and Navigation (FCN) treaties 23. The first known use of
the clause in investment treaty can be traced back to the Draft Convention on Investments
Abroad (1959) in Article I:
“Each Party shall at all times ensure fair and equitable treatment to the property of
the foreign nationals. Such property shall be accorded constant protection and security
within the territories of the other Parties and the management, use and enjoyment shall not
be impaired by any unreasonable or discriminatory measures”.24

20
Organisation for Economic Co-operation and Development, Treatment of Investors and Investments
(Pre/Post- Establishment) Negotiating Group on the Multilateral Agreement on Investment (MAI), 11 October
1995
21
Article 11(2) of Havana Charter for an International Trade Organisation.
22
Article 22: “Foreign capital shall receive equitable treatment. The State therefore agree not to take
unjustified, unreasonable or discriminatory measure that would impair the legally acquired rights or interests of
nationals of other countries in the enterprises, capital, skills, arts or technology they have supplied.”
23
US FCN Treaties with Ireland (1950), Belgium (1963) and etc. contained express provisions on equitable
treatment.
24
Abs and Shawcross, “The Proposed Convention to Protect Foreign Investment: A Round Table: Comment on
the Draft Convention by its Authors”, Journal of Public Law, 9 (1960), pp. 119-24.
The clause was brought into the Draft Convention on the Protection of Foreign Property
(Draft OECD convention, 1967).25
a. Purpose of FET clause: FET clause intended to provide to protect the investors
against the unfairness manifested by the acts of the host State. FET being a non-
contingent standard of treatment, its content is determined on the basis of the
treatment accorded to the foreign entities standing in the shoes of protected
investors.26
b. Part of Customary International law or not: The varying content of FET clauses
across the nations poses the issue of the interpretation of the FET standard. Treaties
like------ locate the basis of FET within the international law framework, specifically
to the minimum standard of treatment to aliens. Draft OECD Convention sets forth
the basis of FET standard in Customary International Law.
NAFTA explicitly provides on this question in Article 1105(1) on Minimum Standard of
Treatment read with interpretation elucidated by NAFTA Free Trade Commission:
1. Each Party shall accord to investments of another Party treatment in
accordance with international law including Fair and Equitable Treatment
and Full Protection and Security.27
2. The FET standard under Article 1105(1) is the manifestation of the
Customary International Law minimum standard of treatment of aliens as
the minimum standard of treatment to be afforded to investments of
investors of another Party.28
c. Content of FET Standard:
Schill explains FET as:
“FET lacks a consolidated and conventional meaning. Neither there is a standard
definition that can be applied. FET constitutes a standard independent of domestic legal
order of a nation and is not limited to bad faith conduct of host States. The exact normative
content is unsettled and disputed.”29 (Schill, 2009, p. 263).

25
Article 1(a): Treatment of Foreign Property: “Each Party shall at all times ensure fair and equitable treatment
to the property of the nationals of other Parties..”.
26
International Investment Arbitration, Substantive Principles, editor: Loukas Mistelis
27
A Bjorklund, j Hannaford and M Kinnear, Investment Disputes under NAFTA: An Annotated Guide to
NAFTA Chapter 11 (2006) p 1105-1-1105-57.
28
Interpretation issued by NAFTA FTC on 31st July 2001.
29
The principle of FET ensures that minimum standards of treatment to be followed by the host
State are followed, thereby providing a stable legal framework to regulate investors. The
principle is built on following premises:
a. Securing legitimate expectations of investors;
b. Transparency;
c. Delivery of justice and
d. Prohibition of coercion and harassment to investors.
The principle of FET is supplemented by the principle of FPS. FPS furthers the protection
from any possibility of physical damage to the assets of the investment. It puts obligation on
the host State to protect assets from violence taking place in the territory of the host State.

The issue with FET clauses lies in the non-uniform drafting of the same. They are often
interpreted in the 30light of:

a. Whether it is a standalone clause or has basis in Customary International Law;

b. Full Protection and Security clause;
c. National Treatment and MFN clause.

The unsettled position of content of FETs has led to varied and inconsistent interpretations of
the standard. The grounds on which the protection under FET has been sought are:
1. Access to the Courts: Access to the court forms the threshold requirement to one’s
claim. It ensures the foreign investors are fully entitled to appear before the courts and
tribunals to either bring any actionable claim or to defend the same also entitling them
to avail procedural safeguards as provided by the law.
Cake vs Hungary sets a classic example of the denial of access of the courts to foreign
investors. In the case, the investments were made in a Hungarian company that subsequently
went into liquidation due to financial hardships. The company applied to the Court for
composition hearing for the liquidation operations, which it was entitled to under the law.
Despite this, it was denied such hearing and the court ordered sale of company’s assets.
Against this order, the Tribunal held that the denial of opportunity of being heard was in
violation to FET standard.
2. Due Process: Due process can be regarded as the heart and soul of FET standard. The
position is well enunciated in the case of Loewen Group Inc vs USA (Award)31:

30
Ambatielos (Greece vs United Kingdom) 1956 XII RIAA 83, 111.
31
ICSID Case no. ARB(AF)/98/3, 7 ICSID Rep 421
“International law places the State under the duty to provide fair trial in the proceedings to
which foreign national is a party before the domestic courts. The courts are equally
responsible to ensure free and fair litigation, free from any local biasness.”
In the above-mentioned case, the claimant (Canadian company) alleged his inability to appeal
because of the requirement of excessive amount of bond to secure a stay on execution of the
order pending appeal, also that his application to relax the requirement was refused by the
Mississippi Court. The Tribunal held the refusal of court to afford the claimant due process as
violation of FET standard.
3. Delay: Timely determination of proceedings is another facet of free and fair trial.
Where the Host State’s action amounts to delay, the exhaustion of local remedies for
foreign investors constitutes denial of justice.32
White Industries vs India33 is a leading judgment on this point of law. In the case the claimant
company (Australian national) filed a case against India under the India-Australia BIT for
enforcement of a commercial arbitration against Coal India Ltd. The claimant alleged India’s
act amounted to denial of justice due to delay in judicial process. Considering the conduct of
parties involved, conduct of the court as well as the judicial pendency in the Higher courts the
dispute settlement tribunal found Indian action not to be violative of FET standard.
4. Other grounds: Over the years, the ambit of FET standard has been expanded to cover
grounds like:
4.1 Lack of judicial or procedural propriety as evidence of fair and equitable
treatment violation;
4.2 Frustration of legitimate expectation of investor;
4.3 Coercion by Host State;
4.4 Unjust enrichment

It is this over-expansion in the interpretation of FET clause that resulted in either the
exclusion of the provision from the treaty or limiting the scope of the clause upon inclusion.
NAFTA adopted a different approach by preparing a standard note on interpretation of the
clause. This approach has been preferred over in other BITs such as USA Model BIT 34 and
Canadian Model BIT35. The States avoid the use of the term “Fair and Equitable” Treatment
due to continued broad interpretation of the clause.
32
Jan De Nul NV vs Egypt (Award) para 256.
33

34
Article 5.
35
Article 5.
2. Full Protection & Security (FPS) to investors:

FPS ensures the foreign investor to by placing the Host State under the obligation:
(i) not to harm investments through the agency of State organs and
(ii) to protect investors and investments against actions of private parties that
can thwart the investments.

FPS standard happens to be in existence since as early as the 1833 US-Chile Friendship,
Commerce and Navigation (FCN) Treaty. 36 The duty to provide protection and security is
based on the implied agreement between foreign investors and the sovereign of the States, by
which the former undertook to obey the law of the latter securing protection in return 37. FPS
is another category of the “non-contingent” standard of treatment i.e. a standard independent
of the Host State’s treatment of other investments or investors. The standard is taken as an
obligation on the Host State to adopt measures protective of investments and investors from
physical injury caused within the territory of the Host State.
Case study of AAPL vs Sri Lanka 38 is worth mentioning at this juncture, where the shrimp
business setup by the claimant company (Hong Kong national) was destroyed in the civil riot-
counter insurgency operations conducted by Sri Lankan government. The tribunal construing
Article 31(3)(c) of the UK-Sri Lanka BIT held the impugned provision was inapplicable as
the claimant failed to establish the direct relationship between government forces and the
damage to the business. Despite this, the tribunal applied the general requirement of full
protection and security to compensate for losses owing to conflict. Ultimately, Sri Lankan
government was held liable due to failure to take precautionary measures.

The FPS standard is interpreted in light of principles of public international law. International
Investment Agreements often provide for treatment in accordance with international law. The
below-mentioned examples shed light on the FPS standard as encapsulated in treaties:

36
David Collins, Applying the Full Protection and Security Standard of International Investment Law to Digital
Assets, 12 J. WORLD INV. & TRADE 225, 228 (2011).
37
WOLFF, Jus Gentium Scientifca Pertractum (1749), in Classics of International law, (Joseph H. Drake trans.,
James Brown Scott ed., 1934) at 537.
38
  Article 2(1)39, Bosnia and Herzegovina-Sweden Investment Agreement
provides, “Neither party shall award treatment less favourable than that
required by international law.”
 Article II(2)(a) of the USA-Argentina Agreement (1991) provides,
“Investment shall at all times be accorded fair and equitable treatment, shall
enjoy full protection and security and shall in no case be accorded treatment
less than that required by international law.”40
 Article 1105(1) of NAFTA provides, “Each Party shall accord to investments
of investors of another State Party treatment in accordance with international
law, including ………full protection and security.”41
Similar to FET standard, FPS has been subjected to varied interpretations on the extent of the
standard42. The tribunal in Saluka v. Czech Republic43, observed that the application of FPS is
limited to physical protection:

“The FPS standard applies essentially when the foreign investment has been affected
by civil unrest and physical violence. FPS protects the physical integrity of an investment
against interference by use of force”.

Further, in Wena Hotels v. Egypt44 the tribunal held Egypt liable under FPS standard for its
failure in preventing seizure of property and providing protection to investments made by
Wena Hotels. With passage of time the tribunals have moved beyond this limitation and
extended the standard to include all types of protection, including legal and physical security.
In Biwater v. Tanzania45 the tribunal held FPS to secure stability physical, commercial as
well as legal. The same position was echoed in Siemens v. Argentina46, where the outreach

39
Article 2 of Agreement on the Promotion and Protection of Investments between Sweden and Bosnia and
Herzegovina (2000): Promotion and Protection of Investments.
40
Article II(2)(a) of Treaty between USA and the Argentine Republic concerning the Reciprocal Encouragement
and Protection of Investment (1991).
41

42
Deutsche Bank AG v. Sri Lanka, ICSID Case No. ARB/09/02, Award, 535 (Oct. 31, 2012),
https://www.italaw.com/sites/default/files/case-documents/italaw1272.pdf

43
Saluka Investments BV v Czech Republic, Partial Award, ICGJ 368 (PCA 2006)

44

45

46
of FPS was extended beyond physical security inferring from the definition of investment as
provided to include intangible assets in BIT.

3. Non-Discriminatory treatment as provided through National Treatment and Most

favoured Nation (MFN) Treatment:

a. National Treatment: The principle of National Treatment ensures a foreign investor to be

treated at par with any domestic investor. The standard secures equal treatment for imported
and locally-produced goods in the same market. The same statement is also available to
foreign and domestic services, copyright, trademark, and patent. The principle of “national
treatment” finds its place in WTO agreements (Article 3 of GATT47, Article XVII of GATS48
and Article 3 of TRIPS49), although once again the principle is handled slightly differently in
each of these.

NAFTA contains provision for National Treatment as:

1. “Each Party shall accord to service providers of another Party treatment no less
favorable than that it accords, in like circumstances, to its own service
providers.”50

To claim the benefit under the National Treatment clause, the following must be
established51:

1. Treatment accorded by the Host State with respect to investment;

47
Article X (Publication and Administration of Trade Regulations): 3(a) Each contracting party shall
administer in a uniform, impartial and reasonable manner all its laws, regulations, decisions and rulings of the
kind described in paragraph 1 of this Article.
48
National Treatment: In the sectors inscribed in its Schedule, and subject to any conditions and qualifications
set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of
all measures affecting the supply of services, treatment no less favourable than that it accords to its own like
services and service suppliers.

49
National Treatment: In the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and service suppliers of any other Member,
in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to
its own like services and service suppliers.

50
Article 1202: National Treatment

51
United Parcel Service of America Inc vs Canada (Award) ICSID Case no ARB(AB)/04/1.
 2. The foreign investment/investor and the local investment/investor must be placed
in like circumstances;
3. The foreign investment/investor must be treated less favourably by the Host State.

b. Most Favoured Nation Treatment: The International Law Commission (ILC)

defines MFN as:
“A treatment accorded by the granting State to the beneficiary State, or to persons or
things in a determined relationship with that State, not less favourable than treatment
extended by the granting State or to a third State or to persons or things in the same
relationship with that third State.”52
MFN empowers the aggrieved investor to seek any favourable right which is equally
available to any investor(s) from other State having a BIT with the host State. MFN clause
extends both substantive as well as procedural protection to the investors. However, it must
be kept in mind that such clauses are not absolute and can be subjected to modifications,
restrictions in certain cases. The claim on MFN standard is structured upon the international
obligation voluntarily undertaken by the Host State.53

MFN standard has been adopted by most of the countries across the globe. It obligates the
parties concerned to treat other party in a manner that creates “level playing field” 54 by
forbidding discriminatory acts on the basis of nationality. The genesis can be traced back to
the 12th century, but the incorporation of MFN at a wide-spread scale only happened with the
growth of trade and commerce in 15th-16th century. It assumed central importance in Havana
Charter (), where members undertook the obligation “to give due regard to the desirability of
avoiding discrimination as between foreign investors”.55
Nonetheless, the failure of the Charter to come into force circa 1950 consequently resulting in
general practice of including MFN clauses in the investment agreements. Apart from these
agreements, obligations under MFN have been included in GATT56 and GATS57.

52
Article 5 of the Draft articles on most-favoured-nation clauses (ILC Draft), in Yearbook of the international
Law Commission, 1978, Vol. II, Part Two, p. 21.

53
1978 ILC Draft Article 7.
54
Ruchi maam
55
United Nations Conference on Trade and Employment, Final Act and Related Documents, April 1948, Article
12 (International Investment for Economic Development and Reconstruction), par. 2(a)(ii).
56
Article I of GATT: General Most-Favoured-Nation Treatment
57
Article II of GATS: Most-Favoured-Nation Treatment
The content of MFN clauses varies across the nations. This can be supplanted through the
following MFN clauses are codified in the treaties:
1. German Model Treaty (1998): Article 3(1) and 3(2) together deal with MFN and
National treatment simultaneously:
Article 3(1): “Neither Contracting State shall subject investments in its territory owned or
controlled by investors of the other Contracting State to treatment less favourable than it
accords to investments of its own investors or to investments of investors of any third State.”

Article 3(2) “Neither Contracting State shall subject investors of the other Contracting
State, as regards their activity in connection with investments in its territory, to treatment
less favourable than it accords to its own investors or to investors of any third State.”

The above clauses are in addition to Article 4(4) that provides for: “Investors of either
Contracting State shall enjoy most-favoured-nation treatment in the territory of the other
Contracting State in respect of the matters provided for in this Article.”
2. Albania-United Kingdom BIT (1996): Article 3 of the BIT contains provisions on
MFN and National Treatment:
1) “Neither Contracting Party shall in its territory subject investments or returns of
nationals or companies of the other Contracting Party to treatment less favourable
than that which it accords to investments or returns of its own nationals or companies
or to investments or returns of nationals or companies of any third State.”
2) “Neither Contracting Party shall in its territory subject nationals or companies of the
other Contracting Party, as regards the management, maintenance, use, enjoyment or
disposal of their investments, to treatment less favourable than that which it accords
to its own nationals or companies or to nationals or companies of any third State.”
3. US-Singapore FTA (2003): Article 15.458 of the draft provides for:
3.1 “Each Party shall accord to investors of the other Party treatment no less
favourable than it accords, in like circumstances, to investors of any non-Party
with respect to the establishment, acquisition, expansion, management, conduct,
operation and sale or other disposition of investments in its territory.” [Article
15.4(1)]
3.2 “Each Party shall accord to covered investments treatment no less favourable
than that it accords, in like circumstances, to investments in its territory of
58
ARTICLE 15.4: National Treatment and Most-Favoured-Nation Treatment
 investors of any non-Party with respect to the establishment, acquisition,
expansion, management, conduct, operation, and sale or other disposition of
investments. The treatment each Party shall accord under this paragraph is
“most-favoured-nation treatment.” [Article 15.4(2)]
3.3 “Each Party shall accord to investors of the other Party and to their covered
investments the better of national treatment or most-favoured-nation treatment.”
[Article 15.4(4)]

4. MFN in Indian Model 2016: Indian Model does not expressly deal with MFN clause.
Absence of MFN clause can be inferred as a response to the landmark case of White
Industries v India59, wherein the petitioner relied on MFN clause as provided in India-
Australia BIT60. White Industries (Australian investor), filed a case against India
under the India-Australia BIT for enforcement of a commercial arbitration against
Coal India Ltd. The plaintiff alleged India failed to provide “effective means to assert
claims and enforcing of rights” due to delay in judicial process. The investor-state
dispute settlement tribunal found Indian action violative of ‘effective means’ standard.
In the absence of “effective means” in India-Australia BIT, the tribunal held that by
virtue of the Most Favoured Nation clause in the India-Australia BIT 61, the plaintiff
was enabled to invoke the ‘effective means’ standard.
The petitioner claimed reading in the “effective means of asserting claims and enforcing
rights” clause as mentioned in another BIT between India and Kuwait. Indian side urged on
the non-importation of such a clause as it would tweak the balance of the BIT. However, this
argument was rejected by the tribunal and allowed reading the provision into India-Australia
BIT. In tribunal’s opinion such importation was in line with the MFN clause. As a response
to this judgment, to avoid foreign investors from claiming beneficial provisions to safeguard
their interests, Indian model does not provide for MFN provision.
However, not having an MFN provision in the investment treaty poses risks to foreign
investors as to “discriminatory treatment by the host State.” Experts point out towards a way

59
White Industries Australia Limited v. Republic of India, Final award, IIC 529 (2011), 30th November 2011.
60
Article 4.2 “A Contracting Party shall at all times treat investments in its own territory on a basis no less
favourable than that accorded to investments or investors of any third country.”
61
Article 4(2) of the India-Australia BIT provides the MFN provision according to which, ‘a contracting party
shall at all times treat investments in its territory on a basis no less favourable than that accorded to
investments or investors of any third country’.
out in this situation: Limiting the scope of MFN clauses in the BIT. 62 This suggestion is
marshalled on the MFN treatment as provided under Article 8.7(1) of EU-Canada CETA63:
“Each Party shall accord to an investor of the other Party and to a covered
investment, treatment no less favourable than the treatment it accords in like situations, to
investors of a third country and to their investments with respect to the establishment,
acquisition, expansion, conduct, operation, management, maintenance, use, enjoyment and
sale or disposal of their investments in its territory.”
The provision ensures that the foreign individuals are protected by the acts of host State in its
application of domestic laws.
Reading with Article 8.7(4), “the ‘treatment’ referred to does not include procedures for the
resolution of investment disputes between investors and states provided for in other
international investment treaties and other trade agreements. Substantive obligations in other
international investment treaties and other trade agreements do not constitute ‘treatment’,
and thus cannot give rise to a breach of this Article, absent measures adopted or maintained
by a Party pursuant to those obligations.”
A joint reading of the provision clarifies that investors cannot use the MFN provision to read
in beneficial provisions from another country BIT unless it is shown that the host State has
adopted the same in provision of the BIT. Thus, India should have followed this approach
and not done away with the MFN provision completely.

 Codification of draft Articles on MFN by International Law Commission Work

In an attempt to codify a set of draft articles on MFN clauses, the International Law
Commission (ILC) in 1964 flagged a project for the same. 64 As a result, in 1978 the ILC
adopted the “Draft Articles on Most Favoured Nation Clauses” and the same was
recommended to the United Nations General Assembly for their consideration of the Draft as
a Convention on the issue. However, the General Assembly did not take concrete steps in this
regard. Yet, the ILC’s draft is considered as a guide by the countries in drafting MFN clauses
in BITs or Multilateral Investment treaties on investment.

4. Expropriation:

62
Prabhas Ranjan.
63

64
Report of the International Law Commission to the General Assembly on the Work of Its Thirtieth Session ,
[1978], Yearbook of the
International Law Commission, A/CN.4/SER.A/1978/Add.1 (Part 2) (“ILC Report”)
Under International law, the States poses a sovereign prerogative to take over any property
within its territory, held in the name of nationals or foreign entities aliens either through
nationalization or expropriation for reasons from economic, political to social.
Expropriation relates to “property or enterprise-specific” takings where the State either takes
over the property rights to itself or to other organs.65
There are certain conditions to be met that impart legality to such operations by State such as:
(a) Property is taken to achieve a public purpose;
(b) The property is taken on a non-discriminatory basis;
(c) Due process of law should be followed;
(d) Adequate compensation is provided to the person whose property is
taken66.
While the right of States is fundamental and within sovereign powers the exercise of this
right has ensued conflicts.

An unjustified, complete and permanent freezing order on assets, for example, might well
amount to an expropriation, for which the state would be responsible.67
Expropriation is classified into 2 types:
1. Direct expropriation: Direct expropriation occurs when the host State formally takes
title of the expropriated asset and refers to mandatory transfer of the title in favour of
State. In the case, there is a deliberate and unequivocal intention to deprive the owner
of their property through the transfer of title or seizure.68

2. Indirect Expropriation: It involves total or near-total deprivation of an investment sans

a formal transfer of title or seizure.
Indirect expropriation has been considered under Article 4 of the Egypt-Germany BIT
(2005): “Investments of Contracting State shall not directly or indirectly be expropriated or
subjected to any other measures which would amount to expropriation in the territory of the
other Contracting State except for the public benefit and against compensation….”69

65
UNCTAD, Expropriation, UNCTAD Series on Issues in International Investment Agreements II, p.16
66
Id, p 21.
67

68
Supra 65, p 22.
69
Supra 65, p 25.
Christie explains, “It has been recognized that property rights may be interfered with and
expropriation can be done even though the State in question has not purported to
expropriate.”70
In Suez v. Argentina71, the tribunal looking into the question whether the economic measures
undertaken by Argentinian government during the years spanning from 2000-2002
constituted indirect expropriation or not, held, “In indirect expropriation host States invoke
their legislative and regulatory powers so as to enact measures that reduce the benefits for
investors without altering their legal title over their assets or diminishing their control over
the assets.”72
What rights/interests can be expropriated: In Amoco v. Iran73, the Claims Tribunal
concluded that “Any right which can become the object of commercial transaction i.e. can be
sold and brought, and has monetary value can be subjected to expropriation.”74
In another case of Methanex v. USA 75 the tribunal extended the reach of the rights and
interests to cover within itself items such as goodwill and market share.76

Examples of Expropriation Clauses as contained in BIT:

1. Austria-Croatia BIT (1997) states: “Investments of investors of either Contracting
Party shall not be expropriated in the territory of the other Contracting Party except
for a public purpose by due process of law and against compensation.”77
In this there is no explicit demarcation between direct and indirect expropriation. The ambit
of expropriation clause is broad to cover both direct and indirect expropriation.
2. Agreements like Japan-Philippines FTA (2008) and Australia-Chile Free Trade
Agreement (2006) explicitly determine elements constituting direct and indirect
expropriation.

Measures qualifying for expropriation: The following qualify as measures amounting to

expropriation:
1. Formal sector-wide transfers of ownership under nationalization;

70
Christie, 1962, p. 310, Also see Starrett Housing case
71

72
Supra 65, p 26.
73

74

75

76
Methanex v. USA (Final Award), 3 August 2005, Part IV, Chapter D,para. 17.
77
 2. Outright seizures;
3. Intervention of government-appointed officials;
4. Concessions and permit breaches and annulments;
5. Prejudice before domestic courts. 78
Most of the expropriation cases fall under executive and administrative acts, a handful of
them are achieved through legislative and judicial actions.

Landmark cases on Expropriation:

1. In Occidental v. Ecuador79, the tribunal held, “Imposition of taxes can result in

expropriation.”80
2. In Waste Management vs Mexico81, the tribunal held, “Mere non-performance of a
contractual obligations neither does not amount to expropriation. The redressal for
such breach is to seek from the defaulting party (in case of default on the part of
government, the breach should not stem from the exercise of government legislative
power) is to sue in the appropriate court to remedy the breach. Only where such
access to court is foreclosed the breach amounts to expropriation.
3. In SGS v. Philippines82 the tribunal held that mere refusal to repay a debt is not an
expropriation of property, where remedies exist to vindicate breach of the contractual
obligations.83

5. Compensation payable for expropriation:

The issue of compensation for foreign investors adversely affected by expropriation in their
host State has always led to a profound divergence of views in international investment law
centered on whether or not there existed an international obligation on the part of a host State
to compensate foreign investors for expropriated investments. Major capital-exporting
countries generally defended the existence of such an obligation, while the newly
independent countries and communist countries challenged the right of foreign investors to
receive compensation in the event of expropriation on various legal grounds, such as national
treatment, or to address economic inequalities borne out of “colonial sin” or excessive profits.

78
Coe and Rubins, 2005, pp. 607–608
79

80
Occidental v. Ecuador (Award), 1 July 2004, para. 85.
81

82

83
Controversies then arose as to the applicable standards for assessing the amount and methods
of paying compensation.

Energy Charter Treaty under Article 13(1)(d) provides for compensation post-expropriation.
It mandates the compensation should be given forthwith and must be fair.84

Today, some of these controversies are no longer an issue. Investment protection treaties and
customary international law now obligate host States to protect foreign investments such that
any expropriation must be done according to certain rules.

In customary international law, a distinction is made between primary rules and secondary
rules for the responsibility of states for internationally wrongful acts. Primary rules are those
whose violation is the responsibility of the state (primary obligations) and secondary rules are
those governing the liability of the state for breaches of primary rules (secondary
obligations). In other words, the primary rule defines “the content of the obligation it
imposes” and the secondary rule sets “whether that obligation has been breached and what
the consequences of this breach must be.”

The BIT Terms of Compensation for Expropriation:

Before we turn to examining various BIT provisions on compensation for expropriation, it

should be noted that there used to be a practice of flat-rate compensation (lump sum
settlement agreements). During the large-scale nationalizations that characterized the 1950s
to 1980s, host States and the investors’ home States reached numerous lump sum settlement
agreements.

Before we look at the various provisions of the expropriation compensation BIT, it should be
noted that the practice of paying a fixed rate (lump sum agreement) used to be the practice.
During the large-scale nationalizations that characterized the 1950s through the 1980s, host
and home states of investors entered into numerous lump-sum settlement agreements.

Traditional Methods of Valuation of Compensation:

1. Liquidation Value:

Liquidation value suggests the amounts in which the assests of a Individual is comprised.
The entire asset of the enterprise could be sold under conditions of liquidation to a willing
buyer.

84
 2. Replacement Value:

Replacement value refers to the amount of cash required to replace individual business
assets in their current condition on the date of acquisition. The replacement cost method is
rarely used in the case of government organizations.

3. Book Value:

Book value is the difference between an entity's assets and liabilities as reported in its
financial statements, or the amount at which tangible assets accepted appear on the
entity's balance sheet, representing their value after deducting accumulated depreciation
in accordance with generally accepted accounting principles.

4. Discounted Cash Flow (DCF) Value can be calculated by subtracting the cash
expenditure after discounting the net cash flow from expected cash receipts from the
enterprise in each future year of its economic life.

Case Laws: In the case of Azurix vs Argentina 85 the monetary value of actual investment
made was taken into consideration to determine the compensation for the breach of FET
Standards.

In Factory at Chorzow case86 the Permanent court of International Justice held that It is a
principle of International law to compensate for any breach of engagement. Such
compensation shall be either restitution in kind or a sum equivalent to the value of restitution
in kind where restitution is not possible.

85

86