FOREIGN INVESTMENT LAW

International Law on Foreign Investment: A Comprehensive Overview

I. Definition of Foreign Investment

Foreign investment refers to the transfer of tangible or intangible assets from one country into
another for the purpose of generating wealth through the ownership of companies, entities, or
other assets in the host country. It involves the flow of capital, technology, management
expertise, and other resources across national borders. Foreign investment can take various
forms, including foreign direct investment (FDI) and foreign portfolio investment (FPI).

II. Types of Foreign Investment

A. Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is a category of cross-border investment in which an investor

residing in one economy acquires a lasting interest in an enterprise operating in another
economy. The key features of FDI are:

1. Equity Participation: FDI involves the acquisition of a substantial equity stake, typically at
least 10% of the ordinary shares or voting power, in a foreign enterprise.

2. Long-term Interest: FDI reflects a long-term relationship between the investor and the foreign
enterprise, involving a significant degree of influence by the investor on the management of the
enterprise.

3. Diverse Forms: FDI can take various forms, such as greenfield investments (establishing new
operations), mergers and acquisitions, joint ventures, and reinvested earnings from existing
foreign investments.

B. Foreign Portfolio Investment (FPI)

Foreign Portfolio Investment (FPI) refers to the purchase of securities, such as stocks, bonds, and
other financial instruments, by investors residing in one country from entities in another country.
Unlike FDI, FPI does not involve a lasting interest or control over the management of the
enterprise. The key features of FPI are:
1. Equity or Debt Securities: FPI involves the acquisition of equity (stocks) or debt (bonds)
instruments issued by foreign entities.

2. Short-term Interest: FPI is typically driven by short-term financial gains, such as dividends,
interest payments, or capital appreciation, rather than a long-term strategic interest in the
enterprise.

3. Passive Investment: FPI does not confer significant influence or control over the
management of the foreign enterprise.

III. Origin and Evolution of International Law on Foreign Investment

The regulation of foreign investment through international law has evolved over centuries,
adapting to changing economic and political landscapes. The following timeline highlights key
milestones in the development of international law on foreign investment:

A. Early Developments (18th - early 20th Century)

1. Friendship, Commerce, and Navigation (FCN) Treaties: These early bilateral agreements
aimed to promote trade and commercial relations between nations, often including provisions
related to the treatment of foreign investors and their property.

2. Calvo Doctrine (1868): Proposed by the Argentine jurist Carlos Calvo, this doctrine asserted
that foreign investors should be subject to the same legal treatment as nationals and should not
seek diplomatic protection from their home countries.

B. Post-World War II Era (1945 - 1970s)

1. Decolonization and the New International Economic Order (NIEO): With the wave of
decolonization, newly independent developing countries sought to assert greater control over
their natural resources and economic development, leading to calls for a New International
Economic Order (NIEO) that challenged the traditional rules governing foreign investment.

2. Nationalization Movements: Several countries, including Mexico, Iran, and Chile,

nationalized foreign-owned enterprises, sparking debates over the rights of host states and the
protection of foreign investors.
3. Emergence of Bilateral Investment Treaties (BITs): In the absence of a comprehensive
multilateral agreement, countries began negotiating bilateral investment treaties (BITs) to
promote and protect foreign investment.

C. Globalization and the Rise of Investment Treaties (1980s - present)

1. Proliferation of BITs and Regional Investment Agreements: The number of BITs and
regional investment agreements grew exponentially, with countries seeking to attract foreign
investment and provide legal protections to investors.

2. Establishment of International Investment Arbitration: The creation of forums like the

International Centre for Settlement of Investment Disputes (ICSID) and the growth of investor-
state dispute settlement (ISDS) mechanisms facilitated the resolution of investment disputes
between states and foreign investors.

3. Multilateral Negotiations: Efforts were made to establish a multilateral framework for

foreign investment, such as the unsuccessful attempts to establish a Multilateral Agreement on
Investment (MAI) under the auspices of the Organisation for Economic Co-operation and
Development (OECD) in the 1990s.

4. Sustainable Development and Investment: More recent developments have focused on

balancing the rights and obligations of investors and host states, promoting sustainable
development, and addressing concerns related to the transparency and legitimacy of the
investment regime.

IV. Theories of International Law on Foreign Investment

The regulation of foreign investment has been shaped by various theoretical perspectives, with
the classical and dependency theories being particularly influential.

A. Classical Theories

Classical theories of international law on foreign investment have their roots in the liberal
economic principles of the late 18th and 19th centuries. These theories emphasize the importance
of foreign investment for economic growth and development, advocating for the protection of
foreign investors' rights and the free flow of capital across borders.
1. The Hull Rule (1938): Proposed by the U.S. Secretary of State Cordell Hull, this rule asserted
that the prompt, adequate, and effective compensation must be paid for expropriated foreign
property, setting a standard for the treatment of foreign investors.

2. Customary International Law: Classical theories drew upon the principles of customary
international law, such as the minimum standard of treatment, fair and equitable treatment, and
full protection and security, to establish legal obligations for host states concerning foreign
investments.

3. Promotion of Foreign Investment: These theories advocated for the creation of a favorable
investment climate through legal frameworks that protect foreign investors' rights, reduce risks,
and promote the free flow of capital across borders.

B. Dependency Theories

Dependency theories emerged in the mid-20th century, primarily in Latin America, as a critical
response to the classical theories and the perceived imbalance in the global economic order.
These theories challenged the notion that foreign investment necessarily leads to economic
development and argued that it can perpetuate economic dependency and exploitation of
developing countries.

1. Critical Perspectives: Dependency theorists criticized the classical theories as being rooted in
Western capitalist ideologies and serving the interests of developed countries and multinational
corporations at the expense of developing nations.

2. Economic Sovereignty and Self-Determination: These theories emphasized the right of

developing countries to exercise economic sovereignty, regulate foreign investment, and pursue
policies aimed at reducing their dependence on foreign capital and achieving self-reliant
development.

3. Call for a New International Economic Order (NIEO): Dependency theories were
instrumental in the calls for a New International Economic Order (NIEO) in the 1970s, which
sought to restructure the global economic system to better serve the interests of developing
countries. While these theories have influenced the evolution of international law on foreign
investment, the contemporary legal framework reflects a more balanced approach, seeking to
reconcile the interests of investors and host states, promote sustainable development, and address
concerns related to transparency, accountability, and the legitimacy of the investment regime.

V. Contemporary International Legal Framework on Foreign Investment

The contemporary international legal framework on foreign investment is a complex web of

multilateral, regional, and bilateral agreements, as well as customary international law principles
and domestic laws. Key components of this framework include:

A. Bilateral Investment Treaties (BITs)

Bilateral Investment Treaties (BITs) are agreements between two countries that establish the
terms and conditions for private investment by nationals and companies of one country in the
other. BITs typically include provisions on:

1. Admission and Establishment: Rules governing the entry and establishment of foreign
investments in the host country.

2. Investment Protection: Standards of treatment for foreign investors, such as fair and
equitable treatment, national treatment, most-favored-nation treatment, and protection against
expropriation without compensation.

3. Investor-State Dispute Settlement (ISDS): Mechanisms for resolving disputes between

foreign investors and host states, often through international arbitration.

B. Regional Investment Agreements

Regional investment agreements are treaties between groups of countries within a particular
geographic region that aim to promote and protect foreign investment among member states.
Examples include:

1. North American Free Trade Agreement (NAFTA) and its successor, the United States-
Mexico-Canada Agreement (USMCA)

2. Energy Charter Treaty (ECT)

3. Association of Southeast Asian Nations (ASEAN) Comprehensive Investment Agreement

(ACIA)
C. Multilateral Agreements and Institutions

Although a comprehensive multilateral agreement on foreign investment has not yet been
achieved, there are several multilateral agreements and institutions that play a role in regulating
foreign investment:

1. World Trade Organization (WTO) Agreements: The Agreement on Trade-Related Investment

Measures (TRIMs) and the General Agreement on Trade in Services (GATS) contain provisions
relevant to foreign investment.

2. International Centre for Settlement of Investment Disputes (ICSID): An autonomous

international institution established under the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States, which provides facilities for conciliation
and arbitration of investment disputes.

3. United Nations Conference on Trade and Development (UNCTAD): A UN body that conducts
research, provides technical assistance, and facilitates negotiations related to foreign investment
and development.

D. Customary International Law

Principles of customary international law, developed through the consistent practice of states and
opinio juris (the belief that such practice is legally obligatory), also govern foreign investment.
These include:

1. Fair and Equitable Treatment (FET)

2. Full Protection and Security

3. National Treatment

4. Most-Favored-Nation (MFN) Treatment

5. Protection against Expropriation without Compensation

E. Domestic Laws and Policies

Host countries often have domestic laws and policies that regulate foreign investment within
their territories. These may include:
1. Investment Laws and Codes

2. Sectoral Regulations (e.g., mining, energy, telecommunications)

3. Screening and Approval Mechanisms

4. Performance Requirements

5. Tax and Incentive Regimes

The interplay between these various sources of international and domestic law creates a complex
legal framework governing foreign investment, with ongoing debates and challenges regarding
the balance between investor rights and host state sovereignty, sustainable development
objectives, and the legitimacy and transparency of the investment regime.

ESSENTAIL CLAUSES OF INVESTMENT CONTRACTS AND BITS

Discussing the essential clauses of international investment contracts and bilateral investment
treaties (BITs) in reference to relevant common law and landmark international cases is a
comprehensive task that requires extensive analysis. I will provide a thorough response
addressing the key aspects of this topic within the specified word limit.

International Investment Contracts:

International investment contracts are agreements between states (host countries) and foreign
investors that govern the terms and conditions of a specific investment project. These contracts
play a crucial role in facilitating foreign direct investment (FDI) and establishing a legal
framework for the protection of investor rights. The essential clauses of international investment
contracts aim to strike a balance between the host state's sovereign rights and the investor's
legitimate expectations.

1. Scope and Definition of Investment:

- This clause defines the types of assets and economic activities that qualify as an "investment"
under the contract.

- It typically includes a broad range of assets, such as tangible and intangible property, equity
participations, contractual rights, intellectual property rights, and claims to money or
performance under contracts.
 - Case law: Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco (ICSID Case
No. ARB/00/4) established the "Salini test" for determining the existence of an investment,
which considers factors such as the commitment of resources, duration of performance, and
contribution to the host state's economic development.

2. Admission and Establishment:

- This clause sets forth the conditions and procedures for the admission and establishment of
foreign investments in the host state.

- It may include requirements for obtaining necessary approvals, licenses, or permits, as well as
provisions related to the treatment of investors during the pre-establishment phase.

- Case law: Mobil Corporation, Venezuela Holdings, B.V. v. Bolivarian Republic of Venezuela
(ICSID Case No. ARB/07/27) addressed issues related to the admission and establishment of
investments, emphasizing the importance of stability and predictability in the legal framework
governing foreign investments.

3. Fair and Equitable Treatment (FET):

- This clause requires the host state to accord fair and equitable treatment to foreign investors
and their investments.

- It is one of the most fundamental and widely invoked standards of protection in international
investment law.

- Case law: Waste Management, Inc. v. United Mexican States (ICSID Case No.
ARB(AF)/00/3) clarified the scope of the FET standard, emphasizing the need for due process,
non-discrimination, and respect for legitimate expectations.

4. National Treatment and Most-Favored-Nation (MFN) Treatment:

- The national treatment clause requires the host state to treat foreign investors and their
investments no less favorably than domestic investors and investments.

- The MFN clause ensures that foreign investors receive treatment no less favorable than that
accorded to investors from any third country.
 - Case law: Diag Human S.E. v. Czech Republic (UNCITRAL) addressed the application of
the MFN clause in the context of dispute settlement provisions, allowing investors to benefit
from more favorable dispute resolution mechanisms in other treaties.

5. Expropriation and Compensation:

- This clause prohibits the host state from expropriating or nationalizing foreign investments,
except under certain conditions, such as public purpose, non-discrimination, due process of law,
and the payment of prompt, adequate, and effective compensation.

- It typically includes provisions for determining the valuation method and the timing of
compensation payments.

- Case law: Metalclad Corporation v. United Mexican States (ICSID Case No. ARB(AF)/97/1)
addressed the issue of indirect expropriation and clarified the scope of the expropriation clause in
international investment agreements.

6. Transfer of Funds and Currency Convertibility:

- This clause guarantees the right of foreign investors to freely transfer funds related to their
investments, including profits, dividends, loan repayments, and proceeds from the sale or
liquidation of investments.

- It may also include provisions related to currency convertibility and the exchange rate
applicable to such transfers.

- Case law: Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic (ICSID Case
No. ARB/01/3) addressed the issue of currency convertibility and transfer restrictions imposed
by the host state during an economic crisis.

7. Dispute Settlement and Arbitration:

- This clause establishes the mechanisms and procedures for resolving disputes between the
foreign investor and the host state, often providing for international arbitration as the preferred
means of dispute resolution.
 - It may specify the applicable arbitration rules, such as those of the International Centre for
Settlement of Investment Disputes (ICSID), the United Nations Commission on International
Trade Law (UNCITRAL), or other institutional or ad hoc arbitration rules.

- Case law: SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (ICSID
Case No. ARB/01/13) addressed the scope of arbitration clauses in investment contracts and the
distinction between contract-based and treaty-based claims.

8. Stabilization Clauses:

- These clauses aim to provide stability and predictability to the legal and regulatory
framework governing the investment by "freezing" or limiting the host state's ability to modify
certain laws or regulations applicable to the investment.

- They may include provisions that require the host state to compensate the investor for any
adverse effects resulting from changes in laws or regulations.

- Case law: Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador
(ICSID Case No. ARB/04/19) addressed the scope and interpretation of stabilization clauses in
investment contracts, clarifying the limits of such clauses in the face of legitimate regulatory
changes by the host state.

9. Environmental and Social Clauses:

- These clauses are increasingly included in international investment contracts to address

environmental and social concerns related to the investment project.

- They may include obligations for the investor to comply with environmental laws and
regulations, conduct environmental impact assessments, and implement sustainable practices.

- Case law: Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur
Partzuergoa v. The Argentine Republic (ICSID Case No. ARB/07/26) addressed the interaction
between environmental regulations and investment protection standards, emphasizing the host
state's right to regulate in the public interest.
10. Force Majeure and Change of Circumstances:

- These clauses address unforeseen events or circumstances that may affect the performance of
the investment contract, such as natural disasters, wars, or significant changes in economic or
political conditions.

- They typically provide for the temporary suspension or termination of obligations, as well as
provisions for renegotiation or adaptation of the contract terms.

- Case law: LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v.
Argentine Republic (ICSID Case No. ARB/02/1) addressed the applicability of the force majeure
and necessity defenses in the context of an economic crisis, highlighting the need for a balanced
approach that considers both the host state's interests and the legitimate expectations of investors.

Bilateral Investment Treaties (BITs):

Bilateral Investment Treaties are international agreements concluded between two sovereign
states that aim to promote and protect foreign investments made by investors from one state in
the territory of the other state. BITs serve as a legal framework for facilitating cross-border
investment flows and providing a stable and predictable environment for foreign investors. The
essential clauses of BITs are designed to achieve these objectives and address various aspects of
investment protection.

1. Scope and Definition of Investment:

- Similar to investment contracts, BITs typically include a broad definition of "investment" to

encompass various types of assets and economic activities.

- Case law: Fedax N.V. v. Republic of Venezuela (ICSID Case No. ARB/96/3) addressed the
interpretation of the term "investment" under the Netherlands-Venezuela BIT, emphasizing the
need for a flexible and pragmatic approach.

2. Admission and Establishment:

- BITs often contain provisions related to the admission and establishment of investments,
including the criteria and procedures for obtaining necessary approvals or permits.
 - Some BITs may also include provisions on the promotion and facilitation of investments,
such as the exchange of information and the creation of favorable conditions for investors.

3. Fair and Equitable Treatment (FET):

- The FET clause is a cornerstone of BITs, requiring the host state to accord fair and equitable
treatment to foreign investors and their investments.

- It provides a minimum standard of treatment that goes beyond the mere observance of
domestic laws and regulations.

- Case law: Tecnicas Medioambientales Tecmed S.A. v. United Mexican States (ICSID Case
No. ARB(AF)/00/2) clarified the scope of the FET standard, emphasizing the need for
transparency, stability, and the protection of legitimate expectations.

4. National Treatment and Most-Favored-Nation (MFN) Treatment:

- BITs typically include provisions on national treatment and MFN treatment, ensuring non-
discriminatory treatment of foreign investors compared to domestic investors and investors from
third countries, respectively.

- Case law: Siemens A.G. v. The Argentine Republic (ICSID Case No. ARB/02/8) addressed
the application of the MFN clause in the context of dispute settlement provisions, allowing
investors to benefit from more favorable dispute resolution mechanisms in other treaties.

5. Expropriation and Compensation:

- BITs generally prohibit the expropriation or nationalization of foreign investments, except for
a public purpose, on a non-discriminatory basis, in accordance with due process of law, and
accompanied by the payment of prompt, adequate, and effective compensation.

- Case law: ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of
Hungary (ICSID Case No. ARB/03/16) addressed the issue of indirect expropriation and the
applicable standard for determining the existence of an expropriation.
6. Transfer of Funds and Currency Convertibility:

- BITs typically include provisions guaranteeing the right of foreign investors to freely transfer
funds related to their investments, including profits, dividends, loan repayments, and proceeds
from the sale or liquidation of investments.

- These clauses may also address currency convertibility and the applicable exchange rate for
such transfers.

7. Dispute Settlement and Arbitration:

- BITs often provide for investor-state dispute settlement mechanisms, allowing foreign
investors to initiate arbitration proceedings against the host state for alleged breaches of the
treaty's provisions.

- Common arbitration forums include the International Centre for Settlement of Investment
Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL),
and other institutional or ad hoc arbitration rules.

- Case law: Abaclat and Others v. Argentine Republic (ICSID Case No. ARB/07/5) addressed
the issue of mass claims and the jurisdiction of ICSID tribunals in cases involving a large
number of individual claimants.

8. Exceptions and Reservations:

- BITs may include exceptions and reservations that allow the host state to maintain or
introduce measures that deviate from the treaty's obligations under certain circumstances, such as
national security, public order, or the protection of essential security interests.

- Case law: Continental Casualty Company v. Argentine Republic (ICSID Case No. ARB/03/9)
addressed the interpretation and application of the essential security interests exception in the
context of an economic crisis.

9. General Treatment and Protection:

- BITs often include a clause requiring the host state to accord full protection and security to
foreign investments and investors, as well as ensuring fair and equitable treatment in accordance
with principles of international law.
 - Case law: Azurix Corp. v. The Argentine Republic (ICSID Case No. ARB/01/12) addressed
the scope and interpretation of the full protection and security clause, emphasizing the need for
due diligence and reasonable measures by the host state to protect foreign investments.

10. Entry into Force, Duration, and Termination:

- BITs typically include provisions governing the entry into force, duration, and termination of
the treaty.

- Some BITs may include "sunset" or "survival" clauses, which extend the treaty's protection
to investments made before its termination for a specified period.

- Case law: Mondev International Ltd. v. United States of America (ICSID Case No.
ARB(AF)/99/2) addressed the interpretation of the "cooling-off" period and the conditions for
invoking the dispute settlement provisions of the North American Free Trade Agreement
(NAFTA).

It is important to note that the interpretation and application of these essential clauses have been
shaped by a wealth of case law from various international arbitration tribunals and courts. These
landmark cases have provided guidance on the scope, meaning, and implications of the clauses,
contributing to the development of a consistent and coherent body of international investment
law.

Additionally, it is worth mentioning that the landscape of international investment law is

constantly evolving, with ongoing discussions and reforms aimed at balancing the interests of
host states and foreign investors, as well as addressing emerging challenges such as sustainable
development, human rights, and environmental protection.

In conclusion, the essential clauses of international investment contracts and bilateral investment
treaties are designed to establish a legal framework that fosters foreign direct investment while
protecting the rights and interests of both the host state and the foreign investor. The
interpretation and application of these clauses have been significantly influenced by relevant
common law and landmark international cases, which have shaped the understanding and
implementation of these instruments in practice.
International law on foreign investment has evolved significantly over the centuries, reflecting
the changing economic and political landscapes, as well as the evolving perspectives on the role
and impact of foreign investment. The contemporary legal framework seeks to balance the rights
and obligations of investors and host states, promote sustainable development, and address
concerns related to transparency and legitimacy.

As the global economy continues to evolve, the regulation of foreign investment through
international law will likely face new challenges and opportunities. Ongoing dialogue,
cooperation, and a commitment to finding balanced solutions that serve the interests of all
stakeholders will be crucial in shaping the future of international investment law.