INTERNATIONAL INVESTMENT LAW

©2023

Compiled by

Emmanuel Mitengo
 TABLE OF CONTENTS
1 SOURCES OF INVESTMENT LAW .........................................................................................6
2 HISTORY OF INTERNATIONAL INVESTMENT LAW ................................................ 12
2.1 THE CALVO DOCTRINE .............................................................................................. 14
2.2 DRAGO DOCTRINE ........................................................................................................ 17
2.3 THE BOLSHEVIK REVOLUTION .............................................................................. 20
2.4 MEXICAN REVOLUTION ............................................................................................. 25
2.5 EMERGENCY OF MINIMUM STANDARD ............................................................ 29
2.6 POST WAR DEVELOPMENT AND THE PRE-WAR DEVELOPMENT OF
INTERNATIONAL INVESTMENT LAW ................................................................................. 34
3 NATURE OF INVESTMENT LAW ........................................................................................ 38
3.1 INVESTORS PERSPECTIVE ......................................................................................... 38
3.2 HOST STATE PERSPECTIVE (ATTRACTING FOREIGN INVESTMENT) . 44
3.3 INTERNATIONAL INVESTMENT LAW AND GOOD GOVERNANCE ..... 45
4 NATIONALIZATION ................................................................................................................ 49
4.1 NATIONALIZATION LEGALITY .............................................................................. 51
4.2 NATIONALIZATION ILLEGALITY .......................................................................... 55
4.3 CATEGORIES OF EXPROPRIATION ....................................................................... 58
4.4 COMPENSATION ............................................................................................................. 61
4.4.1 PROMPT, ADEQUATE AND EFFECTIVE COMPENSATION ................... 61
4.4.2 APPROPRIATE COMPENSATION NORM ......................................................... 62
4.4.3 FAIR COMPENSATION STANDARD................................................................... 66
4.4.4 JUST COMPENSATION ............................................................................................. 68
4.4.5 RESTITUTION .............................................................................................................. 68
5 FOREIGN DIRECT INVESTMENT ...................................................................................... 69
5.1 TYPES OF INVESTMENT CONTRACT .................................................................... 72
5.2 TYPES OF INVESTMENT .............................................................................................. 74
5.3 ADVANTAGES OF FOREIGN DIRECT INVESTMENT .................................... 80
5.4 DISADVANTAGES OF FOREIGN DIRECT INVESTMENT ............................. 82
5.5 MULTINATIONAL ENTERPRISES AND THE REGULATION OF
FOREIGN DIRECT INVESTMENT ........................................................................................... 85
5.6 CLASSES OF FOREIGN DIRECT INVESTMENT ................................................. 92
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 5.7 PULL AND PUSH FACTORS OF FOREIGN DIRECT INVESTMENT ...............
.................................................................................................................................................. 93
6 MULTILATERAL INVESTMENT GUARANTEE AGENCY (M.I.G.A.) .................... 95
6.1 MIGA- INSURANCE PROGRAMS ............................................................................... 96
6.2 MIGA- ELIGIBLE INVESTMENTS ............................................................................. 98
6.3 SETTLEMENT OF DISPUTES ...................................................................................... 98
7 INTERNATIONAL FINANCIAL INSTITUTIONS ......................................................... 109
7.1 INTERNATIONAL MONETARY FUND ................................................................ 109
7.2 THE WORLD BANK ...................................................................................................... 111
7.3 AFRICAN DEVELOPMENT BANK .......................................................................... 117
7.3.2 AFRICAN DEVELOPMENT FUND..................................................................... 118
7.3.3 NIGERIA TRUST FUND .......................................................................................... 119

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 TABLE OF CASES

1. ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of
Hungary. ICSID Case No. ARB/03/16. 2006.
2. AGIP v. Popular Republic of Congo (ICSID Case No. ARB/77/1) 1968
3. Amco Asia Corporation and Others v. The Republic of Indonesia. ICSID Case No.
ARB/81/1. 1984.
4. Amoco International Finance Group v. The Government of the Islamic Republic of
Iran, the National Iranian Oil Company et al. (“Amoco v. Iran”). 14 July 1987. 15 Iran-
United States Claims Tribunal Reports 189.
5. Banco Nacional v. Chase Manhattan Bank (1981) 505 F. Supp. 412
6. Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain (1962))
7. Biwater Gauff Limited v. United Republic of Tanzania (ICSID Case No. ARB/05/22
8. Eureko B.V. v. Republic of Poland (“Eureko v. Poland”). Ad hoc arbitration. 19 August
2005.
9. GAMI Investments v. United Mexican States (“GAMI Investments v. Mexico”).
UNCITRAL Arbitration. 2004.
10. German interests in Polish Upper Silesia (Germany v. Poland) PCIJ Series A No.7
(1925)
11. Generation Ukraine. Inc. v. Ukraine. ICSID Case No. ARB/00/9. 2003.
12. Iran-US Claims Tribunal, Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA, 6
IRAN-U.S. C.T.R
13. Mike Campbell (Pvt) Ltd and others v. Republic of Zimbabwe (2/2007) [2008] SADCT
14. Mavrommatis Palestine Concessions (Greece V Great Britain) (1924 – 27) ICGJ 236
(PCIJ 1924)
15. Neer and Neer (U.S.A) v the United Mexican States (Docket No. 136) 15 October, 1926
16. Norwegian Shipowners’ Claims, Norway v. the United States, (Permanent Court of Arb)
13 October 1922.
17. Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Republic of
Kazakhstan (“Rumeli v. Kazakhstan”). ICSID Case No. ARB/05/16. Award of 29 July
2008.
18. Saipem S.p.A. v. People's Republic of Bangladesh (ICSID Case No. ARB/05/7)
19. Siderman de Blake v Republic of Argentina 965 F.2d 699 (1992)

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20. Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt. ICSID
Case. No. ARB/84/3. (1992)
21. Starrett Housing v. Iran, Interlocutory Award No. ITL 32-24-1, 19 December 1983
22. TOPCO/CALASIATIC v. Libya Arbitration (104 J. Droit Int’l 350 (1977))
23. The Government of the State of Kuwait v The American Independent Oil Company
(‘Kuwait v Aminoil’) 21 ILM 976 (1982)
24. The Chorzow Factory Case (1928, Germany v Poland) (ICGJ 255 (1928))
25. Waguih Elie George Siag and Clorinda Vecchi v. Arab Republic of Egypt (ICSID Case
No. ARB/05/15)

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 ABBREVIATIONS
BIT Bilateral Investment Treaties
CERDS Charter of the Economic Rights and Duties of States (CERDS)
DSU Dispute Settlement Understanding
ECT Energy Charter Treaty
GATS General Agreement on Trade in Services
FET Fair and Equitable Treatment
FDI Foreign direct investment
ICSID International Centre for Settlement of Investment Disputes
ICJ International Court of Justice
IBRD International Bank for Reconstruction and Development
IDA International Development Association
IFC International Finance Corporation
IIA International Investment Agreement
ILO International Labour Organization
IMF International Monetary Fund
IMFC International Monetary and Financial Committee
MEC Marginal Efficiency of Capital
MCE Multinational Corporations or Enterprises
MIA Multilateral Investment Agreement
MIGA Multilateral Investment Guarantee Agency
NAFTA North American Free Trade Agreement
OECD Organisation for Economic Co-operation and Development
TCE Transnational Corporations or Enterprises
TRIMS Trade Related Investment Measures
TRIPS Trade-Related Aspects of Intellectual Property Rights
UNCTAD United Nations Conference on Trade and Development
UNGA United Nations General Assembly Resolutions
UN United Nations
USA United States of America
USSR United Socialist Soviet Russia
UR Uruguay Round
WTO World Trade Organization

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1 SOURCES OF INVESTMENT LAW
The point of departure for a discussion on sources of investment law is the recognized
list of sources of general international law according to Article 38 of the Statute of the
International Court of Justice (ICJ). It is noteworthy, however, that not all rules of
public international law are relevant to relationships between host states and foreign
investors. This chapter emphasizes the distinctive features of the sources of international
investment law.

1. Treaties

A treaty is defined by Article 2 of the Vienna Convention on the Law of Treaties as

an international agreement concluded by states in written for and governed by
international law. ‘From this definition, one can see that only states can make a treaty.
Treaties can either be bilateral (between two countries) or multilateral (between many
countries)

International investment treaties are the primary source of international investment law.
These include bilateral investment treaties (BITs) and multilateral treaties, such as the
Energy Charter Treaty and the Comprehensive and Progressive Agreement for Trans-
Pacific Partnership (CPTPP).

Treaties are a significant source of international investment law, as they establish the
legal framework and rules governing the rights and obligations of states and investors in
the context of foreign investment. Investment treaties come in various forms, including
bilateral investment treaties (BITs), regional investment treaties, and multilateral
investment treaties.

BITs are the most common type of investment treaty, with over 3,000 BITs currently in
force worldwide. They are agreements between two countries that establish the terms
and conditions of investment by investors from one country in the other country. BITs
often provide protection for investments, including guarantees against expropriation,
fair and equitable treatment, and compensation for losses. They also typically include
provisions for dispute resolution, such as investor-state arbitration.

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Regional investment treaties, such as the North American Free Trade Agreement
(NAFTA) and the European Union's Energy Charter Treaty (ECT), are agreements
between countries within a particular region. These agreements aim to promote
investment and trade within the region and typically include provisions related to
investment protection, dispute settlement, and investment promotion.

Multilateral investment treaties, such as the International Centre for Settlement of

Investment Disputes (ICSID) Convention, are agreements between multiple countries
that establish a common framework for investment protection and dispute resolution.
These treaties are typically signed by countries as part of their membership in an
international organization, such as the United Nations.

Treaties are a significant source of international investment law and play a vital role in
shaping the legal framework governing foreign investment. They establish the rules and
principles that govern investment relationships between states and investors, and they
provide a mechanism for resolving disputes that may arise in these relationships.

2. Bilateral Investment Treaties (BITs)

These are agreements between two countries that establish the terms and conditions for
investment by investors from one country in the other. BITs provide a framework for
the protection of foreign investments, and typically include provisions on expropriation,
fair and equitable treatment, and dispute settlement.

BITs typically contain provisions that aim to promote and protect foreign investment,
including provisions on fair and equitable treatment, non-discrimination, protection
against expropriation, and the free transfer of funds. These provisions create legal
obligations for the host state and provide investors with recourse in the event of a breach
by the host state.

BITs also often provide for dispute resolution mechanisms, such as investor-state
arbitration, which allows investors to bring claims against host states for breaches of the
treaty. The arbitral tribunals that hear these disputes are authorized to interpret and apply

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the treaty, and their decisions can contribute to the development of international
investment law.

Overall, BITs are an important source of international investment law because they
establish the legal framework that governs foreign investment between two countries.
While BITs are not the only source of international investment law, they have played a
significant role in shaping the legal principles and norms that regulate foreign investment,
and continue to be an important tool for promoting and protecting investment in today's
global economy.

3. Customary International Law

This refers to unwritten rules and practices that are widely accepted as binding on states.
Customary international law plays an important role in investment law, particularly in
areas such as the prohibition of expropriation without compensation and the obligation
to provide fair and equitable treatment to foreign investors.

Customary international law plays an important role in international investment law as it

can establish legal obligations for states and investors. For example, the customary
international law principle of fair and equitable treatment is a well-established principle
of international investment law, and is often included in international investment
agreements and bilateral investment treaties. Similarly, the customary international law
principle of expropriation, which requires that compensation be paid in the event of an
expropriation of foreign investments, has been incorporated into many investment
treaties and has been widely recognized by international investment tribunals.

Moreover, customary international law can also fill gaps in the law where there is no
explicit treaty or agreement governing a particular issue related to international
investment. In such cases, tribunals and courts may look to customary international law
to determine the applicable legal standards. Overall, customary international law is an
important source of international investment law that helps to shape the legal framework
for foreign investment and investment protection.

4. General International Law

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General international law is also a source of international investment law. It refers to the
body of principles and rules that apply to all states, regardless of whether they have
agreed to specific treaties or agreements. General international law principles can inform
the interpretation and application of international investment law.

For example, the principles of state sovereignty and non-intervention in the affairs of
other states are fundamental principles of general international law. These principles are
also reflected in international investment law, where states are generally allowed to
regulate foreign investment in their territory, subject to certain obligations such as fair
and equitable treatment and protection against expropriation without compensation.

Other general international law principles that are relevant to international investment
law include the principle of good faith, which requires states to act honestly and in good
faith in their dealings with other states and investors, and the principle of the rule of law,
which requires states to respect their international legal obligations and provide effective
remedies for violations of those obligations.

While international investment law has its own specific rules and principles, it is
influenced by general international law and draws on its principles and concepts to
inform its interpretation and application.

Soft Law instruments: soft law refers to non-binding instruments, such as guidelines, codes
of conduct, and best practices, that are developed by international organizations, such as
the United Nations Conference on Trade and Development (UNCTAD) and the
Organisation for Economic Co-operation and Development (OECD). Soft law can help
to shape international investment law by providing guidance on best practices and
establishing norms.

5. Case Law

Decisions of international tribunals, such as the International Centre for Settlement of

Investment Disputes (ICSID) and the Permanent Court of Arbitration (PCA), also
contribute to the development of international investment law. These decisions can help
to clarify the meaning of treaty provisions and establish precedents for future cases.

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Case law is another important source of international investment law. International
investment law disputes are typically resolved through international arbitration, which
involves an independent tribunal deciding on a dispute between a foreign investor and a
state. These tribunals issue decisions that interpret and apply international investment
law principles and rules to specific cases.

These decisions, commonly known as arbitral awards, often provide guidance and
precedent for future cases. They may clarify the meaning of treaty provisions or
customary international law principles and may also contribute to the development of
international investment law.

Moreover, the decisions of international courts and tribunals, such as the International
Court of Justice, the International Criminal Court, and the International Tribunal for the
Law of the Sea, may also contribute to the development of international investment law.
While these courts and tribunals are not specifically focused on investment disputes,
their decisions may have implications for investment law and may be cited in investment
arbitration cases.

Therefore, case law is an essential source of international investment law, as it provides

guidance on the interpretation and application of investment treaties and customary
international law principles, and helps to clarify the rights and obligations of states and
investors in the context of foreign investment.

6. The International Centre for Settlement of Investment Disputes

Article 25(1) of the ICSID Convention provides that: “The jurisdiction of the Centre
shall extend to any legal dispute arising directly out of an investment between a
Contracting State and a national of another Contracting State”. With respect to natural
persons, Article 25(2) of the Convention defines “National of another Contracting State”

The International Centre for Settlement of Investment Disputes (ICSID) is a specialized

institution that was created in 1965 as part of the World Bank Group to promote
international investment and provide a forum for the settlement of investment disputes.

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ICSID is often considered a significant source of international investment law for several
reasons:

a. ICSID Convention: The ICSID Convention is an international treaty that sets

out the framework for ICSID's operation. It has been ratified by over 150
countries, and its provisions have become an integral part of international
investment law.

b. Jurisprudence: ICSID has developed an extensive body of jurisprudence

through its arbitration and conciliation procedures. ICSID decisions are often
cited as authoritative sources of international investment law, and they have
helped to clarify the meaning and scope of key investment law principles, such
as expropriation, fair and equitable treatment, and compensation.

c. Precedent-setting: ICSID decisions have also established important

precedents in international investment law. For example, in the landmark case
of Metalclad Corporation v. United Mexican States, ICSID clarified the
scope of the fair and equitable treatment standard, which has since become a
cornerstone of international investment law.

d. Influence on national laws: ICSID's decisions have also had an impact on

national laws and regulations. Many countries have incorporated ICSID's
jurisprudence into their investment laws, and some have even used ICSID
awards as the basis for their own investment arbitration decisions. In summary,
ICSID has played a significant role in shaping international investment law
through its convention, jurisprudence, precedent-setting decisions, and
influence on national laws.

7. Books by eminent writers

The fully updated books/writings of eminent writers like Rudolf Dolzer,

Muthucumaraswamy Sornarajah, Christoph Schreuer, Rainer Hoffman may offer
thought-provoking analysis of the investment law in historical, political and economic
context capturing leading trends to possible course of future developments.

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2 HISTORY OF INTERNATIONAL INVESTMENT LAW

John Adams

John Adams (1735-1826) was an American statesman, attorney, diplomat, writer,

and Founding Father who served as the second president of the United States from
1797 to 1801. During the latter part of the war and in the early years of the nation,
he served as a diplomat in Europe.

___________________________________________________________________
Concept of international minimum standards and third world response to it

In 1796, John Adams made a treaty of friendship, commerce and navigation with France.
John Adams emphasizes on the protection of the principles of international law. In
commerce there is a private property protection. Until the Communist Revolution in
Russia, neither state practices nor international law had reasons to pay special attention
to rules protecting international investment laws.

In the 19th century, many treaties that addressed the protection of foreign investment
relied on the domestic laws of the host state to provide protection to alien property.
These treaties did not establish an autonomous standard for the protection of foreign
investment but rather relied on the existing legal framework of the host state (Article
2(3) of Treaty between Switzerland and USA in 1850):1

“In case of…...expropriation for purpose of public utility, the citizens of one of the two
countries, residing or established in the other, shall be placed on an equal footing with
the citizens of the country in which they reside in respect to indemnities for damages
they may have sustained.”

The implicit assumption was that each state would in its national laws protect private
property and that the extension of the domestic scheme of protection would lead to
sufficient guarantees for the alien investor. This treaty aimed to establish peaceful

1
In Treaties and Other International Acts of the United States of America, vol. 8, pp. 677-
684. Government Printing Office.
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relations and promote trade between the two countries. It contained provisions related
to the protection of American ships and property in Tripolitania ports, the establishment
of consular relations, and the regulation of commerce. One notable aspect of the treaty
was Article 11, which declared that "the Government of the United States of America is
not, in any sense, founded on the Christian religion".

Under these treaties, foreign investors were generally entitled to the same level of
protection as domestic investors under the host state's laws. However, in many cases,
the host state's laws did not provide adequate protection to foreign investors, which led
to disputes and tensions between foreign investors and the host state.

One notable example of a treaty that relied on the domestic laws of the host state is the
Treaty of Friendship, Commerce and Navigation between the United States and China,
which was signed in 1858. This treaty provided for the protection of American property
in China but did so by reference to Chinese law. Another of a treaty that relies on
domestic laws is the North American Free Trade Agreement (NAFTA), signed in 1994,
which establishes a free trade area between Canada, Mexico, and the United States.

NAFTA contains provisions that require the participating countries to ensure that their
domestic laws and regulations do not unfairly discriminate against businesses and
investors from other member countries. In addition, the agreement provides a dispute
resolution mechanism that allows private parties to challenge government actions that
they believe violate NAFTA's rules. Under NAFTA, each member country is responsible
for ensuring that its domestic laws and regulations comply with the agreement's
provisions. This means that businesses and investors from other member countries can
rely on the domestic legal systems of the host country to protect their interests and
resolve disputes.

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Carlos Calvo

Carlos Calvo (1824-1906) was an Argentine publicist and historian, who devoted
himself to the study of the law. In 1869, Calvo published an article arguing that states
undergoing civil war were not responsible for harm caused to aliens as a result of riot or
civil war.

___________________________________________________________________

Carlos Calvo (1824-1906) was an Argentine jurist, diplomat, and writer who is best
known for his contributions to international law. He served as Argentina's ambassador
to France and Belgium, as well as a member of the country's Supreme Court of Justice.
Calvo was a prolific writer and his works, including "Derecho Internacional Teórico y Práctico
de Europa y América" (Theoretical and Practical International Law of Europe and
America), have been influential in shaping the development of international law in Latin
America and beyond. He was also a strong advocate for the principle of non-intervention
in the affairs of other states and the protection of national sovereignty, as reflected in
the Calvo Doctrine that bears his name.

2.1 THE CALVO DOCTRINE

The doctrine asserts that foreign nationals in a given country do not have the right to
invoke the protection of their home country's government or diplomatic representatives
in case of a dispute with the host country's authorities. Instead, they must rely solely on
the local courts and legal system to resolve any grievances.

The Calvo Doctrine was developed in response to the intervention of foreign powers in
the internal affairs of Latin American countries during the 19th century. Calvo argued
that foreign intervention, often carried out by powerful countries in pursuit of their own
economic or political interests, was a violation of national sovereignty and the principle
of non-intervention in the affairs of other states.

The Calvo Doctrine has been influential in shaping the legal framework for foreign
investment in Latin America and other regions. It has been seen as a way to protect the
sovereignty of developing countries and ensure that disputes between foreign investors
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and host governments are resolved through local legal channels. However, the doctrine
has also been criticized for limiting the rights of foreign investors and potentially
discouraging investment in countries where the legal system is perceived to be weak or
corrupt.

The main features contained in the Calvo Doctrine

The doctrine has several main features, including:

1. Non-intervention: The Calvo Doctrine holds that foreign investors do not

have the right to diplomatic protection from their home countries in the event
of a dispute with the host country. This means that any disputes must be
resolved through the local legal system, and that foreign investors cannot rely
on their home country to intervene on their behalf.

2. Sovereignty: The Calvo Doctrine is based on the principle of sovereignty,

which holds that each nation has the right to govern itself without interference
from other countries. This means that foreign investors are subject to the laws
and regulations of the host country, and must comply with local laws and
regulations.

3. Equal treatment: The Calvo Doctrine holds that foreign investors should be
treated equally to domestic investors. This means that foreign investors should
not be given preferential treatment or discriminated against based on their
nationality.

4. Domestic remedies: The Calvo Doctrine emphasizes the importance of

domestic remedies for resolving disputes between foreign investors and host
countries. This means that foreign investors must seek resolution through the
local legal system, rather than relying on international tribunals or their home
country for protection.

Calvo justified his doctrine as necessary to prevent the abuse of the jurisdiction of weak
nations by more powerful nations. It has since been incorporated as a part of several
Latin American constitutions, as well as many other treaties, statutes, and contracts. The
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doctrine is used chiefly in concession contracts, the clause attempting to give local courts
final jurisdiction and to obviate any appeal to diplomatic intervention.

The Drago Doctrine is a narrower application of Calvo's wider principle. The Drago
Doctrine was later recognized and endorsed by the international community in various
international agreements, including the Montevideo Convention on the Rights and
Duties of States in 1933. The principle has become an important aspect of the
international legal framework governing relations between states and private creditors.
A modified version, known as the Porter Convention after Horace Porter, was
adopted at The Hague in 1907 and added that arbitration and litigation should always be
used first.

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Luis Maria Drago

Luis María Drago (1859-1921) was an Argentine politician. Born into a

distinguished Argentine family. Later, he served as a minister of foreign affairs
(1902). At that time, when the UK, Germany, and Italy were seeking to collect the
public debt of Venezuela by force, he wrote to the Argentine minister
in Washington setting forth his doctrine, commonly known as the Drago Doctrine.

___________________________________________________________________

History

It grew from the ideas expressed by Carlos Calvo in Derecho internacional teórico y práctico de
Europa y América, commonly known as the Calvo Doctrine. The Calvo Doctrine
proposed to prohibit diplomatic intervention before local resources were exhausted.

The Drago Doctrine was announced in 1902 by Argentine Minister of Foreign

Affairs Luis María Drago in a diplomatic note to the United States. This doctrine stated
that simply failing to repay national debt was not a valid reason for foreign intervention,
especially by a power outside of the Western Hemisphere.

The doctrine was a response to the European powers' blockade of Venezuela, which
occurred after the country defaulted on its debt. Washington accepted and used the
Drago doctrine. In order to prevent further interventions, the United States took control
of the customs of several smaller countries to ensure debt payments were made to
Europe.

2.2 DRAGO DOCTRINE

The doctrine holds that no state has the right to use force to collect debts owed by
another state to private lenders.

The Drago Doctrine was a response to the practice of some European powers,
particularly Germany and Great Britain, of using military force to collect debts owed to
their citizens by countries in Latin America. Drago argued that such actions violated the

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sovereignty and independence of the debtor countries and threatened to destabilize the
international system.

The doctrine was first applied in the case of Venezuela, which was under threat of
military intervention by Germany and Great Britain in 1902 due to its failure to repay its
foreign debts. In response, the United States and other Latin American countries
invoked the Drago Doctrine to argue against such intervention.

The Drago Doctrine was later codified in the 1928 Kellogg-Briand Pact, which
renounced the use of war as an instrument of national policy and affirmed the principle
of peaceful settlement of disputes. The pact was signed by many countries, including
Argentina, Germany, Great Britain, and the United States.

Kellogg-Briand Pact, also called Pact of Paris, (August 27, 1928), multilateral
agreement attempting to eliminate war as an instrument of national policy. It was the
most grandiose of a series of peacekeeping efforts after World War I.

As a result of Kellogg’s proposal, nearly all the nations of the world eventually subscribed
to the Kellogg-Briand Pact, agreeing to renounce war as an instrument of national policy
and to settle all international disputes by peaceful means. The signatories allowed
themselves a great variety of qualifications and interpretations, however, so that the pact
would not prohibit, for example, wars of self-defence or certain military obligations
arising from the League Covenant, the Monroe Doctrine, or post-war treaties of alliance.
These conditions, in addition to the treaty’s failure to establish a means of enforcement,
rendered the agreement completely ineffective.

Today, the Drago Doctrine remains an important principle of international law,

particularly in the context of sovereign debt crises and international financial relations.
It is often cited as an example of the principle of non-intervention in the affairs of other
states and the importance of respecting national sovereignty and independence.

Significance of the Drago Doctrine

The significance of the Drago Doctrine lies in its contribution to the development of
the principle of non-intervention in international law.
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 1. The doctrine established that the use of military force to collect private debts
owed by one state to another is a violation of the sovereignty and independence
of the debtor state.
2. This principle helped to reinforce the idea that states have the right to govern
themselves without interference from other states.
3. The Drago Doctrine also contributed to the development of international law
on the peaceful settlement of disputes. By emphasizing the importance of
resolving disputes through peaceful means, such as negotiation and arbitration,
the doctrine helped to establish a normative framework for the peaceful
settlement of disputes between states.
4. The Drago Doctrine played an important role in the history of Latin American
diplomacy, where it became an important symbol of the region's struggle for
independence and sovereignty.
5. The doctrine served as a reminder that Latin American countries had the right
to pursue their own economic and political interests without interference from
foreign powers.

Overall, the Drago Doctrine represents an important milestone in the evolution of

international law and diplomacy, highlighting the importance of national sovereignty,
non-intervention, and the peaceful settlement of disputes in the relations between states.

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2.3 THE BOLSHEVIK REVOLUTION
Vladimir Ilyich Ulyanov

Vladimir Ilyich Ulyanov (1870-1924), better known as Vladimir

Lenin, was a Russian revolutionary, politician, and political theorist. He
served as the first and founding head of government of Soviet Russia from 1917
to 1924 and of the Soviet Union from 1922 to 1924. Under his
administration, Russia, and later the Soviet Union, became a one-party socialist
state governed by the Communist Party.

___________________________________________________________________

History

On October 1917 Bolsheviks, led by Vladimir Lenin, seize power in the October
Revolution and establish a socialist government in Russia. The Bolshevik government,
which came to power after the revolution, nationalized many industries and expropriated
the assets of foreign-owned companies. This led to a period of uncertainty and instability
for foreign investors in Russia.2

Here is a timeline of the Bolshevik government's nationalization and expropriation of

foreign-owned assets:

November 1917: Land, Factories and natural resources

The Bolshevik government, led by Vladimir Lenin, declared all land, factories, and
natural resources to be state property through the Decree on Land, which nationalized
all land and abolished private property rights. This was followed by a series of other
decrees that nationalized industry, banks, and foreign trade, effectively bringing the
means of production under state control.3 These policies were part of the Bolsheviks'
plan to establish a socialist society and build a centralized economy that would benefit

2
Carr, E. H. (1985). The Bolshevik Revolution, 1917-1923 (Vol. 1). WW Norton &
Company.
3
N/A (2021). Bolsheviks and the Economy. The Library of Congress. Retrieved April 19,
2023, from https://www.loc.gov/item/global-10000212/bolsheviks-and-the-economy/.
Page 20 of 122
the working class.4 March 1918: Bolshevik government signs the Treaty of Brest-Litovsk
with Germany, ending Russia's participation in World War I but ceding significant
territories to Germany.5

July 1918: Banks and Financial institutions

The Bolshevik government, issued a decree that nationalized all banks and financial
institutions in Russia. This was part of the government's effort to consolidate control
over the economy and establish a socialist financial system. The decree placed all banking
and financial operations under the authority of the People's Commissariat of Finance,
which was responsible for managing the country's financial resources and directing
investments in accordance with the government's economic plan. The nationalization of
banks and financial institutions was a significant step in the Bolsheviks' efforts to
establish a command economy and centralize control over economic decision-making.

November 1918: Foreign trade operations

The Bolshevik government, nationalized all foreign trade in Russia through a decree
issued by the Council of People's Commissars. The decree transferred control over all
foreign trade operations to a newly established agency, the Supreme Council of National
Economy, which was responsible for managing all aspects of the country's economic
activity. The nationalization of foreign trade was part of the government's broader effort
to establish state control over the economy and implement a socialist economic system.
By controlling foreign trade, the government could manage the inflow and outflow of
goods, regulate prices, and allocate resources in accordance with its economic plan. The
nationalization of foreign trade also aimed to reduce the influence of foreign companies
and governments in Russia's economy, and to promote self-sufficiency and
independence.6

1918-1920: Foreign-owned companies

4
Fitzpatrick, S. (2008). The Russian Revolution. Oxford University Press.
5
BBC News. (2018, March 3). Russia's Treaty of Brest-Litovsk: 100 years on. Retrieved from
https://www.bbc.com/news/world-europe-43266951
6
Fitzpatrick, S. (2008). The Russian Revolution. Oxford University Press.
Page 21 of 122
Between 1918 and 1920, the Bolshevik government, led by Vladimir Lenin, expropriated
the assets of foreign-owned companies operating in Russia, including oil and mining
companies. This policy was part of the government's efforts to consolidate control over
the country's natural resources and establish a socialist economy. 7

The expropriations were carried out through a series of decrees that targeted companies
owned by foreign investors, who were seen as exploiting Russia's resources for their own
benefit. The expropriations were often accompanied by compensation in the form of
government bonds, which were used to fund the government's economic and social
programs.

The expropriations of foreign-owned assets by the Bolshevik government were a

significant development in international investment law, as they raised important
questions about the protection of foreign investments and the rights of foreign investors
in the face of expropriation by a sovereign state.8

March 1920: Large-scale industry, transport and communication

Vladimir Lenin issued the Decree on Nationalization, which declared all large-scale
industry, transport, and communication to be state property. The decree completed the
nationalization of major sectors of the economy that had begun with earlier decrees, and
was a key step in the Bolsheviks' efforts to establish a socialist economic system. Under
the decree, all industrial enterprises employing more than ten workers, as well as all
railways, waterways, and communications systems, were placed under state control.

The government was responsible for managing these industries and directing investment
according to its economic plan. The nationalization of industry was a significant
development in the history of international investment law, as it raised important
questions about the protection of foreign investments and the rights of foreign investors
in the face of state expropriation.

7
Ibid
8
Ibid
Page 22 of 122
1920-1921: Private property

From 1920 to 1921, the Bolshevik government faced a period of civil war and economic
crisis, which led to further nationalizations and expropriations of private property.
During this period, the government sought to centralize control over the economy and
direct resources toward the war effort. This led to the nationalization of additional
industries, including banks, insurance companies, and foreign trade organizations.

The government also expropriated the assets of landowners and wealthy peasants,
redistributing the land to peasants and workers. The economic crisis was exacerbated by
a severe drought and famine, which led to the nationalization of grain supplies and the
imposition of rationing.

The Bolshevik government's policies during this period had a significant impact on
international investment law, raising important questions about the protection of foreign
investments and the rights of foreign investors in the face of state expropriation during
times of crisis.

1922: Soviet Socialist Republics (USSR)

The Bolshevik government established the Union of Soviet Socialist Republics (USSR),
a federal socialist state that comprised Russia and several other republics. The
establishment of the Soviet Union marked a significant milestone in the history of the
Bolshevik government and the development of socialism in the world.

In terms of expropriation, the Bolshevik government's policy of nationalization and

expropriation continued after the establishment of the Soviet Union. The government
sought to extend state control over all sectors of the economy, including agriculture, and
to eliminate private ownership of the means of production. This led to the expropriation
of the assets of private landowners, industrialists, and foreign investors.

The expropriations were carried out through a variety of means, including decrees and
confiscations, and often resulted in compensation in the form of government bonds or
other forms of state debt. The expropriations were a significant development in the
history of international investment law, as they raised important questions about the
Page 23 of 122
protection of foreign investments and the rights of foreign investors in the face of state
expropriation in a socialist context.

Overall, the Bolshevik government's nationalization and expropriation policies had a

significant impact on foreign investment in Russia and contributed to the development
of international investment law principles related to expropriation and compensation for
foreign investors.

The response by foreign governments

In response to these actions, many foreign governments and companies sought

compensation for their losses. However, the Bolshevik government rejected these claims
and argued that the expropriations were justified under international law.

The expropriations in Russia led to a series of legal disputes and debates about the scope
and limitations of expropriation under international law. These disputes ultimately led to
the development of international legal principles related to expropriation and
compensation for foreign investors.

In 1920, the League of Nations established the Committee on the Protection of Foreign
Property to address issues related to the protection of foreign investments. The
committee developed a set of principles for the protection of foreign property, which
were later incorporated into the International Law Commission's Draft Articles on the
Responsibility of States for Internationally Wrongful Acts.

Overall, the Russian Revolution played a significant role in shaping international

investment law and the framework for the protection of foreign investment. It
demonstrated the importance of creating legal protections for foreign investments, while
also highlighting the potential risks and challenges associated with investing in politically
unstable and developing countries.9

9
Münch, F. (2017). The Russian Revolution and the development of international law.
International Journal of Law in Context, 13(1), 1-18.
Page 24 of 122
2.4 MEXICAN REVOLUTION
Lázaro Cárdenas

On 18 March 1938, Cárdenas nationalized Mexico's petroleum reserves and

expropriated the equipment of the foreign oil companies in Mexico. In 1938, the
British severed diplomatic relations with Cárdenas' government, and boycotted
Mexican oil and other goods. An international court ruled that Mexico had the
authority for nationalization. With the outbreak of World War II, oil became a
highly sought-after commodity.

History

The Mexican Revolution, which lasted from 1910 to 1920, had a significant impact on
international investment law. During this period, Mexico nationalized many foreign-
owned assets, including oil fields, mines, and railroads, which led to tensions between
Mexico and foreign investors.

During the revolution, many foreign companies in Mexico were nationalized or had their
assets seized by the revolutionary government. This led to a period of instability and
uncertainty for foreign investors in Mexico.

After the revolution, the Mexican government sought to attract foreign investment to
help rebuild the country's economy. To do so, the government established a legal
framework to protect foreign investments, including the creation of a system of
international arbitration to resolve disputes between foreign investors and the Mexican
government. This framework was further developed in the 1920s and 1930s, with the
negotiation of a series of bilateral investment treaties between Mexico and other
countries, including the United States and Canada.

However, the expropriation of foreign-owned assets by the Mexican government in

1938, particularly in the oil industry, led to tensions with foreign governments and a
period of economic isolation for Mexico. The expropriations led to the development of
international investment law principles related to expropriation and compensation for
foreign investors.
Page 25 of 122
The Mexican government's expropriation of foreign-owned assets took place in two
phases: the first in 1936, and the second in 1938.

Phase one: 1936

The Mexican government's expropriation of foreign-owned assets in 1936 was part of a

broader process of nationalization and industrialization that took place in Mexico during
the mid-20th century. The Mexican government, under President Lázaro Cárdenas, was
committed to promoting economic development and social justice, and saw the
expropriation of foreign-owned assets as a way to achieve these goals.

At the time, many of Mexico's key industries, including oil, were dominated by foreign
companies. These companies were seen as exploiting Mexico's natural resources and
people, and the Mexican government believed that nationalization was necessary to put
these resources and industries under national control.

The expropriation of foreign-owned assets in 1936 was a response to a number of

factors, including:

1. The global economic downturn: The Great Depression had a significant

impact on Mexico's economy, and the government sought to promote
economic growth and stability by asserting greater control over key industries.

2. Labour disputes: Many foreign-owned companies operating in Mexico were

accused of mistreating workers and violating labour laws. The government saw
nationalization as a way to protect workers' rights and improve working
conditions.

3. Nationalism: The Mexican Revolution, which had taken place in the early 20th
century, had promoted a sense of nationalism and a desire for greater national
control over resources and industries. The government saw nationalization as a
way to assert Mexico's sovereignty and promote its economic and political
independence.

Page 26 of 122
Overall, the expropriation of foreign-owned assets in 1936 was part of a broader effort
by the Mexican government to promote economic development, social justice, and
national sovereignty. However, it also had significant consequences for foreign investors,
and led to tensions between Mexico and foreign countries.10

Phase two: 1938

In 1938, the Mexican government announced the nationalization of the country's oil
industry, which included the expropriation of assets owned by foreign oil companies.
The decision to nationalize the oil industry was driven by a number of factors, including
economic and political considerations.

At the time, Mexico's oil industry was dominated by foreign companies, primarily U.S.
and British firms, which were seen as exploiting the country's natural resources and
people. This was a major source of tension between the Mexican government and
foreign investors, and contributed to the decision to nationalize the industry. The
nationalization of the oil industry was seen as a way to put these resources under national
control and to ensure that the benefits of the industry were shared more widely among
the Mexican people. The Mexican government believed that nationalization was
necessary to put these resources and industries under national control and to ensure that
the benefits of the industry were shared more widely.11

Additionally, the government sought to use the revenues generated by the oil industry
to finance social and economic reforms in the country, such as land reform,
infrastructure development, and improvements in public health and education. The
expropriation of foreign-owned assets in the oil industry was also seen as a way to assert
Mexico's sovereignty and independence, and to challenge the dominance of foreign
powers in the country. While the Mexican government compensated the companies for
their expropriated assets, the compensation was considered by many to be inadequate.
The expropriation of foreign-owned assets in Mexico, and in particular the

10
Knight, A. (1990). U.S.-Mexican Relations: The Expropriation of Foreign-Owned Assets.
University of Texas Press.
11
Smith, J. (2005). The History of Mexico's Oil Industry. Oxford University Press.
Page 27 of 122
nationalization of the oil industry, had a significant impact on international investment
law and the framework for the protection of foreign investment.

The Mexican government's expropriation of foreign-owned assets was a significant

challenge to the prevailing international legal framework, which at the time did not
provide clear guidelines for the treatment of foreign investors or for the resolution of
investment disputes between countries. This led to a period of legal uncertainty and
tensions between Mexico and foreign investors, which lasted for several decades.

The aftermath of the expropriation: 1936 and 1938

The Mexican experience played a significant role in the development of international

investment law. In response to the expropriations in Mexico and other countries, several
initiatives were undertaken to establish a framework for the protection of foreign
investment. One of the most important of these initiatives was the negotiation of
investment treaties, which established minimum standards for the treatment of foreign
investors and their investments, as well as a framework for the resolution of investment
disputes.

The Mexican experience also led to the development of international investment

arbitration, which provides a mechanism for resolving disputes between foreign
investors and host states.

Page 28 of 122
2.5 EMERGENCY OF MINIMUM STANDARD
Origins of the International Minimum Standard

The emergence of a minimum standard for the treatment of alien property is an

important development in the history of international investment law. The concept of a
minimum standard emerged in the early 20th century, as countries began to recognize
the need for more comprehensive protection of foreign investment.

The minimum standard is based on the idea that states have an obligation to provide
foreign investors with a minimum level of treatment that is consistent with customary
international law. This minimum standard requires states to provide foreign investors
with fair and equitable treatment, full protection and security, and the ability to freely
transfer funds in and out of the host state.

The minimum standard is now recognized as a fundamental principle of international

investment law and is included in many investment treaties and agreements. It has been
further developed through the decisions of international tribunals, which have clarified
and expanded upon the obligations of states with respect to the treatment of foreign
investors.

One of the earliest examples of a treaty that established minimum standards for the
protection of foreign investment is the Treaty of Versailles, which was signed in 1919
following the end of World War I. This treaty included provisions that required Germany
to provide fair and equitable treatment to foreign investors, as well as full protection and
security for their investments.

Subsequent treaties, such as the General Treaty for the Renunciation of War (also known
as the Kellogg-Briand Pact) in 1928 and the Havana Charter in 1948, also included
provisions related to the protection of foreign investment. These treaties established
minimum standards for the treatment of foreign investors and their investments, such
as fair and equitable treatment, full protection and security, and the right to due process.

The establishment of minimum standards for the protection of alien property reflected
a growing recognition that foreign investment was an important part of international

Page 29 of 122
economic relations and that countries had a responsibility to protect the rights of foreign
investors. Today, these standards are reflected in many investment treaties and
international agreements, which establish a framework for the protection of foreign
investment and the resolution of investment-related disputes.12

Another of the earliest examples of the use of minimum standards is the 1923 Treaty of
Moscow, which was signed between the Soviet Union and Germany. This treaty included
provisions related to the protection of German investments in the Soviet Union and
established minimum standards for the treatment of foreign investors.

In the years that followed, many other investment treaties began to include similar
provisions related to minimum standards. These standards were also incorporated into
customary international law and were recognized by international tribunals and courts.
Overall, the emergence of the minimum standard for the treatment of alien property
represents a significant shift in the approach to the protection of foreign investment,
moving away from the reliance on domestic laws and towards a more comprehensive
and consistent framework for the protection of foreign investment under international
law.13

Minimum Standard Treatment and Bilateral Investment Treaties

Bilateral investment treaties (BITs) were entered into for several reasons, among which
the need to clarify the uncertainties surrounding customary law, as well as the
expectations of influencing the development of customary law. The references to the
standard of treatment in BITs ranged from national treatment, to most-favoured nation,
to "fair and equitable treatment". This latter phrase had also been introduced into the
1948 Havana Charter aimed at establishing an International Trade Organization, which
served as precedent in subsequent instruments concerning international investment.

12
Sornarajah, M. (2010). The International Law on Foreign Investment. Cambridge
University Press.
13
Sornarajah, M. (2010). The International Law on Foreign Investment. Cambridge
University Press.
Page 30 of 122
Among these, the commentary to 1967 Draft Convention on the Protection of Foreign
Property elaborated by the OECD (never entered into force), which equated "fair and
equitable treatment" to MST, reflected the dominant perspective among capital
exporting countries. Of significance is the fact that many BITs granted jurisdiction to
the International Centre for the Settlement of Investment Disputes (ICSID) for the
settlement of disputes between the investor and the host State. ICSID resurfaced the old
mixed-claims tribunals and created an investor-state arbitral mechanism, which
ultimately permits the investor to advance whatever arguments on MST that will
strengthen its claims. In the context of NAFTA Chapter XI, some claimants argued, as
they had regarding earlier BITs, that "fair and equitable" are additional to or beyond
MST.

The first Nafta chapter xi awards

Article 1105(1), which reads:

Each Party shall accord to investments of investors of another Party treatment in accordance with
international law, including fair and equitable treatment and full protection and security.

The early cases in the 1920s as evidence of Minimum Standard Treaty in

customary law

Neer v the United Mexican States

Facts and Allegations

In the evening of November 16, 1924, Paul Neer, an American superintendent of a mine
in Guanaceví, Mexico, was horseback riding to his home with his wife. They were
stopped by a group of armed men, who shot and killed Paul Neer. His wife escaped. The
United States espoused a claim against the United Mexican States on behalf of American
citizens, L. Fay H. Neer, widow, and Pauline E. Neer, daughter, who claimed that they
sustained damages in the amount of $100,000.00. The United States alleged that the
Mexican authorities were liable as they “showed an unwarrantable lack of diligence or an
unwarrantable lack of intelligent investigation in prosecuting the culprits”.

Page 31 of 122
Denial of Justice Standard

The Commission, “without attempting to announce a precise formula” for denial of

justice, nonetheless went further than various commentators and formulated an oft-
quoted standard: “the treatment of an alien, in order to constitute an international
delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty,
or to an insufficiency of governmental action so far short of international
standards that every reasonable and impartial man would readily recognize its
insufficiency.”14 According to the Commission, denial of justice could result either
from “deficient execution” of a law that complies with international standards, or from
enacting a law that falls short of international standards.15 The Commission adopted a
broad notion of denial of justice, in stating that such offense could arise out of the acts
of the executive and legislature, and not only the acts of the judiciary.16

In addition to setting a rigorous substantive standard, the Commission imposed a heavy

evidentiary burden: “convincing evidence.” The Commission’s task was to inquire
“whether there is convincing evidence either:

i. that the authorities administering the Mexican law acted in an outrageous way,
in bad faith, in wilful neglect of their duties, or in a pronounced degree of
improper action, or
ii. that Mexican law rendered it impossible for them properly to fulfil their task.

Analysis

The Commission decided that the first prong outrageous conduct, bad faith, wilful
neglect of duties, or a pronounced degree of improper action was negated by the record.
The record showed that on the night of the shooting, the local authorities went to the
crime scene and examined the corpse. The next day, the judge proceeded to the
examination of witnesses, including Mrs. Neer. The only eyewitness of the crime, Mrs.

14
Schachter, O. (1977). The Extraterritorial Application of National Legislation. American
Journal of International Law, 71(3), 515-541.
15
Ibid
16
Ibid
Page 32 of 122
Neer, was unable to provide any helpful information. The investigation continued for
several days. Some suspects were arrested, but were later released for want of evidence.
In light of the record, the Commission was “not prepared to hold that the Mexican
authorities have shown such lack of diligence or such lack of intelligent investigation in
apprehending and punishing the culprits as would render Mexico liable. The
Commission also noted that no attempt was made to establish the second prong Mexican
law preventing the Mexican authorities from living up to international standards. Thus,
the Commission dismissed the claim against the United Mexican States.

The Neer Doctrine

The Neer Doctrine is a legal principle that was developed in response to the murder of
American mining superintendent Paul Neer in Mexico in 1924. The doctrine holds that
a state is responsible for any injury or harm to foreign investors if it fails to provide them
with a minimum standard of treatment and protection, as required by international law.
It should be noted that the Neer Doctrine was not actually established by the arbitral
tribunal in the case of Neer v. Mexico. Rather, the tribunal's decision was based on
principles of customary international law that had already been established by that time.

Under the Neer Doctrine, a state is not liable for harm to a foreign investor unless the
investor can prove that the state breached its obligation to provide a minimum standard
of protection. This means that a state is only responsible for harm to foreign investors
if it failed to act in a manner that a reasonable and prudent state would have acted under
similar circumstances. The Neer Doctrine is significant because it established the
principle that foreign investors have a right to demand a certain level of protection from
the host state, and that the state has an obligation to provide this protection. The
doctrine has been influential in shaping the development of international investment law,
and has been cited in numerous international arbitration cases. However, it has also been
criticized for placing too much emphasis on the actions of the host state, and for failing
to consider the actions of the foreign investor in cases of harm or injury.17

17
Sornarajah, M. (2010). The international law on foreign investment. Cambridge
University Press.
Page 33 of 122
2.6 POST WAR DEVELOPMENT AND THE PRE-WAR
DEVELOPMENT OF INTERNATIONAL INVESTMENT LAW
The ever-increasing internationalisation of the global economy that has taken place since
the end of the World War II has led to an enormous growth in Foreign Investment. This
became particularly pronounced in the 1990s. Yet the phenomenon of foreign
investment has long been known to the Dutch.

The acquisition in 1629 of the Manhattan Island by the Dutch West Indies Company are
proudly referred to as the earliest cases of Foreign Direct Investment in Dutch history.
Throughout the 17th century Dutch East India Company also began to create trading
settlements around the globe, making the Netherlands one of the most prosperous
countries of that time. Netherlands remained a significance player in the world economy
even after the end of the colonial era ranking 15th in the world measured by its GDP. It
continues to be among the largest sources, as well as recipient of investment in the world.

In terms of Foreign Direct Investment stocks, in 2010, the Netherlands ranked as 8th
largest recipient and 7th largest source of investment. The whole large inflow of Foreign
Direct Investment is largely attributed to the strategic location of the Netherlands and
its generally very favourable investment climate, foreign investment outflow is owed
foremost to the presence of major multinational corporations operating within the
Netherlands for instance Shell, Phillips, Unilever, Akzo which all begin operating on
international stage at an early stage.

Because of many international activities of Dutch companies, the Netherlands also

traditionally attaches great importance into establishing an international legal system for
the protection of foreign investment bilateral as well as multilateral. Therefore, the
Netherlands actively supported the creation of the international Centre for the
settlement of Investment Dispute (ICSID). In the context of the World Bank, it was
among the first to ratify the ICSID Convention in 1966.

Post-WWII Developments

Decolonization and nationalizations: Disputes over the treatment of foreign

investment increased and intensified after WWII as the process of decolonization

Page 34 of 122
resulted in colonial territories becoming states. Many of these newly independent states,
along with the Eastern European communist states, adopted socialist economic policies,
including large scale nationalizations of key sectors of their economies. Notable
examples include the nationalizations of major industries in Eastern European states,
China, Cuba, and Latin America (Argentina, Bolivia, Brazil, Chile, Guatemala and Peru);
the Indonesian nationalization of Dutch properties; the Egyptian nationalization of the
Suez Canal; and the nationalizations of the oil industry throughout the Middle East and
Northern Africa (Algeria, Iran, Iraq, Libya, Kuwait and Saudi Arabia).18

The foreign investment disputes that ensued focused on two principal issues: the extent
to which acquired rights, including natural resource concessions granted by colonial
powers, were to be respected; and the standard of compensation for the expropriation
of those acquired rights. In a series of cases, newly independent and developing states
asserted that, upon independence, states were entitled to review concession agreements
that had been granted by colonial powers, and, furthermore, maintained that
compensation for the expropriation of property would be based on national laws.

The Havana Charter and the International Trade Organization: The post-WWII
political and economic climate stimulated a series of initiatives with the goal of
establishing a multilateral legal framework for investment. The first attempt arose during
the negotiations for the proposed International Trade Organization (ITO), an institution
intended as the third pillar of the new international financial system alongside the
International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (the Word Bank).19

Permanent Sovereignty Over Natural Resources: Confronted with the legacy of

colonialism and continued foreign control over resources, throughout the 1950s
developing states sought to affirm their economic independence. One avenue for the

18
F.N. Burton & H. Inoue, ‘Expropriation of Foreign-Owned Firms in Developing
Countries: A Cross National Analysis’ (1984) 18 JWTL 396 at 397.
19
On the investment aspects of the IMF and World Bank, see T.L. Brewer & S. Young, The
Multilateral Investment System and Multinational Enterprises (Oxford: Oxford University
Press, 1998) at 70-73. The role of the IMF Articles of Agreement with respect to transfer of
funds is addressed at Chapter 8, §8.3.
Page 35 of 122
assertion of economic independence was through the United Nations General Assembly,
which in 1952, passed the first of seven resolutions on Permanent Sovereignty Over
Natural Resources. In the late 1950s the UN Commission on Permanent Sovereignty
over Natural Resources was established to study the question of national control over
resources. In 1962, the General Assembly passed Resolution 1803, which declares that
the ‘right of peoples and nations to permanent sovereignty over their natural wealth and
resources must be exercised in the interest of their national development and of the well-
being of the people of the State concerned.’

Charter of Economic Rights and Duties of States: Throughout the late 1960s and
1970s, developing states sought to reconstruct the legal framework for international
economic relations. In the UN, these efforts culminated in a series of General Assembly
resolutions, including the 1974 Declaration on the Establishment of a New International
Economic Order (NIEO Declaration) and the 1974 Charter of Economic Rights and
Duties of States (Charter). The NIEO Declaration asserts that the international
economic system, including neo-colonialism and the inequitable distribution of income,
are obstacles to developing states. While reaffirming the principle of permanent
sovereignty over resources and economic activities, it sets out principles for a new system
of economic relations, including such items as: terms of trade for raw materials and
primary commodities; the reform of the international monetary system; the financing of
development; the transfer of technology; and the regulation of transnational
corporations.

OECD Convention on the Protection of Foreign Property: In 1962 the OECD

released the Draft Convention on the Protection of Foreign Property, which was revised
and approved by the OECD in 1967 (1967 Draft OECD Convention). Given the
membership of the OECD, it is not surprising that the 1967 Draft Convention generally
reflects the views of the major capital exporting states on the minimum standard of
treatment. The 1967 OECD Council Resolution approving the Draft Convention
highlights that it ‘embodies recognised principles relating to the protection of foreign
property’ and that it ‘will be a useful document in the preparation of agreements on the

Page 36 of 122
protection of foreign investment. ‘The 1967 Draft OECD Convention sets out the
minimum standards of treatment as follows:

Each Party shall at all times ensure fair and equitable treatment to the property of the nationals of the
other Parties. It shall accord within its territory the most constant protection and security to such property
and shall not in any way impair the management, maintenance, use, enjoyment or disposal thereof by
unreasonable or discriminatory measures. The fact that certain nationals of any State are accorded
treatment more favourable than that provided for in this Convention shall not be regarded as
discriminatory against nationals of a Party by reason only of the fact that such treatment is not accorded
to the latter.

New York Convention: The increased use of international arbitration to settle foreign
investment and commercial disputes exposed the practical difficulties involved in
enforcing international arbitral awards. A key development in the evolving international
legal framework for international arbitration was the conclusion and widespread
ratification of the 1958 New York Convention on the Recognition of Foreign Arbitral
Awards (the New York Convention), 20 which provides for the recognition and
enforcement of foreign arbitral awards and limits the grounds upon which local courts
may refuse to recognize and enforce awards. Importantly, the New York Convention
makes respect of arbitration agreements a treaty obligation. Although the New York
Convention provides the foundation for international arbitration, it does not address the
issue of state immunity; thus, even if a foreign investor obtains a favourable arbitral
award and seeks to enforce it against state assets located in another state, the assets may
be subject to immunity from execution under the law of the state where the asset is
located.

20
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 Jun.
1958, 330 UNTS 38 (entered into force 7 Jun. 1959).
Page 37 of 122
3 NATURE OF INVESTMENT LAW

The nature of investment makes it inevitable that the nature, structure and purpose of
foreign investment, especially in comparison to trade. In terms of legal methodology, the
difference between the two fields (trade and investment) calls for caution in assuming
commonalities between foreign investment law and trade law.

Foreign investment and trade are related but distinct fields with different legal
frameworks and objectives. While both involve cross-border transactions, they have
different legal methodologies and require different approaches.

Trade law primarily deals with the exchange of goods and services across borders and is
governed by agreements such as the World Trade Organization (WTO) and regional
trade agreements. The primary objective of trade law is to promote free and fair trade by
reducing barriers to trade and preventing discrimination against foreign goods and
services.

Foreign investment law, on the other hand, primarily deals with the legal framework for
investments made by foreign investors in a host country. It focuses on the legal rights
and protections that are available to foreign investors, as well as the legal
obligations of the host country. The primary objective of foreign investment law is to
create a favourable legal environment for foreign investment that promotes economic
growth and development.

Because of the differences in legal methodology and objectives, it's important to

approach foreign investment and trade law with caution and avoid assuming
commonalities between the two fields. While they may intersect in some areas, they
require different legal frameworks and approaches.

3.1 INVESTORS PERSPECTIVE

Making a foreign investment is different in nature from engaging in a trade transaction
where as a trade deal typically consists of a onetime exchange of goods and money, the
decision to invest in a foreign country initiates a longer-term relationship between the
investor and the host country.

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A Key feature in the design of such a foreign investment is to lay out in advance the risks
inherent in such a longer-term relationship both from a business perspective and from
the legal point of view. This involves identifying a business concept and a legal structure
which is suitable to the implementation of the project in general and minimizes risks
which may arise during the period of investment. The dynamics in the relationship
between the host state and the investor differs in nature before and after the investment
has been made.

Larger projects are typically not made under the general laws of the host state and the
foreign investor negotiate a deal which is called an investment agreement which may
adopt the general legal regime of the host country and specific needs and preferences of
both sides. During these negotiations the investor will try to seek legal and other
guarantees necessary in view of the nature and the length of the project.

Considerations will include bilateral and multilateral treaties concluded by the host state
which will provide guarantees between the level of international law. Depending on the
project, the investor may be in the driver’s seat during these negotiations if the state is
keen to attract the investor.

An investor will look at the following:

A. Stable government

A stable government is a key factor for a business to thrive. A government that has a
stable political environment with consistent policies and regulations provides an investor
with a level of confidence to make long-term investments. A stable government can
create a conducive business environment by providing a predictable and transparent legal
framework, protecting property rights, and enforcing contracts.

Here are some additional points to consider:

• Political stability: A government that is stable and predictable can help to

reduce the risk of political instability or social unrest that could disrupt business
operations.

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 • Regulatory environment: Investors may look for countries with a clear and
transparent regulatory environment that is conducive to business. This may
include policies that promote free trade, protect intellectual property, and
provide incentives for investment.

• Legal system: A reliable legal system that enforces contracts and protects
property rights can help to reduce business risk and provide investors with
greater certainty.

Overall, a stable government can create a favourable business environment that attracts
investment and promotes economic growth. Countries with stable governments and
reliable policies and regulations can be more attractive to investors because they provide
a greater degree of confidence and certainty for long-term investments.

B. Infrastructure

Good infrastructure plays a significant role in the success of any business. This includes
factors such as transportation, telecommunications, and energy infrastructure. A good
infrastructure system provides an investor with the necessary resources to transport
goods, communicate effectively and access the energy needed to power their operations.

Here are some examples of the different types of infrastructure that investors may
consider:

• Transportation infrastructure: This includes roads, highways, airports,

seaports, and railways. Investors may look for countries with well-maintained
transportation infrastructure that can provide reliable and efficient access to
markets and supply chains.

• Telecommunications infrastructure: This includes internet access, phone

lines, and other communication networks. Investors may look for countries with
advanced telecommunications infrastructure that can support high-speed
internet connectivity and enable effective communication with customers,
suppliers, and partners.

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 • Energy infrastructure: This includes power plants, transmission lines, and
other energy-related infrastructure. Investors may look for countries with
reliable and affordable energy supplies, as well as policies that support the
development of renewable energy sources.

Overall, a good infrastructure system can provide investors with the necessary resources
to transport goods, communicate effectively, and access the energy needed to power
their operations. Countries with well-developed infrastructure systems can be more
attractive to investors because they can help to reduce business costs and improve
operational efficiency.

C. Investment policies

Investors would look for investment policies that are transparent and consistent, with a
clear framework for foreign investment. Policies that promote investment in sectors such
as technology, healthcare, and renewable energy would be attractive to investors.

Some additional points to consider for each of these sectors:

• Technology: Investors may look for policies that support research and
development, provide tax incentives for investment in tech start-ups, and
encourage the growth of tech hubs or clusters. Countries with strong intellectual
property laws and robust broadband infrastructure may also be attractive to tech
investors.

• Healthcare: Investors may look for policies that support the development of
new drugs or medical technologies, provide funding for clinical trials, and
promote partnerships between the private sector and healthcare providers.
Countries with strong healthcare systems and a focus on preventative care may
also be attractive to healthcare investors.

• Renewable energy: Investors may look for policies that provide tax incentives
or subsidies for renewable energy projects, support research into new energy
technologies, and promote the growth of clean energy infrastructure. Countries

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 with a strong commitment to reducing carbon emissions and transitioning to a
low-carbon economy may also be attractive to renewable energy investors.

Overall, investors are likely to prefer countries with investment policies that create a
supportive environment for growth and innovation in these key sectors.

D. Labour

The availability of skilled and unskilled labour is an essential factor for an investor. A
strong workforce with the necessary skills to drive business operations can lead to greater
productivity and a competitive advantage.

Here are some countries with highly skilled and productive workforces:

1. Switzerland: Switzerland is known for its highly skilled workforce in areas such
as technology, engineering, and finance. The country has a strong focus on
education and training, and its workforce is renowned for its efficiency,
precision, and attention to detail.

2. Germany: Germany has a well-trained and highly skilled workforce, particularly

in areas such as engineering, manufacturing, and technology. The country's
apprenticeship system is highly regarded, and its workforce is known for its
technical expertise and efficiency.

3. Singapore: Singapore has a highly educated and skilled workforce, particularly

in areas such as finance, technology, and research. The country's education
system is renowned for its emphasis on science, technology, engineering, and
mathematics (STEM) subjects, and its workforce is known for its high levels of
productivity and innovation.

4. United States: The United States has a large and diverse workforce, with highly
skilled workers in areas such as technology, finance, and healthcare. The country
has a strong focus on innovation and entrepreneurship, and its workforce is
known for its creativity and problem-solving skills.

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 5. Japan: Japan has a highly skilled and educated workforce, particularly in areas
such as technology, manufacturing, and research. The country's education
system is rigorous and emphasizes technical skills, and its workforce is known
for its attention to detail and quality.

Overall, a country's workforce is a critical factor for investors to consider when making
investment decisions, and countries with strong and productive workforces can provide
a competitive advantage in today's global economy.

E. Double Taxation Policy

Double taxation is a situation where a taxpayer is required to pay taxes on the same
income in two or more countries. This can occur when a person or company earns
income in one country and is also required to pay taxes on that same income in another
country.

Double taxation can be a significant deterrent to investment because it increases the cost
of doing business and reduces the returns on investment. As a result, investors would
typically prefer to invest in countries with tax policies that minimize the chances of
double taxation.

To avoid double taxation, countries may have tax treaties in place that specify how taxes
should be paid and which country has the right to tax specific types of income.
Additionally, some countries may offer tax credits or exemptions to investors who have
paid taxes on their income in another country. As an investor, it is essential to understand
a country's tax policies and any tax treaties they have in place to determine the tax
implications of investing in that country. This can help to minimize the chances of
double taxation and maximize the returns on investment.

F. Climate and weather

Weather conditions can have a significant impact on certain industries such as

agriculture, tourism, and renewable energy. A stable climate with favourable weather
conditions can provide an investor with the necessary conditions to operate their
business effectively.
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here are some examples of how weather conditions can impact different industries:

1. Agriculture: Weather conditions such as temperature, rainfall, and humidity

can significantly impact crop production. For example, droughts can lead to
crop failure, while excess rainfall can lead to flooding and waterlogging, both of
which can be detrimental to crops. Conversely, a stable climate with moderate
rainfall and temperatures can provide ideal growing conditions for crops such
as fruits, vegetables, and grains.

2. Tourism: Weather conditions can have a significant impact on tourism. For

instance, areas with mild temperatures, sunshine, and low humidity can be more
attractive to tourists than areas with extreme weather conditions. Good weather
can also be a key factor in the success of outdoor activities such as hiking,
swimming, and skiing.

3. Renewable Energy: Weather conditions such as wind speed and solar

irradiation can significantly affect the efficiency of renewable energy systems.
For example, wind turbines require consistent wind speeds to generate
electricity efficiently. Areas with stable wind patterns are, therefore, more
conducive to wind energy production. Similarly, solar panels require access to
sunlight to produce electricity. Areas with high levels of solar irradiation are,
therefore, more suitable for solar energy production.

3.2 HOST STATE PERSPECTIVE (ATTRACTING FOREIGN

INVESTMENT)
The purpose of investment treaties is to address the typical risks of a long-term
investment project and thereby to provide stability and predictability in the sense of an
investment friendly climate. Under the rules of customary international law, no state is
under an obligation to admit foreign investment in its territory. Generally, or in particular
segment of its economy. While the right to exclude and to regulate foreign investment
is an expression of state sovereignty, the powers to conclude treaties with other states
will also be seen as flowing from the same concept. Once it has admitted foreign
investment, a host state is subject to a minimum standard of customary international law.
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Modern treaties on foreign investment goes beyond the minimum standard in the scope
of obligations a host state owes towards a foreign investor. Legal security in a host state
for an investment project is one of the several factors that will influence on investment
decision but the driving parameters are determined not by legal dimensions but by
economic consideration.

On the other hand, globalization has led to the relatively accurate real-time information
about economic and legal matters around the world and the lack of legal stability
surrounding a potential investment in a country may prevent a positive decision on the
part of the investor. Another major advantage of treaties for the protection of
investment of investment arbitration in particular is that investment disputes become
“de-politicized”.

This means that the distance the dispute from the host state and the state of investor for
example the dispute is moved from the political interstate arena and moved into the
judicial arena of investment arbitration.

3.3 INTERNATIONAL INVESTMENT LAW AND GOOD

GOVERNANCE
The concept of good governance has increasingly influenced the international
development agenda. Earlier periods of development practice after 1945 had focused
first on the significance of individual projects and on the raw of micro-economic policies.
The new thinking, along with empirical studies highlighted the facts that all projects and
policies depends in their implementation and indeed, in their conception and
formulation on a functioning state institution. As a consequence, the concept of good
governance has moved to the centre of international aid and poverty reduction policy.

The first coherent formulation of concept seems to be contained in a world bank report
written on sub-Saharan Africa of 1989 on Development challenges. No single definition
has subsequently been adopted, but the core element has been expressed in written
documents by World Bank and IMF. In the treaty between European Community and
African, Caribbean and the Pacific states as adopted in 2001, the so-called Cotonou
Agreement. The wording is as follows: Article 9(3) of the Agreement
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In the context of a political and institutional environment that upholds human rights, democratic
principles and the rule of law, good governance is the transparent and accountable management of human,
natural, economic and financial resources for the purposes of equitable and sustainable development.

Main principles

The Cotonou Agreement replaced the Lomé Convention, which had been the basis for
ACP-EU development cooperation since 1975. The Cotonou Agreement, however, is
much broader in scope than any previous arrangement has ever been. It is designed to
last for a period of 20 years and is based on four main principles:

Equality of partners and ownership of development strategies. In principle, it is up

to ACP states to determine how their societies and their economies should develop.
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Participation. In addition to the central government as the main actor, partnership
under the Cotonou Agreement is open to other actors (e.g., civil society, the private
sector, and local governments).

Dialogue and mutual obligations. The Cotonou Agreement is not merely a pot of
money. The signatories have assumed mutual obligations (respect for human rights)
which will be monitored through continuing dialogue and evaluation.

Differentiation and regionalisation. Cooperation agreements will vary according to

each partner's level of development, needs, performance and long-term development
strategy. Special treatment will be given to countries that are considered least developed
or vulnerable (landlocked or island states).21

Political dimension

The Cotonou Agreement wishes to give a stronger political foundation to ACP-EU

development cooperation. Therefore, political dialogue is one of the key aspects of the
arrangements and addresses new issues which have previously been outside the scope of
development cooperation, such as peace and security, arms trade and migration.
Furthermore, the element of "good governance" has been included as an "essential
element" of the Cotonou Agreement, the violation of which may lead to the partial or
complete suspension of development cooperation between the EU and the country in
violation. It was furthermore agreed that serious cases of corruption, including acts of
bribery, could trigger a consultation process and possibly lead to a suspension of aid.22

The origin of the concept of good governance falls in the same period as the formation
of the Washington Consensus in the 1980s and the beginning of the wave of investment
treaties of the 1990s. The common core of the policies embedded in investment treaties
in the Washington consensus and the principle of good governance lies in the
recognition that institutional effectiveness, the rule of law and an appropriate degree of
stability and predictability of policies form the governmental framework for domestic

21
Article 2 of the Cotonou Agreement
22
Article 8 of the Cotonou Agreement
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economic growth and also for the willingness of foreign investors to enter the domestic
market. Thus, investment treaties provide for external constraints and discipline which
foster and reinforce values. Similar to principle of good governance with its emphasis
on domestic institutions and policies.

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4 NATIONALIZATION

Nationalization is the process of transferring private assets into public assets by bringing
them under public ownership of national government or state. In order for
nationalization to be legal, it must be for the public purpose and accompanied by the
payment of compensation. A good example is what occurred in 1969 in Zambia when
the government acquired a 51% stake in mines belonging to the Lone Selection Trust
and the Anglo-American Corporation, the mines were compensated.

Transfer of property/Taking of property

Tribunals have generally accepted the definition of taking as adopted by John and Baxter
Draft Convention on the state responsibility which is sometimes referred to as the
Harvard Draft. State responsibility is a fundamental principle of international law, arising
out of the nature of the international legal system and the doctrines of state sovereignty
and equality of states. It provides that whenever one state commits an internationally
unlawful act against another state, international responsibility is established between the
two. A breach of an international obligation gives rise to a requirement for reparation.

Draft Convention on state Responsibility 1961

The 1961 Draft Convention on state Responsibility set the modern tone to the definition
of expropriation or taking of foreign private property in the following words: ‘

a) A ‘taking of property’ includes not only an outright taking of property but also
any such unreasonable interference, use, enjoyment, or disposal of property as
to justify an inference that the owner thereof will not be able to use, enjoy, or
dispose of the property within a reasonable period of time after the inception
of such interference.
b) A ‘taking of the use of property’ includes not only an outright taking of property
but also any unreasonable interference with the use or enjoyment of property
for a limited period of time.23

23
Article 10 of the Draft Convention on the International responsibility of States for injuries
for Aliens.
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When employing the term ‘a similar definition of taking was dealt with in the case of
Tippets, Abbett, McCarthy, Stratton v Tams-Affa ‘as deprivation or taking of
property may occur under international law through interference by a state in the use of
that property or with the enjoyment of its benefits, even where legal title to the property
is not affected.’ It would therefore appear from both definitions that there must be some
kind of interference perpetrated by the host state which has an adverse impact on the
investors use and enjoyment of their property.

Iran-US Claims Tribunal, Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA, 6 IRAN-

U.S. C.T.R

The Claimant, Tippetts, Abbett, McCarthy, Stratton ("TAMS") is a United States engineering and
architectural consulting partnership. TAMS and Aziz Farmanfarmaian and Associates ("AFFA"),
an Iranian engineering firm, created and equally owned TAMS-AFFA, an Iranian entity created
for the sole purpose of performing engineering and architectural services on the Tehran
International Airport ("TIA") project. This performance was based on a contract entered into on
19 March 1975 by TAMS and AFFA on the one hand and the Civil Aviation Organization
("CAO") on the other.

TAMS presents four claims to the Tribunal. First, TAMS claims against the CAO on the basis of
the TIA contract for its share of the billed and unbilled amounts allegedly due TAMS-AFFA
under that contract and for amounts retailed as good performance guarantees by CAO from
invoices that were paid to TAMS-AFFA. Second, TAMS claims against the Government of Iran
for the value of its fifty-percent interest in TAMS-AFFA which it alleges was expropriated by the
Government of Iran. In the event the Tribunal should hold that its first claim against CAO is
excluded from the jurisdiction of the Tribunal by the forum selection clause, then TAMS asserts
that the value of TAMS-AFFA would include TAMS-AFFA's accounts receivable from CAO
under the TIA contract. Third, TAMS seeks a cash deposit it maintained with Bank Melli and
which it alleges was wrongfully retained by Bank Melli. Finally, TAMS seeks the cancellation of
bank guarantees and undertakings related to the TIA project. TAMS originally presented a fifth
claim for personal property allegedly expropriated, but it later withdrew that claim.

The Respondents deny the jurisdiction of the Tribunal on various grounds and deny any liability
to the Claimant on the claims. The CAO counterclaims, alleging inadequate and defective
contract Performance by TAMS. The Respondents deny that TAMS-AFFA was expropriated and

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allege that its value had by 1979 become negative. TAMS-AFFA counterclaims for a share of the
debts it allegedly owes to third Parties. Bank Sakhteman and the Mercantile Bank of Iran and
Holland counterclaim for maintenance charges for bank guarantees issued at the request of
TAMS-AFFA.

The tribunal awards as follows:

The Respondent, Government of the Islamic Republic of Iran, is obligated to pay the Claimant,
Tippetts, Abbett, McCarthy, Stratton, U. S. $5, 594,405, plus interest at the rate of 12 percent per
year, calculated as from 1 March 1980 to the date on which the Escrow Agent instructs the
Depositary Bank to effect payment out of the Security Account. This obligation shall be satisfied
by payment out of the Security Account established by paragraph 7 of the Declaration of the
Government of the Democratic and Popular Republic of Algeria of 19 January 1981.

The counterclaims of TAMS-AFFA are dismissed on the merits, except to the extent the
counterclaims include a counterclaim for taxes allegedly owed by the Claimant to the Iranian tax
authorities, which counterclaim is dismissed for lack of standing by TAMS-AFFA to present it.
The remainder of the claims and counterclaims are dismissed for lack of jurisdiction. Each of the
parties shall bear its own costs of arbitrating this claim.

4.1 NATIONALIZATION LEGALITY

Nationalization is as a general rule legal. International case law certainly does endorse
this rule as in the case of German Interest in Upper Silesia also known as the Chorzow
case.

In addition, nationalization is legal under customary international law. The General

Assembly Resolution 1803 (1962) on Permanent Sovereignty Over Natural
Resources states that States do have Sovereignty over their natural resources and as
such states do have the right to take over property within their jurisdiction.

Furthermore, we have the Charter of the Economic Rights and Duties of States
(CERDS) which states;

1. Every State has and shall freely exercise full permanent sovereignty including
possession, use and disposal over all its wealth, natural resources and economic
activities.
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 2. Each state has the right… to Nationalize, expropriation or transfer ownership
of foreign property, in which case appropriate compensation should be paid by
the state adopting such measures, taking into account its relevant laws and
regulations and all circumstances that the state still consider pertinent.

An overwhelming majority of IIAs allow States to expropriate investments as long as the

taking is affected according to the following criteria:

a. For a public purpose

The requirement that an expropriation must be made for a public purpose is recognized
by most legal systems and is a rule of international law. The taking of property must be
motivated by the pursuance of a legitimate welfare objective, as opposed to a purely
private gain or an illicit end. This condition is reflected in most domestic legal systems
as well, which indicates a convergence of approaches among States in various regions
with different legal cultures.

In ADC v. Hungary, the tribunal noted that:

“… a treaty requirement for ‘public interest’ requires some genuine interest of the public. If
mere reference to ‘public interest’ can magically put such interest into existence and therefore
satisfy this requirement, then this requirement would be rendered meaningless since the
Tribunal can imagine no situation where this requirement would not have been met.”

The public purpose requirement is considered by reference to the time when the
expropriator measure was taken. Whether or not the goal originally sought by the
measure is achieved does not affect the public purpose requirement. Conversely, an
expropriation that was affected but not for a public purpose will not be rendered lawful
if the taken property starts serving a public purpose at a later stage.

In Siag and Vecchi v. Egypt, the Egyptian authorities expropriated the land owned by
the claimants on grounds of delays in the construction of a tourist project. The measure
did not contain an explicitly stated public policy objective. Six years after the date of the
taking, the property was transferred to a public gas company for the construction of a
pipeline. For the tribunal, the fact that the land was later used in a public-interest project
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was irrelevant: “The Tribunal does not accept that because an investment was eventually put to public
use, the expropriation of that investment must necessarily be said to have been ‘for’ a public purpose”

Nonetheless, in the context of investor-State disputes, tribunals have scrutinized the

public purpose requirement in the past and seem keener to do so at present. In BP
Exploration Co. v. Libya, the ad hoc arbitrator held that the taking of a foreign oil
company as an act of political retaliation did not qualify as a public purpose

b. In a non-discriminatory manner;

Arbitral tribunals have found this requirement to have been violated when a State has
discriminated against foreign nationals on the basis of their nationality. However, not all
distinctions between different types or classes of investors are discriminatory
(Newcombe and Paradell, 2009, p. 374). Tribunals take a nuanced approach to
expropriations that affect only some foreigners if such discrimination may be the result
of legitimate government policies.

An expropriation that targets a foreign investor is not discriminatory per se: the
expropriation must be based on, linked to or taken for reasons of, the investor’s
nationality. For instance, in GAMI Investments v. Mexico, the Mexican government
expropriated a number of sugar mills owned by a Mexican company with foreign
participation. However, the expropriations were not taken because of the origin of the
investments, but related instead to the precarious financial conditions of the
expropriated mills. The tribunal held:

“…a reason exists for the measure which was not discriminatory. That the measure
plausibly connected with a legitimate goal of policy (ensuring that the sugar industry was
in the hands of solvent enterprises) and was applied neither in a discriminatory manner
nor as a disguised barrier to equal opportunity. …

GAMI [the foreign investor] has failed to demonstrate that the measure it invokes
resulted from or have any connection with GAMI’s participation in GAM [the local
company which owned the mills]; nor were they geared towards treating GAM in a
different mode because of GAMI’s participation in their social capital.”

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 c. In accordance with due process of law

The due-process principle requires that the expropriation comply with procedures
established in domestic legislation and fundamental internationally recognized rules in
this regard and that the affected investor have an opportunity to have the case reviewed
before an independent and impartial body (right to an independent review).

In addition, the expropriation process must be free from arbitrariness. The International
Court of Justice (ICJ) defined arbitrariness as “a wilful disregard of due process of law, an act
which shocks, or at least surprises, a sense of juridical propriety”.

Examples of disregard of due process would be when an expropriation lacks legal basis
(no law or procedure properly established beforehand to order the expropriation), when
the investor has no recourse to domestic courts or administrative tribunals in order to
challenge the measure or when the State engages in abusive conduct. Treaty wording can
have significant implications when it comes to assessing the requirement. However,
whether explicitly referred to or not, the relevant procedures must be assessed against
the domestic laws and regulations of the host State and its judicial and administrative
system. In ADC v. Hungary, the tribunal found a violation of the requirement for due
process, and stated as follows:

“… ‘due process of law’, in the expropriation context, demands an actual and substantive
legal procedure for a foreign investor to raise its claims against the depriving actions already
taken or about to be taken against it. Some basic legal mechanisms, such as reasonable
advance notice, a fair hearing and an unbiased and impartial adjudicator to assess the
actions in dispute, are expected to be readily available and accessible to the investor to make
such legal procedure meaningful.

In general, the legal procedure must be of a nature to grant an affected investor a reasonable
chance within a reasonable time to claim its legitimate rights and have its claims heard. If
no legal procedure of such nature exists at all, the argument that ‘the actions are taken
under due process of law’ rings hollow.

d. Against the payment of compensation

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The last condition for an expropriation to be lawful is that it must be accompanied by
compensation. Different methods of valuation may be employed to determine the
amount of compensation and may lead to varying results. The differences between
compensation for lawful expropriation and reparation for unlawful expropriation are
discussed separately.

The World Bank Guidelines on the Treatment of Foreign Direct Investment define fair
market value as:

“An amount that a willing buyer would normally pay to a willing seller after taking into
account the nature of the investment, the circumstances in which it would operate in the future
and its specific characteristics, including the period in which it has been in existence, the
proportion of tangible assets in the total investment and other relevant factors pertinent to the
specific circumstances of each case.”

4.2 NATIONALIZATION ILLEGALITY

a. Breach of a Treaty

If the nationalization is in breach of a treaty, then it is illegal. This was clearly illustrated
in the Chorzow Factory Case. In this case the ICJ was dealing with a situation whereby
Poland nationalized a nitrate factory that belonged to a German national. The Germans
and the Poles had a treaty that which stated that they would not nationalize each other’s
assets. This is cited as authority that the ICJ said that Poland had the right to nationalize.
However, the nationalization was illegal because there was a treaty here to say that they
would not nationalize each other’s stuff.

Biwater Gauff Limited v. United Republic of Tanzania

The World Bank funded Tanzania for a project to repair, upgrade and expand the water and
sewage infrastructure in Dar es Salaam. A condition of the fund was that Tanzania had to appoint
a private company to manage and operate this project. Biwater Gauff, a British and German
company, was chosen to oversee the infrastructure project and entered into subcontracts with
local Tanzanian companies. Later, the assets of one such subcontractor, City Water, were seized,

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new management was installed and the whole business was overtaken by the Tanzanian
Government and the Dar el Salaam Water and Sewage Authority.

The plaintiff, Biwater Gauff, claims that in doing so, Tanzania breached the terms of a bilateral
investment treaty between the UK and Tanzania for the Promotion and Protection of
Investments (BIT) and violated the terms of the Tanzanian Investment Act. They claimed that
Tanzania had expropriated its assets, failed to act for a public purpose, acted on a discriminatory
basis towards the plaintiff and did not provide adequate compensation. Tanzania argued that
retaking possession of City Water’s assets was justified, because the company did not have
sufficient funds to perform infrastructure improvements so that it created a risk to public health
and welfare.

The Tribunal held that terminating City Water’s management personnel was an expropriation of
the plaintiff’s investment under Article 5 of the BIT. Furthermore, it was decided that Tanzania
indeed acted in a discriminatory manner towards the plaintiff and that they failed to fulfil the
public’s expectation regarding a quick improvement of the water infrastructure, thus violating
Article 2(2) of the BIT. All of the plaintiff’s additional claims were rejected.

b. Discriminatory

Another situation in which nationalization will be illegal is if it is discriminatory.

Discrimination occurs when a specific nationality is targeted.

Siderman de Blake v Republic of Argentina

Siderman de Blake settled in Central District Court for D. Calif., Sept. 13, 1996). Siderman, a
wealthy Jewish businessman, charged that he was abducted by the military on the night of its
coup d’état in 1976 and savagely subjected to torture, deprivation of food and water, anti-Semitic
insults and repeated threats for seven days. He and his family fled to the U.S. and his property
was expropriated by the military. In 1982, the Siderman family filed a complaint in a U.S. district
court, against Argentina, based on the torture and harassment of Siderman and the illegal
expropriation of the family's property.

The Court of Appeals for the Ninth Circuit held, inter alia, that Argentina impliedly waived its
immunity under the Foreign Sovereign Immunities Act, 28 U.S.C. Sec. 1605(a)(1), by implicating
U.S. courts in its persecution when it attempted to file suit against Siderman in Los Angeles

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Superior Court in an effort to seize more of his property. The Court found the nationalization to
be illegal.

Mike Campbell (Pvt) Ltd et al. v. Republic of Zimbabwe

This a case decided by the Southern African Development Community (SADC) Tribunal
(hereinafter "the Tribunal"). The Applicants alleged that their property rights in agricultural lands
had been infringed by a provision in the Zimbabwean Constitution which effectively vested the
ownership of all agricultural lands compulsorily acquired under it to the State, as well as racial
discrimination in the application of the provision. The provision additionally ousted the
jurisdiction of the courts to entertain any challenge concerning such acquisitions of agricultural
land. The Tribunal, in effect, exercised judicial review of the Zimbabwean Constitution on its
compatibility with the SADC Treaty as well as general human rights principles as enshrined in
international instruments. It ruled that the ouster clause in the Zimbabwean Constitution that
precluded the Applicants from litigating their case in the Zimbabwean courts violated the rule of
law as well as Zimbabwe's international human rights treaty obligations.

The Tribunal canvassed a number of issues which directly impact on human rights and these
were: the jurisdiction of the Court to entertain the matter, denial of the right of access to courts,
exhaustion of domestic remedies, the right to freedom from discrimination and the right to fair
compensation for deprivation of property. With regards to the obligation to exhaust domestic
remedies, the Tribunal ruled that where the municipal law does not offer any remedy or the
remedy that is offered is ineffective, the individual is not required to exhaust the local remedies.
The Tribunal found that the concept of the rule of law embraces at least two fundamental rights,
namely;

The right of access to the courts and the right to a fair hearing before an individual is deprived
of a right, interest or legitimate expectation. Zimbabwe was also found to have discriminated
against the Applicants on the basis of race, thereby violating its obligation under the SADC Treaty
and international human rights instrument.

In Aminoil v Kuwait case, an arbitral tribunal held that if the government is targeting
just one sector of the industry, this does not amount to discrimination per se. If a country
nationalized only two out of ten of the same corporations on the basis that they are
carrying out progressive nationalization, a court would probably accept the country ‘s

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arguments, but would have to demonstrate the lack of capacity to take the corporations
all at once.

There is a danger that progressive nationalization is discriminatory but have to look at

the individual facts of the case. The burden of proof of discrimination falls upon the
party challenging the nationalization.

c. Nationalization is illegal if there is no compensation

In order for nationalization to be legal you need compensation. There is some dispute
as to how much compensation the injured party needs to be paid. On the one hand, the
hull principle requires that a nationalizing state pay full, prompt and effective
compensation. Full according to this principle means that the nationalizing state should
put in the same position that he/she would be had the property not been nationalized.

This may mean paying the market value of the enterprise and sometimes future profits.
Prompt means the payment must be made relatively quick. In other words, there should
not be unreasonable delay. Effective means that the currency should be freely
convertible and transferable.

4.3 CATEGORIES OF EXPROPRIATION

Nationalization usually refers to massive or large-scale takings of private property in all
economic sectors or on an industry – or sector-specific basis. Outright nationalizations
in all economic sectors are generally motivated by policy considerations; the measures
are intended to achieve complete State control of the economy and involve the takeover
of all privately owned means of production.

Many former colonies regarded nationalizations as an integral part of their

decolonization process in the period following the end of the Second World War.
Nationalizations on an industrywide basis take place when a government seeks to
reorganize a particular industry by taking over the private enterprises in the industry and
creating a state monopoly. In these cases, the assets taken become publicly owned.

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Expropriations generally refer to property-specific or enterprise-specific takings where
the property rights remain with the State or are transferred by the State to other
economic operators. Expropriations may consist of a large-scale taking of land by the
State, made with the purpose of redistributing it, or specific takings where the target is a
specific foreign firm (for example, a firm dominating a market or industry) or a specific
plot of land (for example, to build a highway).

Direct expropriation

Direct expropriation means a mandatory legal transfer of the title to the property or its
outright physical seizure. Normally, the expropriation benefits the State itself or a State-
mandated third party. In cases of direct expropriation, there is an open, deliberate and
unequivocal intent, as reflected in a formal law or decree or physical act, to deprive the
owner of his or her property through the transfer of title or outright seizure.

Indirect expropriation

Indirect expropriation involves total or near-total deprivation of an investment but

without a formal transfer of title or outright seizure. The notion was recognized in
international law long before the appearance of investment treaties.

In some early judicial and arbitral decisions, such as the Case concerning certain German
Interests in Polish Upper Silesia (the Chorzow Factory case) and the Norwegian Shipowners’ Claims
case, it was found that a State measure can constitute an indirect expropriation. Likewise,
the Iran-United States Claims Tribunal repeatedly referred to the existence of indirect
expropriation under international law and identified a number of tests in that respect. A
classical definition can be found in the Starrett Housing case:

“…it is recognized under international law that measures taken by a State can interfere with property
rights to such an extent that these rights are rendered so useless that they must be deemed to have been
expropriated, even though the State does not purport to have expropriated them and the legal title to the
property formally remains with the original owner.”

Issues relating to indirect expropriation have been addressed by the European Court of
Human Rights. It has been discussed in other instruments, including the Harvard Draft
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Convention on the International Responsibility of States for Injury to Aliens (1961) and
the Third Restatement of Foreign Relations Law of the United States (1987). Although
these two documents are not binding, they are considered to be an influential element
of doctrine (Organisation for Economic Cooperation and Development (OECD).

The terminology is not fully uniform and one can encounter references to de facto,
creeping, constructive, disguised, consequential, regulatory or virtual expropriation
(Weston, 1976, pp. 105–106; Stern 2008, pp. 38–39). All of these are equivalents or
subcategories of indirect expropriation. The subcategory worth highlighting is the so-
called creeping expropriation that results in a deprivation of property or a loss of control
but which occurs gradually or in stages.

Creeping expropriation

May be defined as the incremental encroachment on one or more of the ownership rights
of a foreign investor that eventually destroys (or nearly destroys) the value of his or her
investment or deprives him or her of control over the investment. A series of separate
State acts, usually taken within a limited time span, are then regarded as constituent parts
of the unified treatment of the investor or investment.

On the basis of State practice, doctrine and arbitral awards, indirect expropriations are
characterized by the following cumulative elements:

a. An act attributable to the State;

b. Interference with property rights or other protected legal interests;

c. Of such degree that the relevant rights or interests lose all or most of their value
or the owner is deprived of control over the investment;

d. Even though the owner retains the legal title or remains in physical possession.

The Tribunal in Generation Ukraine v Ukraine, also Rumeli v Kazakhstan, explained

creeping expropriation as follows:

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“Creeping expropriation is a form of indirect expropriation with a distinctive temporal quality in the
sense that it encapsulates the situation whereby a series of acts attributable to the state over a period of
time culminate in the expropriator taking of such property…………. A plea of creeping expropriation
must proceed on the basis that the investment existed at a particular point in time and that subsequent
act attributable to the state have eroded the investor’s rights to its investment to an extent that is violative
of the relevant international standard of protection against expropriation.”

Partial expropriation

Some tribunals have accepted the possibility of an expropriation of particular rights that
formed part of an overall business operation without looking at the issue of control over
the entire investment. In Middle East Cement v Egypt, the investor had, inter alia,
obtained an import licence for cement and had operated ship. Egypt subsequently took
measures that prevented the investor from operating its licence and seized and auctioned
the ship. The investor raised a series of claims in respect of which it alleged
expropriation. These included but went beyond the import licence and ownership of the
ship.

The tribunal looked at these claims separately and determined in respect of each whether
an expropriation had taken place. It found that the licence qualified as an investment and
that the measures that prevented the exercise of the rights under it amounted to an
expropriation. The tribunal examined separately whether an expropriation of the ship
had occurred and gave an affirmative answer. Therefore, this case demonstrates that it
is possible separately to expropriate specific rights enjoyed by the investor regardless of
control over the overall investment as also in Eureko v Poland.

4.4 COMPENSATION

4.4.1 PROMPT, ADEQUATE AND EFFECTIVE COMPENSATION

The ‘’ prompt, adequate and effective’’ standard is likely to be applied by (1) U.S. courts
or tribunals applying a U.S. norm of compensation theory, or searching for an
international standard, or (2) U.S. courts or tribunals applying an agreement between the

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parties or nations that calls for the application of the prompt, adequate and effective
standard, such as a bilateral investment treaty.

There is no assurance, however, that a U.S. court or tribunal searching for ‘’the’’
international law will arrive at a prompt, adequate and effective rule. The 1981 Banco
Nacional v. Chase Manhattan Bank decision suggested that the consensus of nations
was to apply an ‘’appropriate’’ standard, and quoted one highly regarded American
author who rejected the prompt, adequate and effective standard as a norm of
international law.

Banco Nacional de Cuba v Chase Manhattan Bank

This was a legal dispute between the Banco Nacional de Cuba (BNC) and the Chase Manhattan
Bank (Chase). The case involved the issue of whether or not Chase was entitled to set off certain
debts owed to it by BNC against funds that were held by Chase for the account of BNC.

In 1959, the Cuban government nationalized all property owned by foreign entities, including the
Cuban branches of American banks. BNC, a Cuban state-owned bank, had maintained a
correspondent account with Chase, which is a New York-based bank. The Cuban nationalization
caused Chase to freeze BNC's funds that were held in its correspondent account. As a result,
BNC was unable to access its funds, and a dispute arose between the two banks. In 1960, BNC
brought an action against Chase in a New York court, seeking to recover the funds held by Chase.
Chase argued that it was entitled to set off against the funds the amount owed to it by BNC under
various loan agreements. The New York court ruled in favour of Chase, and BNC appealed the
decision to the Second Circuit Court of Appeals.

The Second Circuit Court of Appeals upheld the lower court's decision and ruled in favour of
Chase. The court held that Chase was entitled to set off the amounts owed to it by BNC against
the funds held by Chase for the account of BNC. The court found that the setoff was authorized
under the terms of the loan agreements and that BNC had waived any objection to the setoff by
continuing to maintain its correspondent account with Chase after the loans were made.

4.4.2 APPROPRIATE COMPENSATION NORM

The ‘’appropriate’’ compensation norm is the standard in U.N. Resolution 1803 of 1962,
which in the view of many jurists remains the most likely norm to be applied. It has been
suggested as the standard in the Banco Nacional decision noted above, and in at least
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two important international arbitrations, the TOPCO/CALASIATIC and AMINOIL
cases.

Today virtually all bilateral investment treaties (BITs) contain an expropriation provision.
Customary international law also contains rules on the expropriation of foreign owned
property and continues to supplement IIAs on those issues where the latter leave gaps
or require interpretation

Kuwait nationalization

The Government of the State of Kuwait v The American Independent Oil Company
(‘Kuwait v Aminoil’)

Facts:

In 1948 Kuwait granted to Aminoil, a US company, a 60-year oil concession. The price for the
concession was based on a fixed royalty for every ton of oil recovered. The Concession
Agreement contained a stabilization clause that prevented Kuwait from unilaterally annulling or
altering the terms of the Agreement.

In 1961 Kuwait and Aminoil supplement the fixed-royalties principle of the Concession
Agreement with a 50/50 profit-sharing arrangement. In 1973 the parties agreed on another set of
changes to the Concession Agreement further increasing the Government’s ‘take’. Although the
1973 Draft Agreement was never ratified by the Kuwaiti parliament, in a separate letter the parties
agreed to apply the agreement as if it was ratified. Subsequently, Kuwait demanded to further
increase its ‘take’ under the ‘Abu Dhabi formula’ agreed by the OPEC countries. Aminoil did not
consent and in 1977 Kuwait nationalized the concession with an envisaged payment of ‘fair’
compensation.

On the basis of a separate arbitration agreement, Aminoil initiated arbitration proceedings

contesting the nationalization as contrary to the stabilization clause. Aminoil also challenged the
1973 agreement and the ‘Abu Dhabi formula’ and claimed damages of almost US$ 3 billion
(largely lost profits until 2008). Kuwait counterclaimed and requested the sums allegedly owed to
it by Aminoil under the 1973 agreement and the ‘Abu Dhabi formula’.

The Tribunal found that both 1973 Draft Agreement and ‘Abu Dhabi formula’ were valid and
applicable to Aminoil’s concession. The Tribunal further determined that the nationalization was

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lawful and did not violate the stabilization clause, as the latter prevented only ‘confiscatory
nationalizations.

Decision:

The Tribunal held that in accordance with the 1962 UN Resolution, Aminoil was entitled to
‘appropriate compensation’. The latter was calculated by the Tribunal on the basis of Aminoil’s
assets valued using their replacement cost (the net book value method was rejected as inadequate)
and Aminoil’s value as a going concern estimated on the basis of Aminoil’s legitimate expectations
of a reasonable rate of return. The resulting amount was decreased by Aminoil’s debt to Kuwait,
leaving US$ 83 million in compensation.

This amount was adjusted to account for inflation; compound interest was awarded.

Libyan nationalization

TOPCO/CALASIATIC v. Libya Arbitration

Facts:

The Petroleum Law, 1955 granted deeds of concession to nine international oil companies
including Texaco Overseas Petroleum Company and California Asiatic Oil Company
with a clause which guarantee the rights of the companies which could not be altered except
by mutual consent of the parties. With the advent of oil production, Libya was eager to have the
Deed of Concession revised in order to obtain additional financial benefits. The Deed went
through series of modification.

On September 1, 1973, Libya announced the nationalization of 51 percent of the

interests and properties of the nine international oil companies operating in Libya. On February
11, 1974, Libya again announced the nationalization of the remaining 49 percent of the joint
interests and properties of two of those oil companies, Texaco Overseas Petroleum
Company and California Asiatic Oil Company.

The companies sent notices to the Libyan government requesting arbitration which the
government refused to acknowledge. The two companies objected to the nationalization decrees
and invoked the arbitration provision under the Deeds of Concession.

Issues:

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Texaco Overseas Petroleum Company and California Asiatic Oil Company relied on the
enforceability and breach of the Deeds of Concession by Libya. They also contended that the
Deeds of Concession was not an administrative contract hence the expropriations of their interest
in the nationalization decree are unjustified.

Libya on the other hand argued in their Memorandum to the President of the International Court
of Justice that:

a. The dispute was not subject to arbitration because nationalizations were

acts of the sovereignty.
b. The arbitration proceedings were instituted against the Libyan Arab Republic, while the
Deeds of Concession were concluded by the Minister of Petroleum and, consequently,
the Libyan Arab Republic, a sovereign state, was not a party
c. There could not be an arbitration because there was no dispute between the parties.

The Sole Arbitrator considered the first substantive question as whether the Deeds of Concession
are binding on the parties. He had little trouble finding overwhelming authority in both Libyan
and international law that the principle of “pacta sunt servanda” (treaties shall be complied with).
This doctrine was found in Islamic Law which is a source of Libyan law. The Libyan civil code
also affirms this doctrine.

On the concept of Sovereignty and Nationalization measures, it was upheld that a state
undoubtedly can enact measures affecting its own nationals or aliens. However, where the state
has entered into an international contract with a foreign contracting party, the state is bound by
the international legal order to recognize the terms and conditions of that agreement. It is a basic
attribute of sovereignty fora state to respect all international commitments and be held to abide
by them.

Libya in their Memorandum to the President of the International Court of Justice relied on as
soft law (United Nations General Assembly Resolutions, UNGA), the concept of permanent
sovereignty over natural resources. UNGA Resolutions 3171 and 3201 in effect removed any
sovereign action relating to permanent sovereignty over natural resources from the standards of
international law and conferred exclusive competence upon the legislative and judicial branch of
the host country.

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The Sole Arbitrator focused the consensus of stated and voting patterns within the General
Assembly. It was demonstrated that UNGA Resolutions are not legally binding and binding only
to the extent that nations wish to be bound.

Decision:

The Sole Arbitrator having decided that Libya had failed to perform its obligations under the
Deeds of Concession proceeded to consider whether Libya was obliged to perform such
obligations. In the doctrine of “ubi jus ibi remedium” (for every wrong, the law provides a
remedy), the Companies requested that they be granted the remedy of restitution in kind
(restitutio in integrum). The Sole Arbitrator concluded that “restitutio in integrum” was possible
in the present dispute and ruled that the Libyan government should perform specifically its
contractual obligations. Almost 2 and half months after the expiration of the date given to the
Libyan government to enforce the ruling of the arbitration, Libya and the Companies reached an
amiable settlement dispute.

A report on September 26, 1977, disclosed that Libya agreed to provide the Texaco Overseas
Petroleum Company and California Asiatic Oil Company over the fifteen months with
$152million worth of Libyan crude oil, and the companies agreed to terminate the arbitration
proceedings.

4.4.3 FAIR COMPENSATION STANDARD

The ‘’fair ‘’ compensation standard was used in the much discussed but little followed
Chorzow Factory PCIJ decision, noted above. However, fair compensation has not
generally been accepted as the proper standard, and has not become an accepted norm
of international law. That is at least partly due to the broad sense of what fair might
include. A legal norm deserves greater definition. It is a general principle of law as well
as international law, that any breach of agreement creates an obligation to make
reparation.

The Chorzow Factory Case (1928, Germany v Poland)

Facts:

There was an agreement between Germany and Poland and that bilateral treaty was known as the
Geneva Upper Silesia convention 1922. It had been provided in that treaty that on transfer of
sovereignty of certain territories from Germany to Poland after the 1st world war, existing
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proprietary right were to be maintained except that the Polish Government was granted a right
of expropriation under certain condition with respects of all property belonging to German
nationals in Upper Silesia. The present dispute arose when Poland seized to companies there in
breach of its international obligation under the Upper Silesia convention of 1922. The Germany
demanded compensation from the Poland.

Issues:

1. Whether a state can be held responsible for expropriation of alien property.

2. Whether a state can be made responsible at International Law, for acts of Government
organs or officers

3. Whether it is a basic rule of international law that reparation is to be made for violations
of international law

Decision:

The reparation of wrong may consist in an indemnity corresponding to the damage which is
contrary of International Law. Right or interests of an individual the violation of which rights
cause damages are always in a different plain to rights belonging to a state, which rights may also
be infringed by the same act.

Reasoning:

The action of Poland was not expropriation in its real sense, it was rather a seizure of property,
right and interest which could not be expropriated even against compensation, save under the
special conditions fixed by Art. 7 of the Upper Silesia convention of 1922. in doing so,
therefore, Poland acted contrary to its obligations. It is general principle of international law and
even a general concept of law that a breach of an agreement involves a duty to make reparation.
Reparation is the expendable complement of a failure to apply a convention and there is no
necessity for this to be stated in the convention itself. This case is one of an unlawful
expropriation and in such cases expropriating sates must in addition to paying the compensation
due in respect of lawful expropriation, pay also damages for any loss continued by the injured
party.

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4.4.4 JUST COMPENSATION
The Foreign Relations Law of the United States adopted ‘’just’’ in place of ‘’appropriate’’,
largely to avoid a possible inclusion of host nation demanded deductions under an
‘’appropriate’’ standard. Several expropriating nations had calculated compensation by
taking the company’s value of the property and deducting what were called ‘’excess
profits’’ or ‘’improper pricing’’ of resources to arrive at a conclusion that either no
compensation was due, or that the company actually owed the expropriating nation. But
it is hard to envision a taking nation agreeing that while such deductions could be allowed
under an ‘’appropriate’’ standard, they could not under a ‘’just’’ standard.

4.4.5 RESTITUTION
The expropriated foreign investor may prefer to have the property returned rather than
receive compensation. This is not likely to be the case where there has been a revolution
with an investment –hostile government, such as Cuba, but may be appropriate where a
counter – revolution has soon restored an investment welcoming government. There is
some precedent for restitution.

In the TOPCO/CALASIATIC arbitration, following expropriations of Texas Overseas

Petroleum Corporation and California Asiatic Oil Company by Libya, the sole arbitrator,
Professor Dupuy (Secretary General of the Hague Academy of International law), noted
that the Chorzow Factory decision suggested that restitution remains international law,
and ordered Libya to resume performance of the agreement. But in the BP Arbitration
the arbitrator stated that the Chorzow Factory rule of restitution in integrum was meant
only to be used to calculate compensation, suggesting adherence to full compensation
theory.

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5 FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) abroad often occurs subsequent to less extensive
experience with the foreign country in the form of trading goods, or transferring
technology to have goods produced under licence in a foreign nation. Persons and
multinationals have many reasons to invest abroad. It may be part of an initial overall
plan to produce goods or provide services worldwide. It may be the next progression
considered after the home market is saturated. It may be to avoid high tariffs for
imported finished products in the foreign nation. It may be a consequence of an unhappy
relationship with a licensee abroad, and a belief that the company can make a better
product or provide a better service on its own. Poor –quality products or services
produce by licensees is often the reason for assuming control of production abroad.
Whatever the motivation, foreign investment will almost always encounter laws in the
host nation that differ from the laws regulating investment in the home nation.

Investment abroad involving the creation of new businesses, and the capital transfers to
underwrite them, is often referred to as foreign direct investment (FDI). It means
ownership and control of the enterprise abroad, whether branch or subsidiary in form.
Enterprises which undertake foreign investment are referred to by several names,
multinational corporations (MNCs) multinational corporations (MNEs) or transnational
corporations (TNCs) or enterprises (TNEs). More important than what they are called
are their percentages of ownership and control by the home –nation person or entity.
That discloses whether or not the enterprise is a joint venture, and which country is likely
to assert authority over the enterprise in the host or foreign nation.

Both the governments of the home nation (place of incorporation) and the foreign host
nation (place of the productive part of the business) may attempt to assert such authority,
leading to intergovernmental conflicts foreign investment is a major part of the business
of many companies chartered in developed nations. Especially since the early 1980s,
multinational enterprises have moved toward global production and division of labour.
As a result, global foreign direct investment rose by the opening of this century.

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Intraregional foreign investment is another aspect of this development. The creation of
the European Community (now European Union) in 1958 and the adoption of the
North American Free Trade Agreement in 1994, stimulated increased foreign investment
within trading areas. Others are SADC, COMESA. The completion of the Uruguay
GATT in late 1993 added new WTO investment rules. These new rules have encouraged
even more foreign investment.

The composition of the rules which should govern foreign investment has been a subject
of frequent debate among developed and developing countries. The North- South
dialogue led in the 1970s to both restrictive United Nations General Assembly
resolutions and restrictive foreign investment laws in many developing nations. But after
the debt crisis in the early 1980s, and the subsequent election of governments more
determined to join the developed world than to lead the third world, impediments to
foreign investment began to be dismantled.

Nationalisations gave way to privatisations; investment restrictions gave way to

investment incentives. But even though this recent liberalisation has provided investors
with significant opportunities in many foreign nations, obstacles to foreign investment
remain, and old ones may be exhumed as governments change.

The North-South Dialogue

The North-South Dialogue refers to the process through which the developing and newly
independent nations of the "third world," predominantly in Asia, Africa, and Latin America,
engaged the industrialized countries of North America and Western Europe in negotiations over
changes to the international economic system during the 1970s.

After World War II, many nations of Latin America became increasingly frustrated with U.S.
trade and tariff policies. At the same time, nationalist movements in Asia and Africa helped lead
to widespread decolonization. Membership in the United Nations had risen from 51 countries in
1945 to 100 in 1960 and 150 by 1979. The sudden influx of new countries changed the balance
of power in the General Assembly and made possible the establishment of the United Nations
Conference on Trade and Development, or UNCTAD, in 1964. UNCTAD created a forum
through which the "southern" or "third world" nations could propose economic policies,
engaging industrial democracies of the "north." The term "North-South Dialogue" was used to
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distinguish this dynamic from the East-West conflict of the Cold War, and to stress the point that
development issues were just as pressing as the ideological conflict between communists and
capitalists.

Several factors increased the willingness of the industrialized nations to negotiate. One was the
rising power of oil-producing countries in the Arab world, and another was the U.S. loss in the
war in Vietnam, which demonstrated to both the world and the industrialized North that not
even wealth and power were enough to guarantee military victory. Both of these issues drew
Western attention toward the global balance of economic power. Additionally, the dialogue began
in a period of relaxed East-West tensions, which meant that the industrialized world could give
more attention to issues like development. The Newly Industrializing Economies, meanwhile,
believed the entrenched international economic system benefited developed countries at the
expense of the developing world. They hoped to facilitate a reorganization of the international
economic system to rectify this imbalance.

The North-South Dialogue addressed issues pertaining to trade and tariffs, international finance,
foreign aid, and the governance of multinational companies and institutions. During the era of
detente in the 1970s, when East West tensions were more relaxed, there was a willingness among
industrialized nations to cooperate. Even as detente began to falter in the mid-1970s, the parties
to the North-South Dialogue continued their discussions. U.S. policies and relations with the
other Northern powers inevitably served to help or hinder progress in the dialogue. For example,
changes in trade policies between the United States and Western Europe could serve to distract
these countries from their negotiations with the industrializing countries or cause them to extend
new levels of control over their interactions within their respective spheres of influence in the
developing world.

Late in the 1970s, the increasing conflicts between the United States and the Soviet Union finally
served to sour the prospects for continuing North-South discussions, as the industrialized nations
renewed their focus and redirected their resources to the Cold War and paid less attention to
development issues. By September of 1980, the discussions in the United Nations that had
characterized this dialogue had lost their momentum. Although some dialogue on these issues
continued, it remained a series of discussions on economic issues and never presented the
workable solution that its proponents had hoped it would. There are many ways to interpret the
high point of the North-South Dialogue in the 1970s. Some economists have reviewed the
southern proposals for broad changes in world economic policy and concluded that they were

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either fundamentally unworkable or designed to benefit only certain segments of the Third World;
others counter that the proposals were necessarily extreme in order to establish a firm position
from which to open negotiations with the industrialized North. Either way, the exact
implementation of the proposals presented through UNCTAD was always unlikely, because they
centered on the Southern ideal and would have required the economically-powerful North to
concede every point.

The North-South Dialogue can also be viewed as a political struggle between the world's "haves"
and "have-nots." In this view, the discussions became a vehicle through which the South could
unite and assert power within the United Nations and other international organizations to counter
the ability of the North to dictate the course of world affairs.

In economic terms, as of the early 21st century, the North—with one quarter of the world
population—controls four-fifths of the income earned anywhere in the world. 90% of the
manufacturing industries are owned by and located in the North. Inversely, the South—with three
quarters of the world population—has access to one-fifth of the world income. As nations
become economically developed, they may become part of definitions the "North", regardless of
geographical location; similarly, any nations that do not qualify for "developed" status are in effect
deemed to be part of the "South".

5.1 TYPES OF INVESTMENT CONTRACT

Large scale investment may last for decades they involve interest of the investor as well
as the public interest of the host country. The general legislation of where hosted country
may not sufficiently address the nature of the project and the kind of interesting
concerning. Another legal setting of an investment may need to be at adjusted to its
specifics and the complexity by the way of an investment contract. A second generation
of agreement that have emerged in the 1960s and 1970s reflected the new power of oil
producing countries with the desire to control their resources and their inspiration to
develop the necessary skills indeed technologies within their borders. Often, state owned
the companies were set up for the purpose of concluding and supervising agreement
with the fallen investors.

These rules include the law applicable to the project and the choice of a forum for
dispute resolution, specific provisions were often including force majeure, good faith

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and change of circumstances. From a legal perspective the most complex and difficult
question often include the terms for regulation of conduct of parties in the event of
political changes in the host country.

Current agreement has what is known as a stabilisation clause. A stabilization clause is

the contractual clauses commonly found in investment contract such as concession
agreements. Where in the hosted country glance a concession (right to invest). It is a
contractual risk management tool that aims to maintain legal and economic equilibrium
of the investment project by unilateral action of the host country in exercising its
sovereignty function.

AGIP v. Popular Republic of Congo

The government of Congo nationalized the oil distribution sector in 1974. Only AGIP, who
entered into an agreement for the sale of 50% of AGIP ‘s capital to the government, remained
unaffected. This agreement contained several Stabilisation clauses. In 1975 AGIP was
nationalised by Congo.

The arbitral tribunal opined that: These Stabilisation clauses, freely accepted by the Government,
do not affect the principle of its sovereign legislative and regulatory powers, since it retains both
in relation to those, whether nationals or foreigners, with whom it has not entered into such
obligations, and that, in the present case, changes in the legislative and regulatory arrangements
stipulated in the agreement simply cannot be invoked against the other contracting party.

However, when the host estate countries developing one then the clause may affect the
development of human rights, labour and environmental laws. Investment agreements
are negotiated by investor and the host state to allow for special rules between the two
parties separate from the agreement general legislation of the host state.

For the investor, a key concern who invaluable is to safeguard the stability of the
agreement against the sovereignty of the host state. Applicable treaties between the host
state and the investor home state may provide for rules designed to ensure or promotes
stable contractual relations for their citizens such as umbrella clauses on a provision on
fair and equitable treatment (FET). However, such rules will not be in a place or they

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may not be as specific as desired by the investor. Against this background, an ongoing
practise of including a stabilization clause, in an investor agreement has developed.

5.2 TYPES OF INVESTMENT

1. Business Fixed Investment

Business fixed investment refers to the investment made by businesses in the purchase
of long-term assets, such as machinery, equipment, and other capital goods, that are used
in the production of goods and services. These assets are intended to be used for several
years, and are not meant for resale.

The stock of these machines or plant equipment etc. represents fixed capital. The term
‘fixed’ in it implies that expenditure made on the machines, equipment etc. continues to
be used for production for a relatively long time. This is in contrast to inventory
investment whose components will be either used shortly for production or sold shortly
to others for further production.

Business fixed investment is important in two respects. Business fixed investment is an

important component of aggregate demand and therefore plays a significant role in the
determination of natural income and employment. Business fixed investment is a volatile
component of aggregate demand and, as Keynes emphasized, fluctuation in levels of
fixed business investment is responsible for business cycles in a free market economy.

Keynes Economic Theory

Keynes put forward a theory of investment which states that business fixed investment
is determined by expected rate of profit (which he calls marginal efficiency of capital)
and rate of interest. Since rate of interest in the short run is relatively sticky, it is changes
in expectations about earning profits in future that cause fluctuations in business fixed
investment.

According to Keynes, the expected rate of profit is the marginal efficiency of capital
(MEC), which represents the expected rate of return on an investment in new capital
goods. The MEC is influenced by a range of factors, including technological change,

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market conditions, and expectations about future demand for goods and services. The
rate of interest, on the other hand, represents the cost of borrowing money to finance
investment. In the short run, Keynes argued that the rate of interest is relatively sticky,
meaning that it is slow to adjust to changes in market conditions.

As a result, Keynes argued that fluctuations in business fixed investment are primarily
driven by changes in expectations about future profits. If businesses expect that their
investments will generate high rates of return, they will be more likely to invest in new
capital goods, even if interest rates are relatively high. Conversely, if businesses expect
that their investments will generate low rates of return, they will be less likely to invest,
even if interest rates are relatively low.

Overall, Keynes' theory of investment highlights the importance of expectations and

uncertainty in driving business fixed investment, and suggests that government policies
that help to stabilize expectations and reduce uncertainty can be an important tool for
promoting investment and economic growth.

The Neoclassical Theory

The neoclassical theory of investment is an alternative approach to understanding the

determinants of business fixed investment. Unlike Keynes' theory, which emphasizes the
role of expectations and uncertainty, neoclassical theory focuses on the role of market
forces in determining investment decisions.

According to neoclassical theory, the level of investment in an economy is determined

by the expected rate of return on capital and the cost of borrowing money to finance
investment, which is represented by the real interest rate.

In this view, the expected rate of return on capital is determined by the marginal product
of capital, which is the additional output generated by investing in an additional unit of
capital. If the expected rate of return on capital exceeds the real interest rate, then
businesses will have an incentive to invest in new capital goods. Conversely, if the
expected rate of return is lower than the real interest rate, then businesses will be less
likely to invest. The neoclassical theory of investment also emphasizes the role of market

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efficiency in determining investment decisions. According to this view, markets are
assumed to be efficient, meaning that prices reflect all available information about the
current and future value of investments. In this context, businesses are assumed to make
investment decisions based on a rational assessment of the risks and benefits of different
investment opportunities.

Overall, the neoclassical theory of investment provides an alternative view to Keynes'

theory, emphasizing the role of market forces and efficiency in driving investment
decisions. However, it has been criticized for overlooking the role of expectations and
uncertainty in shaping investment decisions, which can be particularly important in times
of economic instability or uncertainty.

2. Residential Investment

Residential investment refers to the expenditure which people make on constructing or

buying new houses or dwelling apartments for the purpose of living or renting out to
others. Residential investment varies from 3 per cent to 5 per cent of GDP in various
countries.

Two important features of residential investment are worth noting. First, since the
average life of a housing unit is of 40 to 50 years, the stock of existing housing units at a
point of time is very large as compared to the new residential investment in a year (flow
of residential investment). Second, there is well developed resale market for housing
units so that people who construct or own them can sell them in this secondary market.

Residential investment depends on price of existing housing units. The higher the price
of existing units, the higher will be investment in constructing and buying new housing
units. The price of housing units is determined by demand for housing units which slopes
downward and the supply of existing units which is a fixed quantity and its supply curve
is therefore vertical straight line.

In the long run demand for housing is determined by rate of population growth and
formation of new households. The higher rate of population growth will lead to the

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increase in demand for housing units. The tendency towards two-member households
has led to greater demand for housing units.

Income is another important factor determining demand for houses and therefore
greater residential investment. Since level of income over time fluctuates a good deal,
there is strong cyclical pattern of investment in residential construction. Finally, interest
is another important factor that determines demand for dwelling units. Most houses,
especially in cities, are purchased by borrowing funds from banks for a long time, say 20
to 25 years. Generally, the houses purchased are mortgaged with banks or other financial
institutions who provide funds for this purpose.

The individuals who purchase houses on mortgage borrowing pay monthly instalment
of original sum borrowed plus interest. Therefore, demand for housing units is highly
sensitive to changes in rate of interest. Therefore, monetary policy has a substantial effect
on residential investment.

3. Inventory Investment

Firms hold inventories of raw materials, semi-finished goods to be processed into final
goods. The firms also hold inventories of finished goods to be sold shortly. The change
in the inventories or stocks of these goods with the firms is called inventory investment.
Now, why do firms hold inventories? The first motive of holding inventories is
smoothing of the level of production.

The firms experience temporary booms and busts in sales of their output. Instead of
adjusting their production each time to match the changes in sales of the product they
find cheaper to produce goods at a steady rate. With this steady rate of production when
sales are low, the firms will be producing more than they are selling and therefore in
these periods they will hold the extra goods produced as inventories. On the other hand,
when sales are high with a steady rate of production, they will be producing less than
they sell. In such periods to meet the market demand for goods, they will take out goods
from inventories to meet the demand.

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The second reason for holding inventories is that it is less costly for a firm to buy inputs
such as raw materials less frequently in large quantities to produce goods and therefore
it is required to hold inventories of raw materials and other intermediate products.
Buying small quantities of the materials more frequently to produce goods is a more
costly affair.

The third reason for holding inventories by the firms is to avoid ‘running out of stock’
possibilities when their sales of goods are high and therefore it is profitable to sell at that
time. This requires them to hold inventories of goods.

Determinants of Inventory Investment

The inventories of raw materials and goods depend on the level of output which a firm
plan to produce. An important model that explains the inventories of raw materials and
goods is the accelerator model. Though the accelerator model applies to all types of
investment, it applies best in case of inventory investment. According to the accelerator
model, the firms hold the total stock of inventories of raw materials and goods that is
proportional to their level of output.

When manufacturing firms’ level of output is high, they require to keep more inventories
of materials and of goods in process of being converted into finished products. When
the economy is booming, retail firms would like to hold more inventories so that the
goods they are selling may not go out of stock and their customers go away disappointed.

4. Autonomous Investment

By autonomous investment we mean the investment which does not change with the
changes in the income level and is therefore independent of income.

Keynes thought that the level of investment depends upon marginal efficiency of capital
and the rate of interest. He thought changes in income level will not affect investment.
This view of Keynes is based upon his preoccupation with short-run problem. He was
of the opinion that changes in income level will affect investment only in the long run.

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Autonomous investment refers to the investment which does not depend upon changes
in the income level.

This autonomous investment generally takes place in houses, roads, public undertakings
and in other types of economic infrastructure such as power, transport and
communication. This autonomous investment depends more on population growth and
technical progress than on the level of income. Most of the investment undertaken by
Government is of the autonomous nature.

5. Induced Investment

Induced investment is that investment which is affected by the changes in the level of
income. The greater the level of income, the larger will be the consumption of the
community. In order to produce more consumer goods, more investment has to be made
in capital goods so that greater output of consumer goods becomes possible.

Keynes regarded rate of interest as a factor determining induced investment but the
empirical evidence gathered so far suggests that induced investment depends more on
income than on the rate of interest. To produce greater output, more capital goods are
required to produce them. To have more capital goods more investment has to be
undertaken. This induced investment is undertaken both in fixed capital assets and in
inventories. Fixed capital assets are long-term investments in physical assets such as
machinery, buildings, and equipment that are used in the production process. These
assets are expected to generate returns over a long period of time and are not easily
converted into cash.

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Holding inventories allows firms to maintain a smooth production process and respond
to changes in demand quickly.

The essence of induced investment is that greater income and therefore greater aggregate
demand affects the level of investment in the economy. The induced investment
underlines the concept of the principle of accelerator, which is highly useful in explaining
the occurrence of trade cycles.

5.3 ADVANTAGES OF FOREIGN DIRECT INVESTMENT

1. Boost in Economy

One of the major significant reasons a country (especially a developing nation) attracts
foreign direct investment is due to the creation of jobs. FDI increases the production
and services sector, which creates jobs and helps to decrease unemployment rates in the
said country. Elevated employment explicates higher incomes and awards the population
with added buying powers, advancing the overall economy.

2. Human capital expansion

Human capital is concerned with the knowledge and subsistence of any workforce.
Employees’ various skills gained through different training and practices can advance a
particular country’s education system and human capital. Through a prolonged impact,
it helps to train individual resources in other areas, trades and companies.

3. Increased exports
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Many assets produced by the FDI have global markets, and they are not solely based on
domestic consumption. The production of 100% export-oriented segments helps to
serve FDI investors in supporting exports from other foreign countries.

4. Advanced Flow of Capital

The capital inflow is especially beneficial for countries with limited domestic resources
and limited chances to raise stocks in the global capital market.

Capital inflows can provide countries with access to additional investment funds that
they may not have had otherwise. This can enable them to undertake new projects,
expand existing ones, and generally grow their economies more quickly.

5. Competitive Market

By promoting the entrance of foreign organizations into domestic markets, FDI

advocates the creation of a competitive environment and breaks domestic trusts.

In fact, some scholars argue that FDI can actually strengthen domestic firms by
encouraging them to adopt more efficient practices and technologies in order to compete
with the new foreign entrants. This can ultimately lead to higher productivity and growth
for both domestic and foreign firms.

6. Technology transfer

Through technology transfer, host countries can gain access to new production methods
and techniques, as well as to new products and services that may not have been
previously available. This can help to improve productivity, increase competitiveness,
and drive economic growth.

In addition, technology transfer can also lead to the development of local human capital,
as local workers gain new skills and knowledge from working with multinational
corporations. This can help to increase the competitiveness of the local workforce and
to create new opportunities for entrepreneurship and innovation.

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However, it is worth noting that technology transfer is not automatic, and that host
countries must take proactive steps to ensure that they are able to benefit from the new
technologies and knowledge brought by multinational corporations. This includes
investing in education and training programs to ensure that local workers have the skills
and knowledge needed to make use of new technologies, as well as establishing strong
intellectual property rights protections to ensure that local firms are able to benefit from
the new knowledge and innovations generated by multinational corporations.

5.4 DISADVANTAGES OF FOREIGN DIRECT INVESTMENT

1. Hindrance of domestic investment

Sometimes FDI can hinder domestic investment. Because of FDI, countries’ local
companies start losing interest to invest in their domestic products. This can happen if
local companies feel that they are unable to compete with the new foreign entrants or if
they perceive that there is a better return on investment in other sectors.

2. The risk from political changes

Other countries’ political movements can be changed constantly which could hamper
the investors. Political instability in foreign countries can certainly create uncertainty and
risks for investors, including foreign direct investors. Changes in government or political
movements can result in shifts in policies, regulations, or even nationalization of foreign
investments, which can negatively affect the returns on investment or the overall
business environment. Nationalization can result in a complete loss of investment, as
the government may not offer adequate compensation for expropriated assets.

3. Negative exchange rates

Foreign direct investments can sometimes affect exchange rates to the advantage of one
country and the detriment of another. However, the impact on exchange rates can be
more complicated, as there are often other factors at play.

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For example, the economic conditions and policies of both the investing country and
the recipient country can influence exchange rates, as can global economic trends, such
as changes in interest rates or the demand for commodities.

It is also worth noting that changes in exchange rates can have both positive and negative
effects on different stakeholders. For example, an appreciation of the recipient country's
currency can benefit foreign investors by increasing the value of their investments, but
it can also make the country's exports more expensive and less competitive on the global
market.

4. Higher costs

When investors invest in foreign counties, they might notice that it is more expensive
than when goods are exported. Often times, more money is invested into machinery and
intellectual property than in wages for local employees.

5. Economic non-viability

Considering that foreign direct investments may be capital-intensive from the point of
view of the investor, it can sometimes be very risky or economically non-viable. Foreign
direct investment (FDI) can certainly be risky and economically non-viable in some
cases, particularly when the investment involves significant capital-intensive projects.

For example, FDI in industries such as mining, oil and gas extraction, or infrastructure
development often require significant up-front investment, long-term commitments,
and high levels of risk due to uncertain market conditions, political instability, or
environmental factors.

Additionally, FDI can be economically non-viable if the expected returns on investment

do not materialize or if the cost of doing business in the host country exceeds the
potential benefits.

6. Expropriation

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Constant political changes can lead to expropriation. In this case, those countries’
governments will have control over investors’ property and assets. Political changes can
certainly create the risk of expropriation, which is the seizure of private property by a
government without compensation. This risk can be particularly high in countries where
the rule of law is weak or where there is a history of political instability.24

7. Modern-day economic colonialism

Many third-world countries, or at least those with history of colonialism, worry that
foreign direct investment would result in some kind of modern-day economic
colonialism, which exposes host countries and leave them vulnerable to foreign
companies’ exploitation.

8. Poor performance

Multinationals have been criticized for poor working conditions in foreign factories.
Many of these companies operate in countries with lower labour standards and weaker
labour laws than in their home countries, which can create opportunities for labour
exploitation and violations of human rights.

Some of the most common issues related to poor working conditions include low wages,
long working hours, lack of job security, poor safety standards, and limited opportunities
for collective bargaining or unionization. In some cases, these poor conditions can also
contribute to environmental degradation and other negative impacts on local
communities.

9. Pollution

Multinational corporations may prioritize profits over environmental and social

responsibility, leading to a range of environmental problems such as air and water
pollution, deforestation, and soil degradation. This can have significant negative impacts
on the health and well-being of local communities, as well as on the long-term
sustainability of natural resources.

24
Smith, J. (2021). The Ethics of Expropriation
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In addition, FDI can also contribute to a "race to the bottom" in environmental
standards, where countries compete with each other to attract foreign investment by
offering weak environmental regulations or lax enforcement of existing laws. This can
lead to a situation where multinational corporations are able to pollute with impunity,
creating a situation where the costs of pollution are borne by local communities and the
environment.

5.5 MULTINATIONAL ENTERPRISES AND THE REGULATION OF

FOREIGN DIRECT INVESTMENT
A multinational enterprise (MNE) is a company that operates in multiple countries,
typically with a centralized headquarters and subsidiaries or affiliates in foreign markets.
MNEs often engage in Foreign Direct Investment (FDI), which involves investing in
and controlling foreign assets, such as factories, land, and other businesses.

The regulation of FDI can vary widely across countries and regions. Some countries
have relatively open policies towards FDI and actively encourage foreign investment,
while others may have more restrictive policies in place that limit foreign ownership or
require certain conditions to be met.

There are four categories of multinational corporations:

1. A multinational, decentralized corporation with strong home country presence,

2. A global, centralized corporation that acquires cost advantage through
centralized production wherever cheaper resources are available,
3. an international company that builds on the parent corporation's technology or
4. A transnational enterprise that combines the previous three approaches.

Governments may regulate FDI for a variety of reasons, including:

1. Protecting national security and strategic assets

Some industries, such as defense, energy, and telecommunications, may be considered

strategic assets that are important for national security. Governments may regulate FDI
in these industries to prevent foreign entities from gaining too much control over these
critical assets.
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 2. Ensuring fair competition and preventing monopolies

Governments may regulate FDI to ensure fair competition and prevent the formation
of monopolies or oligopolies that could harm consumers and limit innovation.

3. Promoting economic development and creating jobs

Governments may use FDI regulations as a tool to attract investment and promote
economic development. This may involve offering incentives to foreign investors, such
as tax breaks or subsidies, or regulating FDI to encourage investment in certain
industries or regions.

4. Ensuring environmental and social responsibility

Governments may regulate FDI to ensure that foreign investors operate in an

environmentally and socially responsible manner. This may involve requiring investors
to meet certain environmental or labour standards, or limiting FDI in industries that are
particularly damaging to the environment or public health.

5. Balancing foreign ownership with local control

Governments may regulate FDI to strike a balance between foreign ownership and local
control. This may involve limiting the percentage of foreign ownership in certain
industries or requiring foreign investors to partner with local firms.

Regulation

There are principally three parties whose interests are stake in FDI negotiations. These
are the MNE, the home country of the MNE and the Host country. More often than
not, these interests’ conflict with one another. It is not always that the interests of an
MNE and its home country are always the same. It so happens that they would
sometimes conflict. For instance, an MNE can aim to have access low-cost foreign
labour while a home country can on the other hand only have interests in maintaining a
high employment rate further the interest of an MNE to purchase foreign cheap
component parts can conflict with the home country in maintaining a good balance-of-

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payments. In the event that such a conflict arises, it is prudent to settle such conflicts by
having recourse to national laws and regulations.

It has been argued that there is an inherent conflict between an MNE and the host
country interests in cases were an MNE can seek opportunities where the production
costs are lowest and sales where it can get the highest price thereby resulting in
repatriation of profits to its home country whereas, the host country on the other hand
would seek to maximize the benefits to its economy which requires the retention of the
MNE ‘s profits within the host economy.

Regional and Multilateral

Regulation Regional and multilateral regulation is undertaken by a group of states either

by enacting or joining international law instruments aimed at regulating FDI. In spite of
many regional and multilateral instruments, there is no comprehensive international
regime to regulate FDI on multilateral level. The most comprehensive regulatory frame
work for FDI on multilateral level though is still far from being complete can be found
in some parts of the of the World Trade Organization (WTO) agreements. These
agreements are the Agreement on Trade Related Investment Measures (TRIMS) the
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the
General Agreement on Trade in Services (GATS). Regulations may take the form of
laws, regulations, or policies that restrict foreign ownership or require certain conditions
to be met before an investment can be approved. In some cases, governments may also
offer incentives or tax breaks to attract foreign investment.

MNEs must navigate these regulations when making investment decisions, and may
need to engage with local authorities to ensure compliance with local laws and
regulations. In some cases, MNEs may also advocate for changes in regulations that they
believe are overly restrictive or burdensome.

TRIPS Agreement and the Dispute Settlement Understanding

Two other Uruguay Round agreements are important to the current WTO framework
regarding FDI. The Agreement on Trade-Related Aspects of Intellectual Property Rights

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("TRIPS")' provides basic protection for the transfer of technology through FDI
operations. This is an important protection for FDI because nearly all FDI undertakings
involve technology transfer from the MNE to a subsidiary in the host country.'
Protection of this technology will provide additional incentive for such a transfer. TRIPS
grant developing countries a five-year waiver in applying the provisions. The Uruguay
Round Understanding on Rules and Procedures Governing the Settlement of Disputes
("Dispute Settlement Understanding") is also relevant to the current FDI framework
because each of the above discussed agreements- GATS, TRIMs, and TRIPS-is subject
to the strengthened VITO dispute settlement process. Disputes concerning FDI-related
provisions in any of these agreements can be swiftly arbitrated in the new system.

Multilateral Investment Agreement (MIA)

This agreement is now defunct however, there is still a need for comprehensive
regulatory frameworks on FDI at a multilateral level hence, the need to discuss the MIA.
This was a draft agreement negotiated between members of the Organisation for
Economic Co-operation and Development (OECD). It was an ambitious effort to
conclude the most comprehensive farreaching multilateral agreement on FDI.

The idea was to establish an international body of rules on investment. It was envisaged
that it would come in force in 1998. Its ostensible purpose was to develop multilateral
rules that would ensure international investment was governed in a more systematic and
uniform way between states. However, when its draft became public in 1997, it drew
widespread criticism from civil societies and developing countries, particularly over the
possibility that the agreement would make it difficult to regulate foreign investors. There
was an intense global campaign waged against it by the treaty's critics. Due to all this
commotion and some political reasons, France which was the host nation announced in
October 1998 that it would not support the agreement, effectively preventing its
adoption due to the OECD's consensus procedures.

The failure of the MAI meant that FDI was not regulated internationally. This lack of
regulation directly impacts on the unilateral regulation within states. It also entails those

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developing countries like Zambia cannot depend on a multilateral regime to regulate
FDI. This leaves only the unilateral avenue.

Bilateral Regulation

Bilateral regulation usually takes the form of a bilateral investment treaty (BIT) which is
an agreement between two countries usually one developed and another developing that
regulates investment between them. So, BITs have evolved from the earliest treaties
known as treaties of friendship, commerce and navigation, which have been common
since the 18th century. Initially these treaties did not deal with FDI However, as FDI
became common practice by the end of World War II, the treaties became more
investment specific and provided rules for international investments by corporations.
BITs as such, however are considered to be relatively new.

The first BIT was signed only in 1959 between the Federal Republic of Germany and
Pakistan. The number of BITs nonetheless~ had grown so rapidly to 1.160 BITs by June
1996. This increase rendered BITs a critical source of FDI law. In fact, some
commentators even go so far as to regard BITs as a source of customary international
law. Although some countries have model BITs which they adopt in their relations with
other countries there is no unified international mode 1 BIT. Nonetheless, the structure
and provisions of BITs exhibit many similarities. It is this similarity that leads
commentators to believe that BITs create customary international norms. The structure
of BITs and their main provisions cover the:

Investments

Most recent BITs have adopted an elusive open-ended definition of investment to cope
with the evolving nature of the concept of investment. BITs often include an illustrative
list of the kinds of investments (e.g., Movables and immovable property share in
corporations’ intellectual property, business concessions, etc.) and expressly provide that
the list is not exclusive.

A controversial point in BITs' negotiations is the retrospective application of the treaty

to investments made prior to its coming in to force. Host developing countries which

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regard BITs as an investment attracting tool are keen on limiting the treaty’s application
to investments made after the BIT comes into force, since there is no point in attracting
investors that have already invested in their territories. Home countries which view BITs
as a means to protect their national investors, on the other hand, are in favour of the
retrospective application of BITs. Nonetheless the majority of BITs extend to cover
investments made prior to and after their coming into force.

Investor

The definition of investor is another controversial issue in the drafting of BITs. There is
usually a conflict of interest between host developing countries and home developed
countries over defining who an investor is under a BIT. For instance, host countries
wishing to restrict the benefits of a BIT usually seek a narrow definition of invertors
while home countries seek a broad definition to cover as many of its nationals as
possible.

As for legal persons, most BITs require that they:

1. be incorporated in a contracting State;

2. have their seat required office, or principal place of business in a contracting
country and/or
3. be substantially owned or controlled by nationals of a contracting State in order
to clarify problematic situations where nationals of a third country own or
control a substantial share in a company of a contracting country and where
nationals of a treaty country own or control a company in a third country.

Although most BITs require the existence of at least one of these conditions, some BITs
require a combination of these requirements. The Japan-China BIT for example provides
that companies "constituted under the applicable law and regulations of one Contracting
Party and having their seat within its territories shall be deemed companies of that
Contracting Party.

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Unilateral Regulation Unilateral regulation refers to domestic laws enacted by a host
country so as to regulate FDI. These regulations are spread over a wide range of laws
they include;

• Domestic laws that are enacted specially for regulating FDI as well as
• Any domestic law that governs the operation of corporations such as tax law,
labour law, corporate law and environmental law.

The net effect of this legislation represents a country’s policy towards FDI. Since Most
countries follow a pragmatic nationalist approach to maximize the advantages of FDI
and reduce its disadvantages. They try to regulate FDI in such a way as to achieve this
goal. The formula for host developing countries is thus simple: the more FDI a country
can attract and the more regulation it can impose in the direction of its interests, the
more advantages it can harness from FDI. The amount of FDI a country can attract is
however, dependent on how strict its regulations are. MNEs prefer to operate on a free-
market basis and thus try to avoid heavily regulated environments. Therefore, in
regulating FDI host countries try to achieve a balance between the benefits they can
harness from regulating FDI and remaining attractive to MNEs as an investment site.

FDI regulation entails imposing entry restrictions and operational requirements to assure
that the investment is in line with a host country's policies. Through entry restrictions a
country can ensure that FDI is suitable to its development objectives and its interests. A
host country can for instance require that the investment be located in a particular region.
It can also require a certain type of direct investment such as a joint venture with local
partners, or forbid investing in certain industries such as its ail or infrastructure
industries. As for operational restrictions, they might include local content restrictions
trade balancing requirements export performance requirements, limitations on imports,
foreign exchange and remittance restrictions, minimum local equity restrictions,
technology transfer requirements, local employment requirements, personnel entry
restrictions and product licensing requirements

However unilateral FDI regulation is not carved in stone. Despite the existence of
regulation there is usually room for negotiation regarding the conditions of investment
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and the rules applied thereto. In fact, some developing countries enact strict investment
laws to be used as a bargaining tool in their negotiations with foreign MNEs and their
governments.

5.6 CLASSES OF FOREIGN DIRECT INVESTMENT

1. Horizontal Foreign Direct Investment

This is the most common FDI which primarily involves around investing funds in a
foreign company belonging to the same industry as owned or operated by the FDI
investor. This is a company invest in another company that produce the same goods.
This type of investment is also sometimes referred to as "market-seeking FDI" because
it is driven by the desire to tap into new markets and expand the investor's customer
base.

Horizontal FDI allows the investor to leverage its existing knowledge and expertise in a
particular industry or product line, and take advantage of economies of scale by
spreading fixed costs across a larger production base. It can also help the investor to
diversify its geographic risk and reduce its dependence on a single market or country.

2. Vertical Foreign Direct Investment

This occurs when an investment is made within a typical supply chain in a company
which may or may not necessarily belong to the same industry. A such when vertical
FDI happens. A business invests in an overseas firm which may supply or sell products.

Vertical FDI are further categorised as backward vertical integration and forward vertical
integration.

Backward vertical integration involves investing in a foreign company that supplies

inputs or raw materials to the investor's domestic operations. This type of investment is
often driven by the desire to secure a reliable and cost-effective supply of key inputs, and
to improve control over the quality and delivery of those inputs.

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For instance, the Swiss coffee producer Nescafe may invest in coffee plantation in a
country such as Brazil, Colombia, Malawi or Vietnam. Since the investing firm purchase
a supplier in the supply chain, this form of FDI is called Backward Vertical integration.

Forward vertical integration is said to occur where a company invest in another

foreign company which is ranked higher in the supply chain. For example, a coffee
company in India may wish to invest in a French grocery brand.

3. Conglomerate Direct Investment

When investment is made in two completely different companies of entirely different

industries, the investment is known as conglomerate. A conglomerate is a corporation
that is made up of several different businesses that operate in unrelated industries or
business sectors.

The goal of a conglomerate is to diversify its portfolio and reduce risk by investing in
businesses that are not correlated to one another. Conglomerate investments are often
made by large investment firms or holding companies that have significant financial
resources and a diverse portfolio of assets.

4. Platform Direct Investment

A business expands into a foreign country but the products manufactured are exported
to another third country. Platform direct investment, also known as "export-platform
foreign direct investment," refers to a strategy in which a company invests in a foreign
country to take advantage of its lower production costs or other advantages, and then
exports the products or services produced in that country to third countries.

For example, the French perfume brand Chanel set up a manufacturing plant in US and
export the product to other countries in Asia.

5.7 PULL AND PUSH FACTORS OF FOREIGN DIRECT INVESTMENT

Pull factors refer to the positive factors that attract investors to a particular country or
region, while push factors refer to negative factors in the investor's home country that
motivate them to seek investment opportunities abroad.
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Some examples of pull factors that may attract foreign investors include:

• Access to new markets or customers

• Favourable tax policies and incentives

• Low labour costs or access to skilled workers

• Political stability and favourable regulatory environment

• Infrastructure and logistical advantages

• Natural resources or other strategic assets

On the other hand, some examples of push factors that may drive investors to seek
opportunities abroad include:

• Saturation of domestic markets or lack of growth opportunities

• High taxes or regulatory burdens

• Rising labour costs or shortage of skilled workers

• Political instability or uncertainty

• Currency fluctuations or inflationary pressures

It's important to note that push and pull factors can vary widely depending on the
specific industry, country, and investment opportunity. Ultimately, investors will weigh
a variety of factors when deciding where to invest their capital, including potential risks
and returns, market trends, and overall strategic objectives.

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6 MULTILATERAL INVESTMENT GUARANTEE AGENCY (M.I.G.A.)

The concept of offering insurance for various investment risks which led to the creation
of OPIC in the United States, and to similar programs in several other nations, has been
built upon on an international level by the World Bank’s 1988 creation of the Multilateral
Investment Guarantee Agency (MIGA). This organisation, the newest part of the World
Bank group, is intended to encourage increased investment to the developing nations by
offering investment insurance and advisory services.

Creating MIGA within the World Bank structure offers benefits a separate international
organisation lacks. MIGA has access to World Bank data on nation’s economic and
social status. This gives considerable credibility to MIGA, and encourages broad
participation. Banks have found MIGA attractive because bank regulators in some
countries have exempted commercial banks from special requirements for provisioning
against loss where loans or investment are insured by MIGA.

Furthermore, investors in nations without adequate national insurance programs have

very much welcomed MIGA’s creation. MIGA is not intended to replace national
programs, but to extend the availability of investment insurance to many areas where it
was not previously available, which in turn is expected to assist economic development
in those areas. MIGA’s success will likely be where it fills gaps rather than where it
competes with established and successful national insurance programs. The clear
intention of MIGA is to avoid political interference and consider the process solely as
creating legal issues.

Objectives and Purposes

The objectives of the Agency shall be to encourage the flow of investments for
productive purposes among member countries, and in particular to developing member
countries, thus supplementing the activities of the International Bank for Reconstruction
and Development (hereinafter referred to as the Bank), the International Finance
Corporation and other international development finance institutions. As per Article 2 of
Convention Establishing the Multilateral Investment Guarantee Agency the Agency shall:

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 a. issue guarantees, including coinsurance and reinsurance, against non-commercial
risks in respect of investments in a member country which flow from other
member countries;
b. carry out appropriate complementary activities to promote the flow of
investments to and among developing member countries; and
c. exercise such other incidental powers as shall be necessary or desirable in the
furtherance of its objective. The Agency shall be guided in all its decisions by the
provisions of this Article.

6.1 MIGA- INSURANCE PROGRAMS

Risks covered by MIGA are non-commercial and include risks of currency transfer,
expropriation, war and civil disturbance, and breach of contract by the host government.
Only developing nations are eligible locations for insured investments.

Article 11 of Convention Establishing the Multilateral Investment Guarantee Agency states that
Subject to the provisions of Section below, the Agency may guarantee eligible investment
against a loss resulting from one or more of the following types of risk:

1. Currency Transfer

It covers losses incurred when an investor is unable to convert host nation currency into
foreign exchange and transfer that exchange abroad. Currency depreciation is not
covered. In the event of a claim, MIGA pays compensation in the currency specified in
the contract of guarantee.

Host- nation currency may be that obtained from profits, principal, interest, royalties,
capital, etc. the insurance covers refusals and excessive delays where the host
government has failed to act, where there have been adverse changes in exchange control
laws or regulations, or where conditions in the host-nation that govern currency transfer
have deteriorated. Currency devaluations are not covered. Such devaluations are often
the cause of substantial losses, but these are commercial losses attributed to changes that
are to some extent predictable, and are not carried out by host nations to harm

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investment. Indeed, currency devaluations are usually extreme measures to address
changing demand for the nation’s currency.

2. Expropriation and Similar Measures

This is insurance for partial or total loss from acts that reduce ownership of, control
over, or rights to the insured investment included is ‘’ creeping’’ expropriation, where a
series of acts has the same effect as an outright taking. Not covered are non-
discriminatory actions of the host government in exercising its regulatory authority.

Valuation for compensation is net book value; that may mean inadequate compensation
where book value reflects historic costs. Loans and loan guarantees are compensated to
the extent of the outstanding principal and interest. Compensation is paid at the same
time as the insured assigns its rights in the investment to MIGA. Which then may take
action against the expropriating government.

3. War and Civil Disturbance

Losses for damage, disappearance, or destruction to tangible assets by politically

motivated acts of war or civil disturbance, such as revolution, insurrection, coup d’état,
sabotage and terrorism. Compensation is for the book value or replacement cost of
assets lost, and for the repair of damaged assets.

This insurance also covers losses attributable to an interruption in a project for a period
of one year. This is business interruption coverage, and becomes effective when the
investment is considered a total loss. Book value is the measure of compensation.

4. Breach of Contract.

This special insurance covers losses caused by the host government’s breach or
repudiation of a contract. When there is an alleged breach or repudiation, the foreign
investor must be able to invoke an arbitration clause in the contract and obtain an award
for damages. If that award is not paid by the host government, MIGA provides
compensation.

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6.2 MIGA- ELIGIBLE INVESTMENTS
As of 2023, MIGA insurance may cover, to a maximum of US $250 million, new equity
investments, or loans made or guaranteed by holders of equity. Also covered are service
and management contracts, and licensing, franchising and production sharing
agreements, if they are at least of three years duration and the investor’s remuneration is
related to the operating results of the project. MIGA will insure acquisitions under a
state privatization program, an important program in view of the rapid pace of
privatisation in developing nations, Eastern European nations and parts of the former
Soviet Union.

Duration of Guarantee

MIGA provides coverage for a minimum of one year and a maximum of up to 15 years
(and possibly 20 years if justified by the nature of the project). Once a guarantee is issued
and effective, MIGA may not terminate the contract unless a default occurs, but the
guarantee holder may reduce or cancel coverage without any penalty on any contract
anniversary date starting with the first anniversary

Credit Enhancement

Non-honouring of Financial Obligations

protects against losses resulting from a failure of a sovereign or sub-sovereign

government or a qualified state-owned enterprise (SOE) to make a payment when due
under an unconditional financial payment obligation or guarantee related to an eligible
investment. It does not require the investor to obtain an arbitral award. This coverage is
applicable in situations when the financial payment obligation is unconditional and not
subject to defense. Availability of this product is limited to governments/SOEs with
satisfactory credit ratings.

6.3 SETTLEMENT OF DISPUTES

Investment Protection and International Relations

Under traditional international law, investors did not have direct access to international
remedies to pursue claims against foreign States for violations of their rights. Instead,
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they depended on diplomatic protection by their home States. However, the gaps left by
the traditional methods of dispute settlement (diplomatic protection and action in
domestic courts) has led to the idea of offering investors direct access to effective
international procedures, especially arbitration. Arbitration between a host State and a
foreign investor may take place in the framework of a variety of institutions or rules.

There are various methods of settling investment disputes. One way might be through
the national court system. However, there are many potential disadvantages of this.
Secondly, there are concerns that the national courts may be biased against foreign
corporations and as such are unlikely to come out in favour of the investor. In addition
of this, the doctrine of sovereign immunity will bar Multinational Corporation from
bringing action against the host state in national courts. Therefore, the multinational
corporation will need an international forum of same sort. Diplomatic protection carries
serious limitations for the investor relying on it:

i. The investor whether an individual or a corporation must a national of the

protected state.
ii. The investor must have exhausted the local remedies available in the host State.

The usefulness of the diplomatic protection by the state is also limited. Even more
importantly, the investor has no right to diplomatic protection but depends on the
political discretion of his government. The government may refuse to take up the claim.
It may discontinue diplomatic protection at any time. It may waive the national’s claim
or agree to a reduced settlement. As soon as the national State has taken up the claim, it
becomes part of the foreign policy process with all the attendant political risks.
Diplomatic protection on behalf of investors also carries important disadvantages to the
States concerned.

i. It can seriously disrupt their international relations, at times leading as far as the
use of force.
ii. Where the investors state of nationality decides to exercise diplomatic
protection, the primary method of dispute settlement is negotiation, if
negotiation prove fritless, the protecting state may resort before international
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 arbitral tribunals 25 , the Permanent Court of International Justice and the
International Court of Justice26.
iii. Not surprisingly, developing countries resent pressure from capital exporting
countries whether it is exercised bilaterally or in multilateral fora such as
international lending institutions. Diplomatic protection in investment disputes
by capital exporting countries against developing countries has been a frequent
source of irritation for the latter. The right to exercise diplomatic protection
may be entered by treaty provisions, that is where ICSID comes from.

Mavrommatis Palestine Concessions (Greece V Great Britain) (1924 – 27)

The negotiations began in 1924 when the Greek government submitted a proposal to the British
authorities, requesting the establishment of a Greek concession in Palestine. The concession
would have granted Greece certain rights and privileges, including control over specific areas and
the ability to administer Greek Orthodox religious institutions.

However, the British were hesitant to grant such concessions to Greece. They were concerned
about potential conflicts with the existing Jewish and Arab communities in Palestine, as well as
the implications it might have on their overall control of the region. The negotiations were further
complicated by the ongoing tensions between Greece and Turkey, as the British feared that
granting concessions to Greece could exacerbate the existing Greek-Turkish conflict.

Over the course of the negotiations, both sides made several proposals and counter-proposals,
but a final agreement was never reached. The British consistently expressed their reservations
about the establishment of a Greek concession in Palestine, while Greece continued to advocate
for the rights of Greek Orthodox Christians and their historical connections to the region. In
1927, the negotiations reached an impasse, and both parties decided to suspend further
discussions. The British government issued a statement affirming their commitment to protecting
the rights of all religious and ethnic groups in Palestine but emphasized that the establishment of
a Greek concession was not feasible at that time.

The failure of the Mavrommatis Palestine Concessions had several consequences. It strained the
relations between Greece and Great Britain, as Greece felt that its interests and concerns were

25
Mavrommatis Palestine Concession (Greece v. UK)
26
Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain)
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not adequately addressed. The negotiations also highlighted the complexities of the British
Mandate in Palestine and the challenges of accommodating various national and religious groups
within the region.

In the years that followed, the situation in Palestine underwent significant changes, with increased
Jewish immigration and growing tensions between Jewish and Arab communities. The failure of
the Mavrommatis concessions became a historical footnote as the focus shifted towards the
broader issues of Jewish-Arab relations and the future of Palestine.

Overall, the Mavrommatis Palestine Concessions were a failed attempt by Greece to secure a
presence and protect the rights of Greek Orthodox Christians in Palestine. While the negotiations
did not yield the desired outcome, they reflected the complex dynamics of the British Mandate in
Palestine and the challenges of accommodating different national and religious aspirations within
the region.

Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain)

The Barcelona Traction, Light and Power Company, Limited case was a landmark international
legal dispute between Belgium and Spain that took place in the 20th century. The case revolved
around the issue of whether Belgium had standing to bring a claim on behalf of its nationals who
held shares in the Barcelona Traction, Light and Power Company, a Spanish corporation.

The Barcelona Traction Company was a utility company that operated in Spain and had
significant Belgian investments. In 1948, during the Spanish Civil War, the company's assets were
seized by the Spanish government. Belgium, seeking to protect the rights of its nationals who
were shareholders in the company, brought the case before the International Court of Justice
(ICJ) in 1958.

The main contention in the case was whether Belgium had the legal capacity to bring a claim on
behalf of its nationals under international law. Belgium argued that it had a right to protect the
interests of its citizens who had suffered harm due to the expropriation of their shares. Spain, on
the other hand, maintained that only individual shareholders could bring a claim and that Belgium
lacked the necessary legal standing.

After years of legal proceedings, the ICJ issued its judgment in 1970. The court ruled in favour
of Spain, stating that Belgium did not have standing to bring a claim on behalf of its nationals.

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The ICJ held that the protection of shareholders' rights was a matter for individual shareholders
to pursue, rather than for their home state to litigate on their behalf.

The Barcelona Traction case set an important precedent in international law, clarifying the
standing of states to bring claims on behalf of their nationals in cases involving the violation of
private property rights. It emphasized the principle that individual shareholders, rather than their
home states, are generally the appropriate parties to seek redress for such violations.

Although Belgium's claim was ultimately unsuccessful, the case highlighted the significance of
protecting foreign investments and the rights of shareholders in international law. It underscored
the importance of individual investors' access to legal remedies and the limitations on the role of
states in pursuing claims on their behalf.

Investor-State Arbitration

A number of legal instruments have given direct access to arbitration to investors thus
obviating the need for diplomatic protection. This form of investment arbitration serves
several purposes. The investor no longer depends on the uncertainties of diplomatic
protection and is usually absolved from the need to exhaust local remedies. At the same
time access to investor-State arbitration significantly improves the host State’s
investment climate and will create an additional incentive for foreign direct investment.

A beneficial side effect of investor-State arbitration is the impact on the relations

between the States concerned. The host State and the investor’s home State are
disencumbered from the strains arising from investment disputes. These disputes are
transferred from the political bilateral arena to a judicial forum especially charged with
the settlement of mixed investor-State disputes.

International Centre for Settlement of Investment Dispute (ICSID)

The ICSID Convention provides a framework for the settlement of investment disputes
between States and nationals of other States. It specifically provides for the exclusion of
diplomatic protection in disputes that are subject to investor-State dispute settlement.
Article 27(1) of the Convention provides that where consent to investors state
arbitration exists, a contracting state may not give a diplomatic protection or bring an
international claim:
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 No Contracting State shall give diplomatic protection, or bring an international claim, in respect
of a dispute which one of its nationals and another Contracting State shall have consented to
submit or shall have submitted to arbitration under this Convention, unless such other Contracting
State shall have failed to abide by and comply with the award rendered in such dispute.

However, Article 27(2) does not exclude informal diplomatic exchange for the sole-
purpose of facilitating settlement of the dispute.

The Convention would … offer a means of settling directly, on the legal plane, investment disputes
between the State and the foreign investor and insulate such disputes from the realm of politics
and diplomacy.

Article 64 of the ICSID Convention gives jurisdiction to the International Court of

Justice for any dispute concerning the interpretation or application of the Convention.
In exercising diplomatic protection to secure the compliance with an award a home
State may avail itself of this provision. In actual practice, diplomatic protection to secure
the compliance with awards appears to have played little if any practical role. In
particular, no case has ever been brought to the ICJ under Article 64. The consequences
of non-compliance with an award for a state’s reputation with private and public sources
of international finance are such that States usually prefer to abide by decisions of
tribunals.

State-State Dispute Settlement

The treaties providing for investor-State arbitration typically also foresee methods for
the settlement of disputes between the contracting parties. These provisions follow the
tradition of general dispute settlement clauses commonly found in the final clauses of
treaties.

Article 64 of the ICSID Convention has already been referred to. It grants jurisdiction
to the ICJ for disputes concerning the interpretation and application of the Convention,
unless it can be settled by negotiation or the state concerned agree on another
settlement. During the Convention’s drafting there was much concern about the
relationship between this State-State procedure and investor-State arbitration.

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Article 64 ICSID Convention:

Any dispute arising between Contracting States concerning the interpretation or application
of this Convention which is not settled by negotiation shall be referred to the International
Court of Justice by the application of any party to such dispute, unless the States concerned
agree to another method of settlement.

Conflict of law rules will normally point to this court since the dispute will likely to have
the closest connection to the state the investment is made. From the investor’s
perspective, this is not a solution as the investor will fear the lack of impartiality against
its claim. In many countries an independent judiciary cannot be taken for granted and
the executive intervention and judicial loyalty are likely to interpret the out comes to the
forum country. In all situation, domestic courts cannot offer an effective remedy to the
foreign investor. The court of an investor home country are usually not viable
alternative as they will lack territorial jurisdiction.

Siag v. Egypt

Waguih Elie George Siag and Clorinda Vecchi v. Arab Republic of Egypt
(ICSID Case No. ARB/05/15)
This is a notable international arbitration case that involved an investment dispute between a
company named Siag and the Arab Republic of Egypt. The case centered around allegations of
breaches of a bilateral investment treaty (BIT) between Egypt and Germany, as well as violations
of international law.

The dispute arose in 2002 when Siag, a German company involved in the production and
distribution of steel products, initiated arbitration proceedings against Egypt under the auspices
of the International Centre for Settlement of Investment Disputes (ICSID). Siag claimed that
Egypt had violated the provisions of the BIT by failing to provide fair and equitable treatment,
protecting against unlawful expropriation, and ensuring full protection and security for the
investment.

The crux of Siag's argument was that Egypt had taken various measures that negatively affected
the company's business operations and investments in Egypt. These measures included alleged

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harassment, confiscation of assets, arbitrary tax assessments, and interference in Siag's
contractual arrangements.

The arbitration tribunal was composed of three arbitrators, and the proceedings took place over
several years. In 2009, the tribunal issued its final award, largely in favor of Egypt. The tribunal
found that although Egypt had taken some measures that had an adverse impact on Siag's
business, the actions did not amount to a violation of the BIT. The tribunal held that Egypt had
not breached its obligations under the treaty and dismissed Siag's claims for compensation.

The Siag v. Egypt case is significant in the realm of investment arbitration because it sheds light
on the complex issues surrounding the protection of foreign investments and the interpretation
of bilateral investment treaties. The case underscores the high threshold that investors must meet
to establish a breach of a BIT and the importance of providing compelling evidence to support
their claims. Furthermore, Siag v. Egypt demonstrates the role of international arbitration as a
means to resolve disputes between foreign investors and host states. The case highlights the need
for a neutral and independent mechanism to address investment disputes and provides valuable
insights into the legal standards applied by arbitral tribunals in determining the rights and
obligations of both parties.

Saipem v. Bangladesh
Saipem S.p.A. v. People's Republic of Bangladesh
(ICSID Case No. ARB/05/7)
This is a significant international arbitration case involving an Italian construction company
named Saipem and the People's Republic of Bangladesh. The dispute arose from a contract
dispute over the construction of a gas pipeline in Bangladesh.

In 2006, Saipem was awarded a contract by the Bangladesh government to construct a gas
pipeline. However, the project was delayed due to issues with land acquisition and a change in
the scope of work. Saipem claimed that the delays and changes to the contract resulted in
additional costs, and it sought compensation from Bangladesh.

After negotiations failed to resolve the dispute, Saipem initiated arbitration proceedings under
the United Nations Commission on International Trade Law (UNCITRAL) rules in 2009. The
arbitration tribunal was composed of three arbitrators, and the proceedings took place over
several years.

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As a result, the tribunal ordered Bangladesh to pay Saipem over $200 million in damages, plus
interest and legal fees.

The Saipem v. Bangladesh case is significant because it demonstrates the importance of adhering
to contractual obligations and the potential consequences of breaching these obligations. The
case also highlights the role of international arbitration as a means to resolve complex
international disputes, particularly in the context of construction projects involving multiple
jurisdictions.

Furthermore, the Saipem v. Bangladesh case highlights the need for parties to carefully negotiate
and draft contracts to ensure that potential disputes are addressed and that the terms of the
contract are clear and enforceable.

Overall, Saipem v. Bangladesh serves as an important precedent in the field of international

arbitration and highlights the significance of upholding contractual obligations and respecting
the rules of international dispute resolution.

It is mainly for these and other reasons that ADR has been made between state and the
host state. They consist of primarily granting the investor direct access to arbitration
with the host state. The gaps left by the traditional disputes (diplomatic protection and
action in domestic courts) has led to the idea of offering investors direct access to
international settlement procedures especially arbitration. This carries advantage for
both the investor and the host state.

The advantage to the investor is in two-fold.

a. By offering an international procedure for dispute settlement. It improves its

investment climate and is likely to attract more foreign investment.

b. By consenting to international arbitration, the host state shields itself against

other processes notably diplomatic protection.

Arbitration is usually more efficient than litigation through regular courts as it offers the
parties the opportunity to select arbitrators who enjoys their confidence and have
necessary expertise in the field. Confidentiality of proceedings is often valued by parties
to major economic development project.

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Investment majority of cases, the method chosen for the international settlement of
investor state disputes is through arbitration seconded by conciliation. In contrast to
conciliation, arbitration is more formal and adversarial and most impartial it leads to a
binding decision at law. This is why claimants prefer arbitration.

Investment arbitration uses mechanism originally developed for settlement of

commercial disputes between private parties. The main characteristics for commercial
arbitration are also applied in investor-state arbitration. But the application of
international rules governing the conduct of the state-state arbitration has its own
distinctive features.

The Small Investment Program (sip)

MIGA’s SIP program is designed to facilitate investment into small and medium
enterprises (SMEs) involved in the finance, agribusiness, manufacturing, and services
sectors. Investments are eligible for coverage under the SIP if they are related to the
establishment of an SME, or made into an existing SME, in a developing member
country. In order to qualify as an SME, the project enterprise must fulfil at least two of
the following criteria:

• no more than 300 employees

• total assets not more than $15 million
• total annual sales not more than $15 million

Investments in the financial sector are eligible under the SIP if they are geared toward
providing financial services for SMEs, and at least 50 percent of clients related to the
investment are SMEs as defined above.

The SIP offers:

• coverage up to $10 million (the actual size of the investment may be bigger)
• a guarantee package covering currency transfer restriction, expropriation, and
war, terrorism, and civil disturbance a quick approval process

The SIP has no restrictions with respect to the size of the investor.
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How to Apply

Applicants seeking MIGA coverage should submit a completed Preliminary Application

as soon as feasible. There is no fee charged. Once investment and financing plans are
established, applicants submit a Definitive Application along with any relevant project
documentation and a processing fee. Applications may be submitted through MIGA’s
website, via email, or by post.

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7 INTERNATIONAL FINANCIAL INSTITUTIONS

Toward the end of the Second World War, in July 1944, representatives of the United
States, Great Britain, France, Russia, and 40 other countries met at Bretton Woods, a
resort in New Hampshire, to lay the foundation for the post war international financial
order. Such a new system, they hoped, would prevent another worldwide economic
cataclysm like the Great Depression that had destabilized Europe and the United States
in the 1930s and had contributed to the rise of fascism and the war.

Therefore, the United Nations Monetary and Financial Conference, as the Bretton
Woods conference was officially called, created the International Monetary Fund (IMF)
and the World Bank to prevent economic crisis and to rebuild economies shattered by
the war.

The Bretton Woods strategy addressed what were considered to be the two main causes
of the pre-war economic downturn and obstacles to future global prosperity- the lack of
stable financial markets around the world that had led to the war and the destruction
caused by war itself. The IMF would be aimed at stabilizing global financial markets and
national currencies by providing the resources to establish secure monetary policy and
exchange rate regimes, while the World Bank would rebuild Europe by facilitating
investment in reconstruction and development.

7.1 INTERNATIONAL MONETARY FUND

The Bretton Woods conference set out six goals for the IMF in its Articles of Agreement.
Those goals remain the guiding principles of the IMF today.

(i) To promote international monetary cooperation through a permanent

institution that provides the machinery for consultation and collaboration on
international monetary problems.
(ii) To facilitate the expansion and balanced growth of international trade, and to
contribute thereby to the promotion and maintenance of high levels of
employment and real income and to the development of the productive
resources of all members as primary objectives of economic policy.

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 (iii) To promote exchange stability, to maintain orderly exchange arrangements
among members, and to avoid competitive exchange depreciation.
(iv) To assist in the establishment of a multilateral system of payments in respect of
current transactions between members and in the elimination of foreign
exchange restrictions that hamper the growth of world trade.
(v) Try to reduce the effects of volatility in countries balance of payments accounts,
it helps assure that global trade and financial relationships can continue at a
steady rate without the risks of global depressions like that of the 1930s.
(vi) The IMF has three main activities
1. Surveillance

Each year the IMF sends economists to each of its member countries to analyse the
county’s economic situation. The team examines fiscal and monetary policy, exchange
rate, general macroeconomic stability, and any related policies, such as labour policy,
trade policy, and social policy (such as pension system). This process is known as an
article IV consultation. The purpose of such consultation is to provide an outside check
on national decisions that might have an effect on the international economic system.

After the team finishes its analysis, the IMF executive board discusses the report and
gives it to the leaders of the country in question as the official opinion of the IMF.

2. Financial Assistance

The central activity undertaken by the IMF is financial assistance to national treasury
departments. Member countries with balance of payments problems can receive credits
and loans to pay off their obligations and readjust their economic policies so that they
will not face another crisis. To receive assistance, however, the member –country must
agree, through a ‘’letter of intent’’, to implement changes in its fiscal and monetary
policies that IMF experts have determined are necessary.

3. Technical assistance

The IMF provides technical assistance on fiscal and monetary policy, regulatory
procedures, tax policy, and collection of statistics among other issues. These programs

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are aimed at strengthening developing countries abilities to reform and properly manage
their macroeconomic policies. The IMF dispatches its own experts and private
consultants on training missions to educate government officials and also runs the IMF
institute in Washington, D.C. to provide courses for officials.

The IMF goals are to facilitate the expansion and balanced growth of international trade,
to assist in the elimination of foreign exchange restrictions which hamper the growth of
international trade, and to shorten the duration and lessen the disequilibrium in the
international balances of payments to members. The mitigation of wide currency
fluctuations is achieved through a complex lending system which permits a country to
borrow money from other Fund members or from the Fund (by way of ‘’ special
Drawing Rights’’ or ‘’SDRs’’) for the purpose of stabilizing the relationship of its
currency to other world currencies. These monetary drawing arrangements permit a
member country to support its national currency’s relative value when compared with
national currencies of other countries, especially the ‘’hard’’ (‘’reserve’’) currencies such
as the Swiss franc, the Euro, Japanese yen, and United States dollar.

7.2 THE WORLD BANK

The World Bank is the name that has come to be used for the International Bank for
Reconstruction and development (IBRD) founded at Bretton Woods. As the World
Bank expanded beyond its initial scope and purpose of rebuilding Europe after the
Second World War, the World Bank grew through the creation of four additional
organisations. Together, these five financial organisations comprise the World Bank
Group, namely the IBRD, the International Development Association (IDA), the
International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency
(MIGA), and the International Centre for Settlement of Investment Disputes (ICSID).

The IBRD and the IDA focus mainly on public sector monetary policy and provide low
–interest free credit, and grants to developing countries. Additionally, they work to affect
the policies of governments by providing macroeconomic policy advice, research, and
technical advice. The remaining three institutions that belong to the World Bank Group

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focus more on private market interactions, providing funding, insurance, and dispute
resolution for private sector projects.

The mission statement of the IBRD states that it ‘’ aims to reduce poverty in middle-
income and creditworthy poorer countries by promoting sustainable development,
through loans, guarantees, and non-lending- including analytical and advisory services.
The World Bank aims at issues such as building infrastructure (roads, dams, power
plants,) natural disaster relief, humanitarian emergencies, poverty reduction, infant
mortality, gender equality, education, and long-term development issues. Furthermore,
the World Bank tries to foster social reforms to promote economic development, such
as the empowerment of women, building schools and health centres, provision of clean
water and electricity, fighting disease and protecting the environment.

Like IMF loans, World Bank loans are conditioned on the World Bank’s approval of the
investment plans and schedule for the project and repayment of the loans. The World
Bank fund its loans by raising money on the international bond market, issuing bonds in
its name to large institutional international investors, such as banks and pension funds.

As a non –profit institution, however, the World Bank does not take any profit on the
results of its fundraising. Instead, it uses its profits to subsidise its lending back to the
countries whose projects it finances. Only about half of the World Bank’s funding comes
from grants by members, and the rest comes from the World Bank’s own operations.

THE WORLD BANK ASSOCIATES

The International Bank for Reconstruction and Development (IBRD)

IBRD is the original institution of the World Bank Group. When it was established in
1944, its first task was to help Europe recover from World War II.

Today, IBRD plays an important role in improving living standards by providing its
borrowing member countries—middle-income and creditworthy poorer countries with
loans, guarantees, risk management, and other financial services, as well as analytical and
advisory services. It provides these client countries with risk management tools and

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access to capital on favourable terms in larger volumes, with longer maturities, and in a
more sustainable manner than the market in several important ways:

• By supporting long-term human and social development needs those private

creditors do not finance.
• By preserving borrowers’ financial strength through support during crisis
periods, which is when poor people are most adversely affected
• By using the leverage of financing to promote key policy and institutional
reforms (such as safety net or anticorruption reforms).
• By creating a favourable investment climate to catalyse the provision of private
capital.
• By providing financial support (in the form of grants made available from
IBRD’s net income) in areas critical to the well-being of poor people in all
countries.

IBRD is structured like a cooperative that is owned and operated for the benefit of its
187 member countries. Shareholders of IBRD are sovereign governments, and its
borrowing members, through their representatives on the Board of Executive Directors,
have a voice in setting its policies and approving each project and loan. IBRD finances
its activities primarily by issuing AAA-rated bonds to institutional and retail investors in
global capital markets. IBRD’s financial objective is not to maximize profit, but to earn
adequate income to ensure its financial strength and to sustain its development activities.

Although IBRD earns a small margin on this lending, the greater proportion of its
income comes from investing its own capital. This capital consists of reserves built up
over the years and money paid in from the Bank’s 187-member country shareholders.
IBRD’s income also pays for World Bank operating expenses and has contributed to
IDA, debt relief, and other development causes.

International Development Associates (IDA)

After the rebuilding of Europe following World War II, the Bank turned its attention to
the newly independent developing countries. It became clear that the poorest developing

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countries could not afford to borrow capital for development on the terms offered by
the Bank; hence, a group of Bank member countries decided to found IDA as an
institution that could lend to very poor developing nations on easier terms. To imbue
IDA with the discipline of a bank, these countries agreed that IDA should be part of the
World Bank. IDA began operating in 1960.

The International Development Association (IDA) is the part of the World Bank that
helps the world’s poorest countries. IDA aims to reduce poverty by providing loans
(called “credits”) and grants for programs that boost economic growth, reduce
inequalities, and improve people’s living conditions.

IDA complements the World Bank’s original lending arm the International Bank for
Reconstruction and Development (IBRD). IBRD was established to function as a self-
sustaining business, and provides loans and advice to middle-income and credit-worthy
countries. IBRD and IDA share the same staff and headquarters and evaluate projects
with the same rigorous standards. IDA is one of the largest sources of assistance for the
world’s 75 poorest countries, 39 of which are in Africa, and is the single largest source
of donor funds for basic social services in these countries.

The significance of the IDA

The availability of a large volume of development finance through the IDA is likely to
have the following effect s on the pattern of economic a i d as a whole:

a. it makes funds available to the developing countries on terms that do not result
in a crippling burden of debt;

b. i t draws resources from the developed countries i n accordance with an agreed

scale, which ensures a reasonably fair distribution of any increase i n the amount
provided;

c. it greatly strengthens the World Bank's ability to perform certain functions:

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 i. the provision of development finance to countries in Asia and Africa which
cannot afford to accept large amounts on the terms of IBRD loans, especially
India and Pakistan;

ii. the organisation of machinery for co-ordinating aid from different sources;

iii. the influencing of developing countries' policies in directions which the

World Bank, the United States, and other major donors think conducive to
development of an appropriate sort.

iv. the organisation and supervision of large projects, i n which contractors from
several countries participate on competitive terms - a function which the
Bank can only, fulfil in a position to put resources of its own int o the project
in question.

International Financial Cooperation (IFC)

Established in 1956, IFC is one of the oldest multilateral lending institutions and a
member of the WBG. IFC's very strong enterprise risk profile is supported by its strong
track record. In April 2018, WBG's Development Committee of the Board of Governors
endorsed a $5.5 billion paid-in capital increase, largely in support of IFC's 3.0 strategy
designed to create a more deliberate approach to creating and opening new private-sector
markets, particularly in International Development Association (IDA)-eligible and
fragile and conflict-affected situations (FCS), as well as mobilizing new sources of funds
to support private-sector solutions. We believe if IFC meaningfully delivers on this
strategy, its enterprise risk profile could strengthen.

Scope of Application
IFC urges sponsors of investment projects to avoid the disturbance and displacement of
human populations. Where such disturbance is unavoidable, the project sponsor should
minimize adverse effects on people and on the environment through judicious routing
or siting of project facilities. The aim of the involuntary resettlement policy is to ensure
that people who are physically or economically displaced as a result of a project end up
no worse off and preferably, better off than they were before the project was undertaken.
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IFC’s three businesses

▪ investment services,

▪ advisory services,

▪ asset management

All these foster sustainable economic growth in developing countries by financing

private sector investment, mobilizing capital in international financial markets, providing
advisory services to businesses and governments, and channelling finance to the poor.
IFC helps companies and financial institutions in emerging markets create jobs, generate
tax revenues, improve corporate governance and environmental performance, and
contribute to their local communities. The goal is to improve lives, especially for the
people who most need the benefits of growth.

Direct lending to businesses is the fundamental contrast between IFC and the World
Bank: under their Articles of Agreement, IBRD and IDA can lend only to the
governments of member countries. IFC was founded specifically to address this
limitation of World Bank lending.

IFC provides equity finance, long-term loans, syndicated loans, loan guarantees,
structured finance and risk management products, and advisory services to its clients. It
seeks to reach businesses in regions and countries that otherwise would have limited
access to capital. It provides financing in markets deemed too risky by commercial
investors in the absence of IFC participation.

IFC also supports the projects it finances by providing advice to businesses and
governments on access to finance, corporate governance, environmental and social
sustainability, the investment climate, and infrastructure. Much of the advisory work is
funded by IFC’s donor partners, through trust funds, or through facilities with a regional
or thematic focus.

To maximize its effect on development, IFC emphasizes five strategic priorities:

strengthening the focus on frontier markets; building long-term client relationships in

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emerging markets; addressing climate change and ensuring environmental and social
sustainability; addressing constraints to private sector growth in infrastructure, health,
education, and the food supply chain; and developing domestic financial markets.

In conjunction with IFC, the Bank is also helping countries strengthen and sustain the
fundamental conditions they need to attract and retain private investment. With Bank
Group support—both lending and advice— governments are reforming their overall
economies and strengthening banking systems. Investments in human resources,
infrastructure, and environmental protection help enhance the attractiveness and
productivity of private investment.

It can also combine its financial products and services with advice tailored to the needs
of each client. The bulk of the funding, as well as leadership and management
responsibility, however, lies with the private sector owners. IFC charges market rates for
its products and does not accept government guarantees. Therefore, it carefully reviews
the likelihood of success for each enterprise. To be eligible for IFC financing, projects
must be profitable for investors, must benefit the economy of the host country, and
must comply with IFC’s environmental and social standards.

7.3 AFRICAN DEVELOPMENT BANK

This is a multilateral development finance institution established to contribute to the
economic development and social progress of the African countries. It was founded in
1964, and began operations in 1966. It comprises three entities namely; African
Development Bank, African Development Fund, and the Nigerian Trust Fund. Its
mission is to fight poverty and improve living conditions on the continent through
promoting the investment of public and private capital in projects and programs that are
likely to contribute to the economic and social development of the region.

Established in 1972, started operations in 1974, provides development finance on

concessional terms to low- income which are unable to borrow on the non- concessional
terms of the African Development Bank. Poverty reduction is the main aim of ADF
activities. ADF financial sources are mainly contributions and periodic replacements by
non- African member states. Replenished every three years.
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Functions

The primary function of African Development Bank is the provision of loans and equity
investments for the socio –economic advancement of RMC’s. The bank also provides
technical assistance for development projects and programs Promotes investment of
public and private capital for development. The bank assists in organising the
development policies of RMC’s.

7.3.1 AFRICAN DEVELOPMENT FUND

Established in 1972, the African Development Fund started operations in 1974. It
provides development finance on concessional terms to low-income RMCs which are
unable to borrow on the non-concessional terms of the AfDB. In harmony with its
lending strategy, poverty reduction is the main aim of ADF activities. Twenty-four non-
African countries along with the AfDB constitute its current membership. The largest
ADF shareholder is the United States with approximately 6.5 percent of the total voting
shares, followed by Japan with approximately 5.4 percent.

The ADF’s general operations are decided by a Board of Directors, six of which are
appointed by the non-African member states and six designated by the AfDB from
among the bank's regional Executive Directors. The ADF’s sources are mainly
contributions and periodic replacements by non-African member states. The fund is
usually replenished every three years, unless member states decide otherwise. The total
donations, at the end of 1996, amounted to $12.58 billion. The ADF lends at no interest
rate, with an annual service charge of 0.75%, a commitment fee of 0.5%, and a 50-year
repayment period including a 10-year grace period. The tenth United Kingdom
replenishment of the ADF was in 2006.

i. Multilateral development bank; 53 African Countries

ii. The Goal of the Group is to promote sustainable economic growth in order to
reduce poverty in Africa. To achieve this goal, it finances a wide range of
projects and programs.
d. Public and private sector loans and equity investments
e. Technical assistance for projects and programs

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 f. Public and private capital investment
g. Assistance in coordinating regional member country development
policies and plans e. Grants of up to $500,000 emergency support
iii. The group has a board of Governors (one from each member state) who do the
following:
a. Issue general directive on the Banks Operation
b. Approve amendments to the agreement
c. Admit new members
d. Increase the Banks capital
e. Elect the President of the Group for Five a year term.

7.3.2 NIGERIA TRUST FUND

The Nigeria Trust Fund (NTF) was established in 1976 by the Nigerian government with
an initial capital of $80 million. The NTF is aimed at assisting in the development efforts
of the poorest AfDB members. The Nigeria Trust Fund is administered by the African
Development Bank. The ADB conducts the general operations of the NTF on the basis
of the terms of the Agreement and in consultation with the Government of Nigeria. The
NTF utilizes the offices, staff, organization, services and facilities of the Bank and
reimburses the Bank for its share of the costs of such facilities, based on an agreed-upon
cost-sharing formula (see Note J). The amount outstanding as at 31 December 2019 in
respect of the Fund’s share of administrative expenses was UA 0.16 million (2018: UA
0.10 million) and is included in Accounts Payable on the balance sheet.

The NTF uses its resources to provide financing for projects of national or regional
importance which further the economic and social development of the low-income
RMCs whose economic and social conditions require financing on non-conventional
terms. In 1996, the NTF had a total resource base of $432 million. It lends at a 4%
interest rate with a 25-year repayment period, including a five-year grace period

NTF resources are wholly contributed by the Government of Nigeria. The Fund’s
development activities are divided into five sub-regions of the continent of Africa for
internal management purposes, namely: Central Africa, East Africa, North Africa,
Southern Africa, and West Africa. Treasury investment activities are carried out mainly
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outside of the continent of Africa and are therefore not included in the table below. In
presenting information on the basis of the above geographical areas, revenue is based on
the location of customers. The Fund uses ADB’s offices, staff, organization, services
and facilities and therefore has no fixed assets of its own.

Loans

Following the extension of the Agreement in April 2008, the terms of the NTF loans
were further modified in line with the terms of financing in the operational guidelines of
the Fund, approved pursuant to the Board of Directors’ resolution ADB/BD/
WP/2008/196 of December 2, 2008 which stipulates that the resources of the Fund will
henceforth be deployed in accordance with the following three options:

Financial terms for the first option include:

(i) no interest charges on NTF loans;

(ii) a service charge of 0.75 percent per annum on outstanding balances;
(iii) a commitment fee of 0.5 percent per annum on undisbursed commitments; and
(iv) a 20-year repayment period with a 7-year grace period.

Financial terms for the second option include:

(i) no interest charges on NTF loans;

(ii) a service charge of 0.75 percent per annum on outstanding balances;
(iii) a commitment fee of 0.5 percent per annum on undisbursed commitments; and
(iv) a 15-year repayment period with a 5-year grace period.

Financial terms for the third option would be the same terms as for the ADB private
sector financing, taking into consideration the risk analysis of the project.

For all the above-mentioned options, the grace period starts from the date of signing of
the financing agreement or at a date agreed amongst co-financiers, in the case of co-
financed projects. For private sector operations, a commitment fee of 0.75 percent per
annum on undisbursed balances will be charged from 120 days after the signing of the
loan agreement. The NTF shall provide financing to suit the needs of its borrowers.

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MEMBERSHIP OF AFRICAN DEVELOPMENT BANK

At the end of June 2023, the Bank had 81 member countries, comprising 54 African or
regional member countries (RMCs) and 27 non-African or non-regional member
countries (NRMCs).

Initially, only independent African countries could become members of the Bank. With
a larger membership, the institution was endowed with greater expertise, the credibility
of its partners and access to markets in its non-regional member countries. The Bank
however maintains its African character by virtue of its geographical location and
ownership structure. It is always headquartered in Africa; its investment operations are
exclusively in Africa and its President is always an African.

African/Regional member countries

Algeria, Angola, Benin, Botswana, Burkina-Faso, Burundi, Cameroon, Cape-Verde,

Central African Republic, Chad, Comoros, Congo, Democratic Republic of Congo, Côte
d’Ivoire, Djibouti, Egypt, Eritrea, Equatorial Guinea, Ethiopia, Gabon, The Gambia,
Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Libya, Madagascar, Malawi,
Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda,
Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, Sudan,
Swaziland, Tanzania, Togo, Tunisia, Uganda, Zambia and Zimbabwe.

Non-African/Non-regional member countries

Argentina, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France,

Germany, India, Italy, Japan, Korea, Kuwait, Netherlands, Norway, Portugal, Saudi
Arabia, Spain, Sweden, Switzerland, United Kingdom and United States of America.

To become an AfDB member, non-regional States must first and fore most accede to
ADF membership. Only one ADF member state, the United Arab Emirates, is yet to
accede to AfDB membership. South Africa is currently completing the requirements of
accession to ADF. Turkey whose membership was approved by the Board of Governors
in Maputo, Mozambique, in May 2008 is in the process of completing the requirements
of state participation in the ADF.
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