INTRODUCTION

An international investment agreement (IIA) is a type of treaty between

countries that addresses issues relevant to cross-border investments, usually
for the purpose of protection, promotion and liberalization of such
investments. Most IIAs cover foreign direct investment (FDI) and portfolio
investment, but some exclude the latter. Countries concluding IIAs commit
themselves to adhere to specific standards on the treatment of foreign
investments within their territory. IIAs further define procedures for the
resolution of disputes should these commitments not be met. The most
common types of IIAs are bilateral investment treaties (BITs) and preferential
trade and investment agreements (PTIAs). International taxation agreements
and double taxation treaties (DTTs) are also considered IIAs, as taxation
commonly has an important impact on foreign investment.

Bilateral investment treaties deal primarily with the admission, treatment and
protection of foreign investment. They usually cover investments by
enterprises or individuals of one country in the territory of its treaty partner.
Preferential trade and investment agreements are treaties among countries on
cooperation in economic and trade areas. Usually they cover a broader set of
issues and are concluded at bilateral or regional levels. In order to classify as
IIAs, PTIAs must include, among other content, specific provisions on foreign
investment. International taxation agreements deal primarily with the issue
of double taxation in international financial activities (e.g., regulating taxes on
income, assets or financial transactions). They are commonly concluded
bilaterally, though some agreements also involve a larger number of countries.

Countries conclude IIAs primarily for the protection and, indirectly, promotion
of foreign investment, and increasingly also for the purpose of liberalization of

1
such investment. IIAs offer companies and individuals from contracting parties
increased security and certainty under international law when they invest or
set up a business in other countries party to the agreement. The reduction of
the investment risk flowing from an IIA is meant to encourage companies and
individuals to invest in the country that concluded the IIA. Allowing foreign
investors to settle disputes with the host country through international
arbitration, rather than only the host country's domestic courts, is an
important aspect in this context.

Typical provisions found in BITs and PTIAs are clauses on the standards of
protection and treatment of foreign investments, usually addressing issues
such as fair and equitable treatment, full protection and security, national
treatment, and most-favored nation treatment.[1] Provisions on compensation
for losses incurred by foreign investors as a result of expropriation or due to
war and strife usually also form a core part of such agreements. Most IIAs
additionally regulate the cross-border transfer of funds in connection with
foreign investments.

Contrary to investment protection, provisions on investment promotion are

rarely formally included in IIAs, and if so such provisions usually remain non-
binding. Nevertheless, the assumption is that the enhanced protection
formally offered to foreign investors through an IIA will encourage and
promote cross-border investments. The benefits that increased foreign
investment can bring about are important for developing countries that aim at
using foreign investment and IIAs as tools to enhance their economic
development.

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 INVESTMENT TYPES

1. Bilateral investment treaties

to a large extent, the international legal aspects of the relationship between

countries and foreign investors are addressed bilaterally between two
countries. The conclusion of BITs has evolved from the second half of the 20th
century onwards, and today these agreements constitute a key component of
the contemporary international law on foreign investment. The United Nations
Conference on Trade and Development (UNCTAD) defines BITs as "agreements
between two countries for the reciprocal encouragement, promotion and
protection of investments in each other's territories by companies based in
either country."[2] While the basic content of BITs has largely remained the
same over the years, focusing on investment protection as the core issue,
matters reflecting public policy concerns (e.g. health, safety, essential security
or environmental protection) have in recent years more frequently been
incorporated into BITs.

A typical BIT starts with a preamble that outlines the general intention of the
agreement and provisions on its scope of application. This is followed by a
definition of key terms, clarifying amongst others the meanings of
"investment" and "investor". BITs then address issues related to the admission
and establishment of foreign investments, including standards of treatment
enjoyed by foreign investors (minimum standard of treatment, fair and
equitable treatment, full protection and security, national treatment and most-
favored nation treatment). The free transfer of funds across national borders

3
in connection with a foreign investment is usually also regulated in BITs.
Moreover, BITs deal with the issue of expropriation or damage to an
investment, determining how much and how compensation would be paid to
the investor in such a situation. They also specify the degree of protection and
compensation that investors should expect in situations of war or civil unrest.

Another core element of BITs relates to the settlement of disputes between an

investor and the country in which the investment took place. These provisions,
often called investor-state dispute settlement provisions, usually mention the
forums to which investors can resort for establishing international arbitral
tribunals (e.g. ICSID, UNCITRAL or ICC) and how this relates to proceedings in
host countries' domestic courts. BITs also typically include a clause on State-
State dispute settlement. Finally, BITs usually refer to the time frame of the
treaty, clarifying how the agreement is extended and terminated, and
specifying to what extent investments conducted prior to conclusion
and ratification of the treaty are covered.

2. Preferential Trade And Investment Agreements

Preferential Trade and Investment Agreements (PTIAs) are broader economic

agreements among countries that are concluded for the purpose of
facilitating international trade and the transfer of factors of production across
borders. They can be economic integration agreements, free trade
agreements (FTAs), economic partnership agreements (EPAs) or similar types
of agreements that cover, among many other things, provisions dealing with
foreign investment. In PTIAs, the section dealing with foreign investment forms
only a small part of the treaty, usually encompassing one or two chapters.
Other issues dealt with in PTIAs are trade in goods and services, tariffs

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and non-tariff barriers, customs procedures, specific provisions pertaining to
selected sectors, competition, intellectual property, temporary entry of
people, and many more. PTIAs pursue the liberalization of trade and
investment in the context of this broader focus. Frequently, the structure and
appearance of the respective chapter on foreign investments is similar to a BIT.

There exist many examples of PTIAs. A notable one is the North American Free
Trade Agreement (NAFTA). While the NAFTA agreement deals with a very
broad set of issues, most importantly cross-border trade
between Canada, Mexico and the United States, chapter 11 of this agreement
covers detailed provisions on foreign investment similar to those found in BITs.
[5]
Other examples of PTIAs concluded bilaterally can be found in the EPA
between Japan and Singapore, the FTA between the Republic of
Korea and Chile, and the FTA between the United States and Australia.

3. International Taxation Agreements

The main purpose of international taxation agreements is to regulate how

taxes imposed on the global income of multinational enterprises are
distributed among countries. In most cases, this is done through the
elimination of double taxation. The core of the problem lies in the
disagreements among countries on who has jurisdiction over the taxable
income of multinational corporations. Most commonly, such conflicts are
addressed through bilateral agreements that deal solely with taxation on
income and sometimes also capital. Nevertheless, a few multilateral

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 agreements on taxation as well as bilateral agreements that address
taxation together with other issues have also been concluded in the past.

In contemporary treaty practice, avoidance of double taxation is achieved by

concurrently applying two separate approaches. The first approach is the
elimination of definition mismatches for terms such as "residence" or "income"
that could otherwise be a cause of double taxation. The second approach
constitutes the relief from double taxation through one of three methods. The
credit method allows foreign tax to be credited against the tax paid in the
residence country. According to the exemption method, foreign income and
resulting taxation is simply disregarded by the residence country. The
deduction method taxes income net of foreign tax, but it is rarely applied.

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Trends In International Investment Rulemaking

Historically, the emergence of the international investment framework can be

divided into two separate eras. The first era – from 1945 to 1989 – was
characterized by disagreements among countries about the degree of
protection that international law should offer to foreign investors. While most
developed countries argued that foreign investors should be entitled to a
minimum standard of treatment in any host economy, developing
and socialist countries tended to contend that foreign investors do not need to
be treated differently from national firms. In 1959, the first BITs were
concluded, and during the following decade, much of the content that forms
the basis of a majority of the BITs currently in force were developed and
refined. In 1965, the Convention for the Settlement of Investment Disputes
Between States and Nationals of Other States was opened to countries for
signature. The rationale was to establish ICSID as an institution that facilitates
the arbitration of investor-State disputes.

The second era – from 1989 to today – is characterized by a generally more

welcoming sentiment towards foreign investment, and a substantial increase
in the number of BITs concluded. Amongst others, this growth in BITs was due
to the opening up of many developing economies to foreign investment, which
hoped that the conclusion of BITs would make them a more attractive
destination for foreign companies. The mid-1990s also saw the creation of
three multilateral agreements that touched upon investment issues as part of
the Uruguay Round of trade negotiations and the creation of the World Trade
Organization (WTO). These were the General Agreement on Trade in
Services (GATS), the Agreement on Trade-Related Investment

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Measures (TRIMS), and the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS). In addition, this era saw the growth of
PTIAs, such as regional, interregional or plurilateral agreements, as exemplified
in the conclusion of the NAFTA in 1992 and the establishment of
the ASEAN Framework Agreement on the ASEAN Investment Area in 1998.
These agreements typically also began to pursue liberalization of investment
more intensively.[10] However, IIAs may be entering a new era as regional
agreements, such as the European Union, North American Free Trade
Agreement, and dozens of others already in existence or under negotiation are
set to supplant traditional bilateral agreements.

Statistics show the rapid expansion of IIAs during the last two decades. By 2007
year-end, the entire number of IIAs had already surpassed 5,500,[11] and
increasingly involved the conclusion of PTIAs with a focus beyond investment
issues. As the types and contents of IIAs are becoming increasingly diverse and
as almost all countries participate in the conclusion of new IIAs, the global IIA
system has become extremely complex and hard to see through. Exacerbating
this problem has been the shift among many States from a bilateral model of
investment agreements to a regional model without fully replacing the existing
framework resulting in an increasingly complex and dense web of investment
agreements that will surely increasingly contradict and overlap.

Moreover, the number of IIA-based investor-State dispute settlement cases

has also been on the rise in recent years. By the end of the year 2008, the total
number of known cases reached 317

Another new development in the global system of IIAs is the increased

conclusion of such agreements among developing countries. In the
past, industrialized countries usually concluded IIAs to protect their firms when

8
they undertake overseas investments, while developing countries tended to
sign IIAs in order to encourage and promote inflows of FDI from industrialized
countries. The current trend towards increased conclusions of IIAs among
developing countries reflects the economic changes underlying international
investment relations. Developing countries and emerging economies are
increasingly not only destinations but also significant source countries of FDI
flows. In line with their emerging role as outward investors and their improved
economic competitiveness, developing countries are increasingly pursuing the
dual interests of encouraging FDI inflows but also seeking to protect the
investments of their companies abroad.

Another key trend relates to the myriad of different agreements.[13] As a result,

the evolving international system of IIAs has been equated with the metaphor
of a "spaghetti bowl". According to UNCTAD, the system is universal, as
practically every country has signed at least one IIA. At the same time, it can be
considered as atomized due to the large number of individual agreements
currently in existence. The system is multi-layered, with agreements being
signed at all levels (bilateral, sectoral, regional etc.). It is also multi-faceted, as
an increasing number of IIAs include provisions on issues traditionally
considered only distantly related to investment, such as trade, intellectual
property, labor rights and environmental protection. The system is also
dynamic, as its key characteristics are currently rapidly evolving.[14][15] For
example, more recent IIAs tend to include provisions addressing issues such as
public health, safety, national security or the environment more frequently,
with a view to better reflect public policy concerns. Finally, beyond IIAs, there
is other international law relevant for countries' domestic investment
frameworks, including customary international law, United Nations
instruments and the WTO agreement (e.g., TRIMS).
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In sum, recent developments have made the system increasingly complex and
diverse. Moreover, even to the extent that the principal components of IIAs
are similar across most of the agreements, substantial divergences can be
found in the details of these provisions. All of this makes managing the
interaction among IIAs increasingly challenging for countries, particularly those
in the developing world, and also complicates the negotiation of new
agreements.

In the past, there have been several initiatives for the establishment of a more
multilateral approach to international investment rulemaking. These attempts

10
include the Havana Charter of 1948, the United Nations Draft Code of Conduct
on Transnational Corporations in the 1980s, and the Multilateral Agreement on
Investment (MAI) of the Organisation for Economic Co-operation and
Development (OECD) in the 1990s. None of these initiatives reached successful
conclusion, due to disagreements among countries and, in case of the MAI,
also in light of strong opposition by civil society groups. Further attempts of
advancing the process towards establishment of a multilateral agreement have
since been made within the WTO, but also without success. Concerns have
been raised regarding the specific objectives that such a multilateral
agreement is meant to accomplish, who would benefit in what way from it,
and what impact such a multilateral agreement would have on countries'
broader public policies, including those related to environmental, social and
other issues. Particularly developing countries may require "policy space" to
develop their regulatory frameworks, such as in the area of economic or
financial policies, and one major concern was that a multilateral agreement on
investment would diminish such policy space. As a result, current international
investment rulemaking remains short of having a unified system based on a
multilateral agreement.[16] In this respect, investment differs for example from
trade and finance, as the WTO fulfills the purpose of creating a more unified
global system for trade and the International Monetary Fund (IMF) plays a
similar role with respect to the international financial system.

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The Development Dimension

By providing additional security and certainty under international law to

investors operating in foreign countries, IIAs can encourage companies to
invest overseas. While there is a scientific debate on the extent to which IIAs
increase the amount of FDI flows to signatory host countries, policymakers do
tend to anticipate that IIAs encourage cross-border investment and thereby
also support economic development. Amongst others, FDI can facilitate the
inflows of capital and technology into host countries, help generate
employment and have other positive spillover effects. Accordingly, developing
country governments seek to establish an adequate framework to encourage
such inflows, amongst others through the conclusion of IIAs.

However, despite this potential to generate pro-development benefits, the

evolving complexity of the IIA system may also create challenges. Amongst
others, the complexity of today's IIA network makes it difficult for countries to
maintain policy coherence. Provisions agreed upon in one IIA may be
inconsistent with those included in a different IIA. For developing countries
with lower capacity to participate in the global IIA system, this complexity of
the IIA framework is particularly hard to manage. Additional challenges arise
from the need to ensure consistency between a country's national and
international investment laws, and from the objective to design investment
policies that best support a county's specific development goals.

Furthermore, even if governments conclude IIAs with general development

goals in mind, these agreements themselves usually do not directly deal with
problems of economic development. While IIAs rarely contain specific
obligations on investment promotion, some include provisions that advocate
information exchange about investment opportunities, encourage the use of

12
investment incentives, or suggest the establishment of investment promotion
agencies (IPAs). Some also contain provisions that address public policy
concerns related to development, such as exceptions related to health or
environmental issues, or exceptions related to essential security. Some IIAs
also grant countries specific regulatory flexibility, amongst others when it
comes to making commitments for investment liberalization.

An additional burden arises from the growing number of investor-State

disputes, which are increasingly lodged against governments from developing
countries. These disputes are very costly for the affected countries, which have
to shoulder substantial expenses for the arbitration procedures, for the
payment of lawyer's fees and, most importantly, for the financial
compensation to be paid to the investor in case the tribunal decides against
the host country. The problem is further exacerbated by inconsistencies in
the case law that is emerging from investor-State disputes. Increasingly,
tribunals addressing similar cases come to differing interpretations and
decisions. This increases the uncertainty among countries and investors about
the outcome of a dispute.

One of the key organizations concerned with the development dimension of

IIAs is the United Nations Conference on Trade and Development (UNCTAD),
which is the key focal point of the United Nations (UN) for dealing with matters
related to IIAs and their development dimension. This organization's program
on IIAs supports developing countries in their efforts to participate effectively
in the complex system of investment rulemaking. UNCTAD offers capacity
building services, is widely recognized for its research and policy analysis on
IIAs and functions as an important forum for intergovernmental discussions
and consensus building on issues related to international investment law and
development.

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Definition of “Investor”

1. Natural Persons

It is a firmly established principle in international law that the nationality of the

investor as a natural person is determined by the national law of the state
whose nationality is claimed. However, some investment agreements
introduce alternative criteria such as a requirement of residency or domicile.

The ICSID Convention requires nationality to be established on two important

dates: the date of consent to arbitration and the date of registration. The
Convention does not cover dual nationals when one of the nationalities is the
one of the Contracting State. The jurisprudence as to the nationality of natural
persons is so far limited to four cases brought by dual nationals.

2. Customary International Law

The right to grant and withdraw nationality of natural persons remains part of
the sovereign domain. The question before tribunals has been whether and to
what extent a state can refuse to recognise the nationality of a claimant.
International law practice on questions of nationality has developed primarily
in the context of diplomatic protection. In the Nottebohm case,2 the ICJ held
that even though a state may decide on its own accord and in terms of its own
legislation whether to grant nationality to a specific person, there must be a
real connection between the state and the national. The Court made the
following statement: “Nationality is a legal bond having as its basis a social fact
of attachment, a genuine connection of existence, interests and sentiments,
together with the existence of reciprocal rights and duties. It may be said to

14
constitute the juridical expression of the fact that the individual upon whom it
is conferred, either directly by the law or as the result of an act of the
authorities, is in fact more closely connected with the population of the State
conferring nationality than with that of any other State. Conferred by a State, it
only entitles that State to exercise protection vis-à-vis another State, if it
constitutes a translation into juridical terms of the individual’s connection with
the State which has made him its national.” However, in today’s circumstances
of the modern world it would be very difficult to demonstrate effective
nationality following the Nottebohm considerations, i.e. the person’s
attachment to the state through tradition, interests, activities or family ties.3
The International Law Commission’s (ILC)

Report on Diplomatic Protection recognised the limitations presented by the

Nottebohm ruling in the context of modern economic relations: “[…] it is
necessary to be mindful of the fact that if the genuine link requirement
proposed by Nottebohm was strictly applied it would exclude millions of
persons from the benefit of diplomatic protection as in today’s world of
economic globalisation and migration there are millions of persons who have
moved away from their State of nationality and made their lives in States
whose nationality they never acquire or have acquired nationality by birth or
descent from States with which they have a tenuous connection.”4 However,
the Nottebohm principles are still useful in cases of dual or multiple nationality
when the nationality of the claimant in order to be accepted has to be
“predominant”. In the case of dual nationality, Article 7 of the ILC Draft Articles
on Diplomatic Protection states: “A State of nationality may not exercise
diplomatic protection in respect of a person against a State of which that
person is also a national unless the nationality of the former State is
predominant, both at the time of the injury and the date of the official
15
presentation of the claim.”5 Under customary international law, a state may
exercise diplomatic protection on behalf of one of its nationals with respect to
a claim against another state, even if its national also possessed the nationality
of the other state, provided that the dominant and effective nationality of the
person was that of the state exercising diplomatic protection. In this respect,
customary law has evolved from the earlier rule of non-responsibility under
which diplomatic protection could not be exercised in those circumstances.

The Iran-United States Claims Tribunal7 had recourse to the test of dominant
and effective nationality in that it had to determine whether a claimant with
dual US-Iranian nationality was to be regarded as predominantly American or
Iranian for purposes of bringing a claim before the Tribunal. In Esphahanian v.
Bank Tejarat, 8 Chamber Two found that the claimant could claim before the
Tribunal because his “dominant and effective nationality at all relevant times
[was] that of the United States and the funds at issue in the present case
related primarily to his American nationality, not his Iranian nationality”.
Nevertheless, the Chamber distinguished the case as one in which the dual
national, rather than the state, brought his own claim before the international
tribunal against one of the states whose nationality he possessed.

3. Investment Agreements

Some Bilateral Investment Treaties (BITs) include a single definition of

“national” which applies to both parties. Other BITs offer two definitions, one
relating to one Contracting Party and the other to the second Contracting
Party. For example the Finland-Egypt BIT9 provides that the term “national”
means:

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 “a)In respect of Finland, an individual who is a citizen of Finland according to
Finnish law.

b) In respect of Egypt, an individual who is a citizen of Egypt according to

Egyptian Law.” The US-Uruguay BIT10 defines national to mean:

“a)For the United States, a natural person who is a national of the United
States as defined in Title III of the Immigration and Nationality Act.

b) For Uruguay, a natural person possessing the citizenship of Uruguay, in

accordance with its laws.”

Some investment agreements require some link beyond nationality. For

example, the Germany-Israel BIT11 provides in its Article (1)(3)(b), that the
term “nationals” means with respect to Israel, “Israeli nationals being
permanent residents of the State of Israel”

The criterion of permanent residence is sometimes used as an alternative to

citizenship or nationality. For instance in the Canada-Argentina BIT12 the term
“investor” means “i) any natural person possessing the citizenship of or
permanently residing in a Contracting Party in accordance with its laws”.

Natural persons that are covered by the Energy Charter Treaty (ECT)13 are
similarly defined by reference to each state’s domestic laws determining
citizenship or nationality but also extends coverage to permanent residents:
“Investor” means: “a) with respect to a Contracting Party: i) a natural person
having the citizenship or nationality of or who is permanently residing in that
Contracting Party in accordance with its applicable law”.

Article 201 of NAFTA equally provides in part that: “National means a natural
person who is a citizen or permanent resident of a Party.”

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The new Canada Model FIPA which replaces the 2004 Model FIPA covers
citizens as well as permanent residents of Canada, but it expressly provides
that a natural person who is a national of both contracting parties shall be
deemed to be exclusively a national of the party of his or her dominant or
effective nationality. Not many investment agreements address the issue of
dual nationality.14 Nevertheless Dolzer and Stevens15 say that in the absence
of treaty regulation, general principles of international law would apply,
according to which the “effective” nationality of the individual would govern.

4. ICSID Convention

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” to mean: “a) Any natural person who
had the nationality of a Contracting State other than the State party to the
dispute on the date on which the parties consented to submit such dispute to
conciliation or arbitration as well as on the date on which the request was
registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article
36, but does not include any person who on either date also had the
nationality of the Contacting State party to the dispute.”

The ICSID Convention requires claimants to establish that they had the
nationality of a Contracting State on two different dates: the date at which the
parties consented to ICSID’s jurisdiction and the date of the registration of the
request for arbitration.

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An extension of treaty rights to permanent residents cannot extend ICSID’s
jurisdiction beyond nationals of Contracting States to the ICSID Convention.17
With respect to dual nationality, the ICSID Convention excludes dual nationals,
if one of the nationalities is that of the host state.18 In practice, investment
treaty jurisprudence under the ICSID Convention as to the nationality of
natural persons is limited to four cases brought by dual nationals.

The first case is Eudoro A. Olguín v. Republic of Paraguay.19 Mr. Olguín, a dual
national of Peru and the United States, brought a claim against the Republic of
Paraguay under the Peru-Paraguay BIT, for the treatment allegedly received
from the Paraguayan authorities, in relation to his investment in a company for
the manufacture and distribution of food products in Paraguay. The arbitral
tribunal rejected Paraguay’s objection to jurisdiction based on the claimant’s
dual nationality by relying on the fact that Mr. Olguín’s Peruvian nationality
was effective, which was deemed enough for purposes of the ICSID Convention
and the BIT.

In Soufraki v. United Arab Emirates,20 the claim was related to a port

concession in Dubai. When a dispute arose, Mr. Soufraki, a dual Italian and
Canadian national, invoked the Italy-United Arab Emirates BIT to bring a claim
based on his Italian nationality. The Tribunal investigated his claim of Italian
nationality and found that he had lost it when he acquired Canadian
citizenship.

The fact that he could present certificates of nationality only provided prima
facie evidence of his Italian nationality.21 The tribunal therefore held that he
was not entitled to bring a claim under the Italy-U.A.E. BIT as an Italian
national.22 The Tribunal recognised the difference between the ease with
which an investor may incorporate an investment in a favourable jurisdiction in

19
order to have the most advantageous BIT coverage and the many difficulties
faced by Mr. Soufraki as a natural person in proving that he had Italian
nationality, when he had previously lost it: “… had Mr. Soufraki contracted
with the United Arab Emirates through a corporate vehicle incorporated in
Italy, rather than contracting in his personal capacity, no problem of
jurisdiction would now arise. But the Tribunal can only take the facts as they
are and as it has found them to be.”23 On 4 November 2004, Mr. Soufraki
submitted a request for annulment of the Arbitral Award issued on 7 July 2004
because of a manifest excess of power by the Tribunal and its failure to state
reasons. The core issue was whether the Tribunal could make an independent
determination of the nationality of the claimant or whether it was bound by
the determination made by the Italian authorities relying on passports and
certificates of nationality issued to the claimant. The ad hoc Committee found
that the arbitral tribunal correctly stated that certificates issued by consular
authorities are not binding on the tribunal’s determination of the claimant’s
nationality in order to ascertain its own jurisdiction. The presumption in favor
of the existence of the Italian nationality was not corroborated by further
evidence showing that Mr. Soufraki had reacquired his lost Italian nationality.

In the case Champion Trading v. Egypt,24 US nationals who were also found to
be Egyptian nationals were denied the right to bring a claim against Egypt
(based on the US-Egypt BIT) because of the rule in Article 25(2)a) excluding
nationals having the nationality of the Contracting State Party to the dispute.
The tribunal dismissed three claims brought by these individual shareholders in
the National Cotton Company (NCC), a firm involved in cotton processing and
trading, although it affirmed jurisdiction over two related claims brought by US
corporate entities, Champion Trading Company and Ameritrade International
Inc., which each held larger stakes in the NCC.
20
The individual claimants argued that the tribunal should employ the
international law test of “real or effective nationality”, which they contended
would show that they “have not effectively acquired Egyptian nationality”. In
the end, the tribunal did not wholly rule out the applicability of such a test in
the ICSID context, where it would be manifestly absurd or unreasonable for a
person to be classified as a dual national, perhaps where a third or fourth
generation individual “has no ties whatsoever with the country of its
forefathers” – and where a test of real or effective nationality might be
appropriate to use in ICSID. However, the tribunal was convinced that there
could be little doubt that the claimants in this case had sufficient ties to Egypt
and that that they were therefore clearly excluded from ICSID arbitration. It
was relevant that their Egyptian nationality had been used for the registration
of their business. After dismissing jurisdiction for the individual claims, the
tribunal upheld jurisdiction for the claims brought by the two corporate
entities observing that there was no bar to ICSID claims by companies whose
shares were held by dual nationals of the two parties engaged in the
arbitration.

In the case Siag and Vecchi v. Egypt,25 Mr. Siag and his mother Ms. Vecchi,
former Egyptian nationals submitted a claim under the Italy-Egypt BIT as Italian
nationals. Because the ICSID Convention does not allow persons to initiate
arbitration against their own state, the tribunal examined extensively the
Egyptian law in order to determine whether they had ceased to be Egyptian
nationals. Although all three arbitrators held that Ms. Vecchi had lost her
Egyptian nationality on the date she re-acquired her Italian nationality, one
tribunal member,26 in a partial dissenting opinion disagreed that this was the
case with Mr. Waguih Siag. Two of the three arbitrators held that Mr. Waguih

21
Siag had lost his Egyptian nationality by virtue of his failure to take formal steps
to retain it.

5. Legal Persons

The issues related to the nationality of legal persons can be even more
complicated than for natural persons. Companies today operate in ways that
can make it very difficult to determine nationality. Layers of shareholders, both
natural and legal persons themselves, operating from and in different
countries make the traditional picture of a company established under the
laws of a particular country and having its centre of operations in the same
country, more of a rarity than a common situation. It is quite common that a
company can be established under the laws of country A, have its centre of
control in country B and do its main business in country C. Tribunals have
usually refrained from engaging in substantive investigations of a company’s
control and they have usually adopted the test of incorporation or seat rather
than control when determining the nationality of a juridical person.

Accordingly, it is the general practice in investment treaties to specifically

define the objective criteria which make a legal person a national, or investor,
of a Party, for purposes of the agreements, rather than to simply rely on the
term “nationality” and international law. Since the objective criteria used may
include investors to whom a Party would not wish to extend the treaty
protection, some treaties themselves include “denial of benefit clauses”
allowing exclusion of investors in certain categories.

OECD governments are often confronted with requests by their investors to

advocate on their behalf in their relations with the host state, before any

22
arbitral claims are presented. It seems that in such situations government
determinations on the nationality of an investor are not based exclusively on
BITs provisions, but often use different, more flexible tests. The ICSID
Convention which limits the jurisdiction of the Centre to disputes between one
contracting state and a national of another contracting state, provides specific
rules on the nationality of claims in its Article 25 and investment treaties
specify any other or additional requirements that the contracting states wish
to see apply to determine the standing of claimants.

A related issue is the question of the extent to which shareholders can bring
claims for injury sustained by the corporation, an issue that has evolved
significantly since the ICJ decision of Barcelona Traction.

Place of constitution in accordance with the law. In order to determine the

nationality of a legal person, some bilateral investment treaties have adopted
the test of the place of constitution in accordance with the law in force in the
country. By so doing, the contracting parties simply make reference to national
law provisions of each contracting party in order to establish the legal persons
entitled to protection. A legal person constituted in accordance with the laws
of a contracting party will be considered an investor of that state. Since states
are free to chose the criteria for the attribution of nationality to legal persons,
such criteria – be they incorporation, seat or control, etc. – may vary in
accordance with the specific provisions of the applicable laws of each
contracting party. Investment treaties concluded by Greece have often
followed this pattern in order for legal persons to qualify as investors under
investment agreements. Article 1 of the Greece-Cuba BIT31 defines as
investors:

23
Definition of “Investment”

1. Definition Of “Investment” In International

Instruments

There is no single definition of what constitutes foreign investment. According

to Juillard and Carreau, the absence of a common legal definition is due to the
fact that the meaning of the term investment varies according to the object
and purpose of different investment instruments which contain it.153 The
multiplication of definitions of investment thus results from the proliferation of
different sources.

Customary international law and earlier international agreements did not use
the notion of investment but the one of “foreign property”155 dealing in a
similar manner with imported capital and property of long-resident foreign
nationals.156 According to Juillard the static notion of property has been
substituted by the more dynamic notion of investment which implies a certain
duration and movement.

Traditionally, investments have been categorised as either direct or portfolio

investments. During the nineteenth and the early years of the twentieth
century, the predominant form of foreign investment was portfolio
investment, mainly in the form of bonds issued by governments of developing
countries floated in the financial markets. The first half of the twentieth
century was marked by the contraction of investment flows brought about by
the two Wars, stagnation of direct investment and virtual collapse of portfolio
investment in developing countries.158 The post-war period was characterised
by the growing expansion of multinational corporations setting up wholly or

24
majority owned subsidiaries with the consequent change in the form of foreign
investments which became predominantly direct in character. The increase of
direct investment in several sectors led to the steady evolution of new forms of
investment, when the investor enters a country and markets a product or
service but does not own the asset.159 A great variety of assets are included
today in the definition of investment and broad definitions appeared in
national investment codes and international instruments.

A narrow approach was followed by earlier agreements which were aiming at

the gradual liberalisation of capital movements and preferred to enumerate
the transactions covered by these agreements. Today, most international
investment instruments, in particular investment protection treaties, adopt a
broad definition of investment.

2. “Investment” For Jurisdictional Purposes

The definition of investment is also crucial for the establishment of the

jurisdiction of arbitral tribunals. Dispute settlement clauses in investment
treaties usually provide for the submission of investment disputes between
states and investors to arbitration. Foreign investors are frequently given the
choice to submit the investment dispute to more than one dispute settlement
mechanism. International arbitration under either the ICSID Convention or its
Additional Facility is widely included in many investment treaties. Alternatively
reference is frequently made to the Rules of arbitration of the International
Court of Arbitration of the International Chamber of Commerce (ICC), the Rules
of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) or to
ad hoc arbitration under the UNCITRAL Arbitration Rules. Jurisdictional
questions relating to the scope of arbitrable investment disputes may arise, no
matter which forum of arbitration is selected, since the jurisdiction of an
25
arbitral tribunal under an applicable BIT relies on a showing of the existence of
an “investment.” At the same time it should be pointed out that neither the
ICC, nor UNCITRAL nor SCC arbitration rules “filter claims through their own
autonomous notion of investment as a condition of jurisdiction rationae
materiae”.

In this section the interplay between the definition of investment under

investment treaties and the choice of different potential venues for the
settlement of investment disputes is reviewed and compared.

3. Definition Of Investment And Non-ICSID Arbitration

Recently one of the most critical question in BIT cases has been whether rights
conferred by contract constitute covered investments. 1. Trade in goods. In the
case Petrobart v. Kyrgyz Republic170 brought under the Energy Charter Treaty
(ECT) under the auspices of the Arbitration Institute of the Stockholm Chamber
of Commerce, the arbitral tribunal had to decide whether a contract for the
sale of gas condensate, which did not involve any transfer of money or
property as capital in a business, qualified as an investment under the ECT. It
should be pointed out that in a previous action brought by Petrobart against
the Kyrgyz Republic under Kyrgyz Foreign Investment Law, an UNCITRAL
Tribunal declined jurisdiction. The question before the Stockholm Tribunal was
whether the sale of goods constituted an investment under the ECT. In the
Tribunal’s view: “There is no uniform definition of the term investment, but
the meaning of this term varies (cf. Dolzer-Stevens, Bilateral Investment
Treaties, 1995, p. 25-31, and Sacerdoti, Bilateral Treaties and Multilateral
Instruments on Investment Protection, Collected Courses of the Hague
Academy of International Law 1997, Tome 269, p. 305-310). While in ordinary
language investment is often understood as being capital or property used as a
26
financial basis for a company or a business activity with the aim to produce
revenue or income, wider definitions are frequently found in treaties on the
protection of investments, whether bilateral (BITs) or multilateral (MITs). The
term investment must therefore be interpreted in the context of each
particular treaty in which the term is used. Article 31(1) of the Treaty on the
Law of Treaties provides, as the main rule for treaty interpretation, that a
treaty shall be interpreted in good faith in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and in the light
of its object and purpose. It is obvious that, when there is a definition of a term
in the treaty itself, that definition shall apply and the words used in the
definition shall be interpreted in the light of the principle set out in Article
31(1) of the Treaty on the Law of Treaties. The relevant treaty in this case is the
Energy Charter Treaty which protects investments of an investor of one
Contracting Party in the Area of another Contracting Party, and the terms
Investor and Investment are defined in Article 1 of the Treaty.”

In order to appreciate whether Petrobart’s right to payment for goods

delivered constituted an investment the tribunal turned to Article 1(6) of the
ECT. The tribunal found that relevant items of the provisions were Article
1(6)c) which covers claims to money and claims to performance pursuant to
contract having an economic value and associated with an investment and
Article 1(6)f) relating to any right conferred by law or contract or by virtue of
any licences and permits granted pursuant to law to undertake any Economic
Activity in the Energy Sector. “Economic Activity in the Energy Sector” is in
Article 1(5) defined as “economic activity concerning the exploration,
extraction, refining, production, storage, land transport, transmission,
distribution, trade, marketing, or sale of Energy Materials and Products except
those included in Annex NI, or concerning the distribution of heat to multiple
27
premises”. The Tribunal found that a right conferred by contract to undertake
an economic activity concerning the sale of gas, including the right to be paid
for such a sale, is an investment according to the Treaty.

Although supported by some commentators who have interpreted the

extensive definition of investment in the ECT to encompass proprietary rights
of any sort, including claims to money based on sales contract,172 it has been
pointed out by some others that this conclusion is not indisputable with regard
to the requirement that the claims to money and performance be associated
with an investment under Article 1(6)c)

Article 1(1) of the UK-Czech BIT contains a broad asset-based definition of

investment, including claims to money or to any performance under contract
having a financial value. The claimant argued that his rights arising from the
Cooperation Agreement were indeed “investments” within the definition of
the BIT because they were “claims to money or to any performance under
contract having a financial value”. After a careful examination of the terms of
the cooperation agreement, the arbitral tribunal came to the conclusion that
the basic undertaking under the contract was that the parties should work
together for the purpose of obtaining a licence. The tribunal considered that a
claim could have financial value “only if it appears to be well-founded or at the
very least creates a legitimate expectation of performance in the future.” In
the tribunal’s view, the claimant’s mere prospects of obtaining the deal could
not be raised to the level of legitimate expectations with a financial value since
there was not and could not be a guarantee that a licence would in fact be
obtained. The arbitral tribunal therefore concluded that Mr. Nagel’s rights
under the Cooperation Agreement were not such as to constitute an “asset”
and an “investment” within the meaning of Article 1 of the investment treaty.

28
Definition of investment and ICSID arbitration

Investor-state arbitration under the aegis of the ICSID Convention and ICSID
Arbitration Rules deserves a separate analysis in consideration of its specific
features. Unlike other arbitral regimes, bilateral and multilateral investment
treaties which include ICSID clauses, provide for the submission of investment
disputes between states and foreign investors under another multilateral
treaty, namely the 1965 Convention on the Settlement of Investment Disputes
between States and Nationals of Other States. As clearly put by A. Parra in
these cases the dispute concerned must qualify for coverage not only under
the bilateral or multilateral investment treaty, but also under the ICSID
Convention.183 In other words, the dispute must be a legal dispute arising out
of what is an investment for investment treaties as well as for ICSID
Convention purposes.

The outer limits of the jurisdiction ratione materiae of the Centre are clearly
set out in Article 25(1) which provides as follows: “The jurisdiction of the
Centre shall extend to any legal dispute arising directly out of an investment,
between a Contracting State (or any constituent subdivision or agency of a
Contracting State designated to the centre by that State ) and a national of
another Contacting State, which the parties to the dispute consent in writing to
submit to the Centre. When the parties have given their consent, no party may
withdraw its consent unilaterally.” The term investment is not defined in the
Convention. The relevant passage of the World Bank Executive Directors’
Report accompanying the Convention reads as follows: “no attempt was made
to define the term ‘investment’ given the essential requirement of consent by
the parties, and the mechanism through which Contracting States can be made
known in advance, if they so desire, the classes of disputes which they would

29
or would not consider submitting to the centre [Article 25(4)]”. An account of
these negotiations given by A. Broches is pertinent: “During the negotiations,
several definitions of ‘investment’ were considered and rejected. It was felt in
the end that a definition could be dispensed with ‘given the essential
requirement of consent by the parties’. This indicates that the requirement
that the dispute must have arisen out of an ‘investment’ may be merged into
the requirement of consent to jurisdiction. Presumably, the parties’ agreement
that a dispute is an ‘investment dispute’ will be given great weight in any
determination of the Centre’s jurisdiction, although it would not be controlling.

Typical features of an investment

According to C. Schreuer,190 it is possible to identify certain features of an

investment under the Convention on the basis of ICSID case-law:

 the project should have a certain duration;

 there should be a certain regularity of profit and return;
 there is typically an element of risk for both sides;
 the commitment involved would have to be substantial;

 the operation should be significant for the host state’s development.

C. Schreuer has clarified that these features should not be necessarily
understood as jurisdictional requirements but as typical characteristics of an
investment. The expectation of a long-term relationship and return would
exclude that a one-spot transaction or a one-time lump sum agreement can
qualify as an investment. With regard to the last feature, Schreuer also
remarked that, although not necessarily a characteristic of investments in
general, the operation’s significance for the host state’s development becomes

30
a relevant feature under the ICSID Convention: “The only possible indication of
an objective meaning that can be gleaned from the Convention is contained in
the Preamble’s first sentence, which speaks of ‘the need for international co-
operation for economic development and the role of private international
investment therein’. This declared purpose of the Convention is confirmed by
the Report of the Executive Directors which points out that the Convention
was ‘prompted by the desire to strengthen the partnership between countries
in the cause of economic development.’ Therefore it may be argued that the
Convention’s object and purpose indicate that there should be some positive
impact on development. Under ICSID case-law, the reference to the these
typical features of an investment operation has varied according to the specific
circumstances of each case and to the more or less readily recognisable
character of the activity at stake.

i) Readily-recognisable investments.192192Until the tribunal in Fedax N.V. v.

Venezuela193 was faced with an objection to jurisdiction on the ground that
the underlying transaction, promissory notes, did not meet the investment
requirement under the Washington Convention, the term “investment” had
been broadly understood in the ICSID practice as well as in scholarly writings.
Before this case, ICSID tribunals194 had examined on their own initiative the
question whether an investment was involved, and in each case have reached
the conclusion that the “investment” requirement of the Convention had been
met on the basis of a global assessment of an economic operation often
composed of interrelated transactions. In Kaiser Bauxite v. Jamaica as in Alcoa
Minerals of Jamaica Inc. v. Jamaica, the Tribunal established the Centre’s
jurisdiction both on the consent given by the parties and on the fact that the
case “in which a mining company has invested substantial amounts in a foreign
state in reliance upon an agreement with that state, is among those
31
contemplated by the Convention”. Amounts paid out to develop a concession
and other undertakings based on a concession agreement, were also
considered to qualify as an investment under the Convention in LETCO v.
Liberia. Also in SOABI v. Senegal the tribunal considered the issue of
jurisdiction in respect of an operation encompassing separate agreements, but
this dealt only indirectly with the existence of an investment. In Holiday Inns v.
Morocco, the tribunal emphasised “the general unity of an investment
operation”, in spite of it being composed of multiple interrelated transactions.

Even in certain recent cases, ICSID tribunals have not deemed it necessary to
review all the hallmarks of an investment. In the PSEG Global Inc. v. Republic of
Turkey,195 the dispute concerned a contract for the development of an energy
plant in Turkey. The tribunal did not discuss in detail how a concession contract
amounted to an investment, because the operation in question was a readily
recognisable investment.

In Salini Costruttori S.P.A. and Italstrade S.P.A. v. Marocco198 the arbitral

tribunal held that a civil construction contract was an investment within the
meaning of the Italy-Morocco BIT since it created “a right to a contractual
benefit having an economic value” covered by Article 1c) as well as a “right of
economic nature conferred […] by contract” under Article 1e). The tribunal
observed that the investment requirement must be respected as an objective
condition of the jurisdiction of the Centre, which cannot be diluted by the
consent of the parties. Of the contributions made by the two claimants, the
Tribunal considered that:

32
Investment Policy Framework for Sustainable Development

Within their roles, United Nations Conference on Trade and Development has
published the Investment Policy Framework for Sustainable
Development(IPFSD) which is a dynamic document created to help
governments formulate sound investment policy, especially international
investment agreements, that capitalize on foreign direct investment (FDI)
for sustainable development. IPFSD intends to promote a new generation of
investment agreements by pursuing a broader development agenda; and offer
guidance to policymakers when formulating their national and international
investment policies. To that end, IPFSD defines eleven critical Core Principles.
Flowing from these Core Principles IPFSD provides States guidelines and advice
on formulating good investment policy including clause-by-clause options for
negotiators to enhance the sustainable development value of domestic
investment policies.

The IPFSD proposes clause-by-clause options for negotiators to strengthen the

sustainable development aspects of IIAs.

IPFSD also offers an interactive online platform, the Investment Policy Hub,
giving stakeholders the opportunity to critically assess policy guidelines and
recommend any appropriate changes.

33
International Chamber of Commerce Guidelines for
International Investment

Similar to UNCTAD's IPFSD, in 2012, the International Chamber of

Commerce (ICC) issued its Guidelines for International Investment updating its
1972 recommendations.

The guidelines are "a reaffirmation of the fundamental principles for

investment set out by the business community in 1972 as essentials for further
economic development." The ICC hopes "that these Guidelines will be useful
for investors and governments alike in creating a more enabling environment
for cross-border investment and in understanding more clearly their shared
responsibilities and opportunities in fulfilling the vast potential of cross-border
investment for shared global growth." The 2012 update "retains the proven
construct of the 1972 Guidelines, setting forth separately responsibilities of the
investor, the home government and the host government." In addition, the
update has added an introduction to provide setting and context, and updated
or added chapters on labour, fiscal policy, competitive neutrality, and
corporate responsibility.

34
Principles of International I Investment Law

project, will typically be addressed during these initial negotiations. Unless

these risks are appropriately addressed in an applicable investment treaty, the
investor may ask for protection on a number of points, such as the applicable
law, the tax,., regime, provisions dealing with inflation, a duty of the host state
to buy a cenain" volume of the product (especially in the field of energy
production), the future. pricing of the investor's product, or customs regulation
for materials needed for the' product, and, especially, an agreement on future
dispute settlement. Such rights may be included in an investment contract
between the investor and the host state. Once these negotiations are
concluded and the investor's resources are sunk into the project, the dynamics
of influence and power tend to shift in favour of the host state. The central
political risk which hencefonh arises for the foreign investor lies in a change of
position of the host government that would alter the balance of burdens, risks,
and benefits which the two sides laid down when they negotiated the deal and
which formed the basis of the investor's business plan and the legitimate
expectations embodied in this plan. Such a change of position on the part of
the host country becomes more likely with every subsequent change of
government in the host state during the period of the investment.

The host state's perspective: attracting foreign investment

35
It is reasonable to assume that the object and purpose of investment treaties is
closely tied to the desirability of foreign investments, to the benefits for the
host state and for the investor, to the conditions necessary for the promotion
of foreign investment, and to the removal of obstacles which may stand in the
way of allowing and channelling more foreign investment into the host states.
Thus, the purpose of investment treaties is to address the typical risks of a
long-term investment project, and thereby to provide stabiliry and
predictability in the sense of an investmentfriendly climate.

Under the rules of customary international law, no state is under an obligation

to admit foreign investment in its territory, generally or in any particular
segment of its economy. While the right to exclude and to regulate foreign
investment is an expression of state sovereignty, the power to conclude
treaties with other states will also be seen as flowing from the same concept.

Once it has admitted a foreign investment, a host state is subject to a minimum

standard of customary international law. 82 Modern treaties on foreign
investment go beyond this minimum standard in the scope of obligations a host
state owes towards a foreign investor. Whether such treaties in general, or any
panicular version of them, are beneficial to the host state, remains a matter for
each state to decide. In panicular, each state will weigh, or at least has the power
to weigh, the economic and financial benefits of a treaty-based promotion of
foreign investments against the consequences of being bound to the standards of
protection laid down in the treaty. None of these benefits and consequences is
open to a qualitatively or origin or from any domestic source, whether specified
in terms of particular products, in/ terms of volume or value of products, or in
terms of a proportion of volume or value of its local production;

The three branches of the law

36
Beyond the right of the host state to expropriate, international law on
expropriation has developed three branches, which regulate the scope and
conditions of the exercise of this power. The first one defines the interests that
will be protected. This facet has not traditionally been in the forefront of
academic and practical discussions but has received some prominence more
recently. Most contemporary treaties, in their provisions dealing with
expropriation, refer to 'investments'. Similarly, the jurisdiction of arbitral
tribunals is typically restricted to disputes arising &om 'investments'.
Therefore, it is 'investments' as defined in these treaties that are protected. 3
The second branch concerns the definition of an expropriation. While this
matter raises no questions in cases of a formal expropriation, the issue may
acquire a high degree of complexity when the host state interferes with the
rights of the · foreign owner without a formal taking of title. Indeed, in the
practice of the past three decades, most cases relating to expropriation have
turned on the controversy of whether or not a 'taking' had actually occurred.
Matters of public health, the environment, or general changes in the
regulatory system may prompt a state to regulate foreign investments. This
has led to claims against the state on the basis · : that a regulatory taking or
indirect expropriation has occurred. The elements of {indirect expropriation
are discussed below.4 ·· The third branch of the law on expropriation relates to
the conditions under ;;which a state may expropriate alien property. The
classical requirements for ~.lawful expropriation are a public purpose, non-
discrimination, as well as prompt, \~dequate, and effective compensation. In
practice, the requirement of compen- :§ation has turned out to be the most
controversial aspect. This issue is discussed in .· ,the next section.

The legality of the expropriation

37
it is today generally accepted that the legality of a measure of expropriation is ·
· conditioned on three (or four) requirements. These requirements are contained
in ost treaties. They are also seen to be part of customary international law.
These ·· Requirements must be fulfilled cumulatively:

 The measure must serve a public purpose. Given the broad meaning of
'public purpose', it is not surprising that this requirement has rarely been
questioned by the foreign investor. However, tribunals did address the
significance of the term and its limits in some cases.

 The measure must not be arbitrary and discriminatory within the

generally: accepted meaning of the terms.

 Some treaties explicitly require that the procedure of expropriation

mus{ follow principles of due process. 6 Due process is an expression of
the min-: imum standard under customary international law and of the
requirement of fair and equitable treatment. Therefore, it is not clear
whether such a clause, iii the context of the rule on expropriation, adds an
independent requirement foi the legality of the expropriation

 The expropriatory measure must be accompanied by prompt, adequate,

anf: effective compensation. Adequate compensation is generally

understood today .. to be equivalent to the market value of the
expropriated investment..
Of these requirements for the legality of an expropriation, the measure of
compensation has been by far the most controversial. In the period between
roughly 1960 ,; and 1990, the rules of customary law on compensation were at
the centre of the debate on expropriation. They were discussed in the broader
context of economic decolonization, the notion of'Permanent Sovereignty over

38
Natural Resources', and of the call for a new international economic order.
Today, these fierce debates are over and nearly all expropriation cases before
tribunals follow the treaty-based standard of compensation in accordance with
the fair market value. In the terminology of the earlier decades this means 'full'
or 'adequate' compensation. However, this does not mean that the amount of
compensation is easy to determine. Especially in cases of foreign enterprises
operating on the basis of complex contractual agreements, the task of
valuation requires close cooperation of valuation experts and the legal
profession.

Various methods may be employed to determine market value. The discounted

cash flow method will often be a relevant yardstick, rather than book value or
replacement value, in the case of a going concern that has already produced
income. Before the point of reaching profitability, the liquidation value will be
the more appropriate measure.7 A traditional issue that has never been
entirely resolved concerns the consequences of an illegal expropriation. In the
case of an indirect expropriation, illegality will be the rule, since there will be
no compensation. According to one school of thought, the measure of
damages for an illegal expropriation is no different from compensation for a
lawful taking. The better view is that an illegal expropriation will fall under the
general rules of state responsibility, while this is not so in the case of a lawful
expropriation accompanied by compensation. In the case of an illegal act the
damages should, as far as possible, restore the situation that would have
existed had the illegal act not been committed. By contrast, compensation for
a lawful expropriation should represent the market value at the time of the
taking.

The Rule of Law through Investment Treaties

39
Rather then engaging with the criticism of international investment expressed
by Gus Van Harten and others in detail, I want to lay out the positive case for
understanding international investment law as an instrument for the
furtherance of the rule of law. This section of the chapter does so on a
conceptual level in discussing how investment treaties and investment treaty
arbitration can be understood as an expression of the rule of law. As a
definition and benchmark, I want to use a “thick” definition of the rule of law,
similar to that developed by Lord Bingham.16 Given that international
investment law is part of international law and hence subjects domestic legal
systems to its understanding of the rule of law, but itself also needs to be
measured against an international yardstick, the transnational definition
contained in the UN Secretary-General’s 2012 report, Delivering Justice:
Programme of Action to Strengthen the Rule of Law at the National and
International Levels, seems particularly appropriate in this context. It defines
the rule of law:

as a principle of governance in which all persons, institutions and

entities, public and private, including the State itself, are accountable to
laws that are publicly promulgated, equally enforced and independently
adjudicated, and which are consistent with international human rights
norms and standards. It requires, as well, measures to ensure adherence
to the principles of supremacy of law, equality before the law,
accountability to the law, fairness in the application of the law,
separation of powers, participation in decisionmaking, legal certainty,
avoidance of arbitrariness and procedural and legal transparency.

Rule of Law Objectives of Investment Treaties

40
Turning to the first point, the existence of investment treaties is best
considered in relation to the rule of law by looking at the objectives of
investment treaties. These are closely related to the functions of the rule of
law. According to Jeswald Salacuse, the objectives of investment treaties can
be distinguished into primary, secondary, and long-term objectives.18 Primary
objectives are the protection and promotion of foreign investment; secondary
objectives encompass market liberalization and the building of closer economic
and political relations among contracting states. Yet, all of this is not an end in
itself, but geared towards enhancing, on the long run, the economic welfare of
contracting states. Investment protection and promotion, in other words, have
the objective to lead to economic growth and, ultimately, human
development.

The functions of the rule of law can be seen in parallel to these objectives. The
goal to protect foreign investment corresponds to the protection that the rule
of law is designed to afford against illegitimate government conduct. The
promotion of foreign investment runs parallel to the function of the rule of law
in decreasing political risk, that is, the risk resulting from cooperation with a
state that has sovereignty over the law regulating the investment and which, in
the absence of an investment treaty, exercises complete judicial control over
any disputes that might arise between the investor and the host state.19 And
finally, just as investment treaties ultimately aim at contributing to the
development of host states, the concept of the rule of law is widely recognized
as an important factor for economic growth and development.20 Richard
Posner, for instance, points to the “empirical evidence showing that the rule of
law does contribute to a nation’s wealth and its rate of economic growth.”21
Similarly, the link between the rule of law and economic development has
materialized in the World Bank’s legal reform program22 and has been
41
reiterated in its good governance agenda, which comprises, as one of the core
concepts to help developing countries develop, the rule of law.23

The critical point from a rule of perspective, however, remains, how a system
for the protection of the specific class of foreign investors can be justified,
instead of a system creating rule of law institutions for all investors, both
domestic and foreign. The main reason for the limited personal scope of
application of investment treaties lies in their pedigree in the international law
of aliens which was based on the idea that conduct that interferes with the
rights of a foreigner, including her property rights, was a violation of the rights
of the foreigner’s home state.24 Yet, notwithstanding the limited protection
ratione personae, investment treaties are considered to have an impact on
domestic investments as well. This is most obvious in case of investment
projects that are implemented through joint ventures between a foreign and a
domestic investor, where the latter indirectly benefits from the protection
afforded to the former.

But arguably the indirect impact of investment treaties on domestic investors

goes further. As pointed out by Salacuse, a secondary objective of investment
treaties is the encouragement of domestic investments. As he argues, “[a]n
investment treaty … serves as a ‘signaling device’ to the domestic private
sector that the government’s intentions towards private capital, both foreign
and domestic, are benign in view of the international commitments it has
made in the treaty to protect capital of foreigners.”25 In addition, improved
domestic governance and a strengthened rule of law are another secondary
objective given that, as soon as governments internalize the disciplines that
investment treaties demand in the treatment of foreign investors, domestic

42
investors are likely to benefit through “trickle-down effects”. As explained by
Salacuse:

The theory underlying this rationale is that developing country

authorities and institutions that have prevented themselves from acting
in arbitrary and abusive fashion towards foreign investors by signing a
treaty will also be lead to avoid arbitrary and abusive actions towards
their own nationals. Over time those authorities and institutions may
demonstrated improved governance and a heightened respect for the
rule of law.

Looking at the primary, secondary, and long-term objectives of investment

treaties and comparing them to the function of the rule of law therefore makes
a case for understanding investment treaties as an instrument geared towards
furthering the rule of law. In this perspective, investment treaties are serving
both as substitutes for domestic institutions and the domestic rule of law and
as inducements to governments to improve their domestic legal regimes in
order to reduce the prospect of future international claims for damages.

43
Standards of Treatment as Embodiments of the Rule of Law

Turning from the objectives of investment treaties to the substantive

standards of protection, how is the rule of law reflected in them? On a general
level, the standards of protection contained in investment treaties reflect a
liberal, rights-based approach which seeks to limit government action that
interferes with protected investments. In terms of their content, these
standards correspond, or at least are analogous in some respects, to the rights
and principles governing state-market relations found in the domestic legal
orders of many countries, mostly at the constitutional level.

The specific guarantees contained in investment treaties aim at implementing

structures that are essential for the functioning of a market economy and
cover aspects of the rule of law. National and most-favored-nation treatment
are designed to bring about equality before the law by ensuring, as a
prerequisite for fair competition, a level playing field for the economic activity
of foreign and domestic economic actors. The protection against expropriation
guarantees respect for property rights as an aspect of the rule of law and an
essential prerequisite for market transactions; capital transfer guarantees
ensure the free flow of capital in and out of the host state and contribute to
the efficient allocation of resources in a global market; and umbrella clauses
back up private ordering between foreign investors and the host state by
ensuring that contractual and other similar promises vis-à-vis foreign investors
benefit from a layer of international law protection in addition to the
protections that exist under domestic law. All these standards address
problems that businesses face and which concern aspects of the rule of law.

But there is one standard that is even more closely related to the rule of law,
that is, the standard of fair and equitable treatment. In fact, as I have argued
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elsewhere, the way arbitral tribunals have interpreted fair and equitable
treatment can be equated with how the rule of law is commonly understood in
domestic public law, international law, and in the development efforts of
various development organizations as part of the concept of good
governance.28 In close parallel to the definition of the rule of law set out
above, and depending upon the context of different cases, arbitral tribunals
have variously interpreted the standard of fair and equitable treatment to
encompass (1) the requirement of legal security and predictability; (2) the
principle of legality; (3) the protection of legitimate expectations; (4) basic due
process requirements for administrative and judicial proceedings; (5)
protection against arbitrariness and discrimination; (6) legal certainty and
transparency; and (7) the concept of proportionality or reasonableness. These
concepts reflect elements of the rule of law that one can also find in the
administrative and constitutional frameworks of many countries worldwide.

Two examples from arbitral jurisprudence to illustrate the parallels between

the rule of law and fair and equitable treatment may suffice for present
purposes. The first example is the decision in Waste Management v Mexico, an
ICSID Additional Facility case under the North American Free Trade Agreement
(NAFTA). In its award, the Tribunal understood the fair and equitable
treatment to be:

… infringed by conduct attributable to the State and harmful to the

claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic,
is discriminatory and exposes the claimant to sectional or racial
prejudice, or involves a lack of due process leading to an outcome which
offends judicial propriety – as might be the case with a manifest failure

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 of natural justice in judicial proceedings or a complete lack of
transparency and candour in an administrative process.29

The parallels to the concept of the rule of law as set out above are striking.
While not identical, and qualified through adjectives such as “gross” or
“manifest”, the Tribunal’s interpretation of fair and equitable treatment is
structurally analogous to elements of the rule of law, such as the prohibition of
discrimination and arbitrariness as well as due process and transparency in
administrative proceedings.

A second example is the ICSID case Tecmed v Mexico30 under the Spanish-
Mexican BIT. In applying the fair and equitable treatment standard to the
relations between an investor in a hazardous waste landfill and the supervisory
agency, the Tribunal focused on the concept of legitimate expectations as part
of fair and equitable treatment and held that the latter standard

… requires … treatment that does not affect the basic expectations that
were taken into account by the foreign investor to make the investment.
The foreign investor expects the host State to act in a consistent
manner, free from ambiguity and totally transparently in its relations
with the foreign investor … The foreign investor also expects the host
State to act consistently, i.e. without arbitrarily revoking any preexisting
decisions or permits issued by the State that were relied upon by the
investor to assume its commitments … The investor also expects the
State to use the legal instruments that govern the actions of the investor
or the investment in conformity with the function usually assigned to
such instruments, and not to deprive the investor of its investment
without the required compensation.31

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Once again, and even though the interpretation of the Tecmed tribunal of fair
and equitable treatment differed from that of the Waste Management
tribunal, there are clear structural parallels between fair and equitable
treatment and how the rule of law is applied to administrative relations at the
domestic level to protect legitimate expectations of private actors. Structural
analogies are also notable in that the Tecmed tribunal considered fair and
equitable treatment to prohibit the inconsistent application of domestic law or
its non-application, as well as arbitrary conduct of the administration.

Not only can an understanding of fair and equitable treatment as an

embodiment of the rule of law be reconstructed from arbitral jurisprudence; it
can also be linked to the developmentrelated object and purpose of
investment treaties. This is possible when considering the debate about the
relationship between the rule of law and development together with the
object and purpose of international investment law to contribute to the host
country’s development by protecting and promoting foreign investment.32
Indeed, development as the wider context and objective of investment treaties
is also articulated in the ICSID Convention. Reflecting the development goals of
the World Bank Group, of which ICSID forms part, and the belief that the
creation of facilities for the neutral arbitration and conciliation of disputes
between private investors and states could further development,33 the
Preamble of the ICSID Convention explicitly draws a connection between
economic development and the protection of foreign investment.34

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