PUBLIC

INTERNATIONAL LAW
BLESSING MAKANYISA

CHARMAINE MAPUNO

V I C T O R N K O S I L AT H I D U B E M 2 2 5 4 7 4

J A C K S O N Y O TA M U
SELECTED PRINCIPLES ON THE
PROTECTION ON INTERNATIONAL
INVESTMENTS
International investment law is one of the fastest growing areas
of international law today. It plays a very important role in
governing the protection of international investments made by
foreign entities in host countries because international
investments play a crucial role in the global economy, job
creation, and technological transfer across borders. As
businesses expand their operations internationally, they seek
protection for their investments to mitigate risks associated
with political instability, regulatory changes, and expropriation.
Therefore, the principles of protecting international
investments exist in a bid to provide investors with a secure
environment for their capital
Both the investors and host countries need to articulate these
principles for a conducive investment climate to prevail.
SEVERAL PRINCIPLES ACT AS A GUIDELINE IN THE PROTECTION
OF INTERNATIONAL INVESTMENTS AND THESE COMPRISE:

1. Fair and Equitable treatment of investing parties

2. Protection against expropriation
3. Civil disturbance Remedies
4. Investor-State dispute settlement mechanisms
1. Fair and equitable treatment
The principle of equitable treatment appears prominently in
almost all of the more than 2600 bilateral investment treaties
(BITs) as well as regional and multilateral treaties including in
Article 1105(1) of the North American Free Trade Agreement
(NAFTA) and in Article 10(1) of the Energy Charter Treaty
(ECT). This shows it clearly that it is one of the core concepts
of international investment law ensuring that investments are
treated fairly without discrimination or arbitrary actions by the
host state. It requires the host country to provide a level playing
field for all investors and to refrain from taking measures that
could harm the legitimate interests of the investors.
A standard is used to restrict the exercise of sovereign powers
by host states thus interpreting fair and equitable treatment as a
public law concept. Seven specific clusters can be discerned
that occur in recurring fashion as sub elements of fair and
equitable treatment. These are (1) The requirement of stability,
predictability ,and consistency of the legal framework; (2) The
principle of legality; (3) The protection of legitimate
expectations; (4) Procedural due process and denial of justice;
(5) Substantive due process and protection against
discrimination and arbitrariness; (6) transparency; and (7) The
principle of reasonableness and proportionality. These sub-
principles also figure as expressions of the broader concept of
the rule of law in domestic legal systems.
(i) Stability, predictability, consistency
Investment treaties seek to enhance the stability of the investment
climate and reduce political risk. Accordingly, aspects that are
recurrently invoked by arbitral tribunals as part of fair and equitable
treatment are the concepts of stability, predictability, and consistency
of the host state's legal order. The tribunal in CMS v Argentina, for
example, found that ‘there can be no doubt… that a stable legal and
business environment is an essential element of fair and equitable
treatment’. In PSEG v Turkey the tribunal found a breach of fair and
equitable treatment by what it described as ‘the “roller-coaster” effect
of the continuing legislative changes’. ‘Stability,’ it observed, ‘cannot
exist in a situation where the law kept changing continuously and
endlessly, as did its interpretation and implementation.
Similarly, the predictability of the legal framework governing the
activity of foreign investors is frequently considered as an element of
fair and equitable treatment. The tribunal in Metalclad v Mexico, for
instance, based its finding of a violation of Article 1105(1) of NAFTA,
inter alia, on the argument that Mexico ‘failed to ensure a…predictable
framework for Metalclad's business planning and investment’.
Likewise, the tribunal in Tecmed v Mexico stressed that a foreign
investor needs to ‘know beforehand any and all rules and regulations
that will govern its investments, as well as the goals of the relevant
policies and administrative practices and directives, to be able to plan
its investment and comply with such regulations’. Accordingly, a lack
of clarity of the legal framework or excessively vague rules can violate
fair and equitable treatment.
Likewise, the concept of consistency plays an important role in
applying fair and equitable treatment provisions. The tribunal in
Lauder v Czech Republic, for example, stressed that fair and
equitable treatment could be violated if domestic agencies acted
inconsistently in applying domestic legislation. Similarly, in
MTD v Chile the tribunal found a violation of fair and equitable
treatment due to ‘the inconsistency of action between two arms
of the same Government vis-à-vis the same investor’
(ii) Legality
Fair and equitable treatment has also been interpreted by arbitral tribunals
as including the principle of legality. In various cases tribunals based their
assessment of fair and equitable treatment on whether domestic actors
complied with national legal provisions. Although tribunals diverge on the
question to what extent the correct application of domestic law is subject to
arbitral review, their jurisprudence is consistent in holding that at least a
qualified violation of domestic law can constitute a violation of fair and
equitable treatment. Such qualified violations take place, for example,
when the host state acts in bad faith vis-à-vis foreign investors by misusing
its governmental powers, for example in order to inflict harm on an
investor, to coerce an investor in negotiations, or to induce an investor to
abandon its investment.
In Pope & Talbot v Canada, for example, the
tribunal took into account that a domestic agency
failed to produce a legal basis under domestic law
for the administrative proceedings it initiated
against a foreign investor in a case where the
relations with the investor ‘were more like combat
than cooperative regulation’.
Fair and equitable treatment was also interpreted to
include an obligation to apply domestic law. In GAMI
Investments v Mexico, the tribunal deduced from fair
and equitable treatment an obligation not only to
abide by, but also to enforce, provisions of national
law.62 Similarly, in Tecmed v Mexico the tribunal
underscored that host states have to make use of ‘the
legal instruments that govern the actions of the
investor or the investment in conformity with the
function usually assigned to such instruments’.
Arbitral jurisprudence therefore clearly considers the principle of
legality as an element of fair and equitable treatment. The principle of
legality also finds its counterpart in rule of law concepts that encompass
the requirement that public power derives its authority from a legal basis
and is exercised along the lines of pre-established procedural and
substantive rules. The principle of legality should, however, not distract
from the fact that fair and equitable treatment does not simply buttress
the application of domestic law and provide a claim of the foreign
investor against the host state to apply its domestic law correctly. Rather,
fair and equitable treatment remains an independent standard of
international law against which the domestic legal order is measured. In
consequence, only qualified breaches of domestic law will constitute a
breach of fair and equitable treatment.
(iii) Protection of legitimate expectations
Accordingly, the concept of legitimate expectations is another prominent
sub-element of fair and equitable treatment. The tribunal in Saluka v Czech
Republic referred to the concept of legitimate expectations even as ‘the
dominant element of that standard’. Its existence can also be traced as an
element of the rule of law in domestic legal systems and as a concept of
general international law. Its main thrust is the protection of confidence
against administrative and legislative conduct. In this sense, the tribunal in
Tecmed v Mexico held that fair and equitable treatment requires provid[ing]
to international investments treatment that does not affect the basic
expectations that were taken into account by the foreign investors to make
the investment’.
Similarly, the tribunal in International Thunderbird Gaming
Corporation v Mexico explained that ‘the concept of
“legitimate expectations” relates…to a situation where a
Contracting Party's conduct creates reasonable and justifiable
expectations on the part of an investor (or investment) to act
in reliance on said conduct, such that a failure by the [state] to
honor those expectations could cause the investor (or
investment) o suffer damages’.
Legitimate expectations can result from a number of actions
that are attributable to the host state. In the first place, a breach
of legitimate expectations will come into play if there is conduct
‘in breach of representations made by the host State which were
reasonably relied on by the [investor].’ They can result, for
example, from opinions and statements released by
administrative agencies about the application of domestic law.
(iv)Administrative due process and denial of justice
Several cases interpreted fair and equitable treatment as enshrining
the concept of due process. Due process, in this context, mainly
comes in two forms: administrative and judicial due process. It is
closely connected to the proper administration of administrative,
civil, and criminal justice. This is also reflected in recent US treaty
practice. Article 10.5(2)(a) of the Dominican Republic-Central
America-United States Free Trade Agreement, for instance, stipulates
that ‘fair and equitable treatment includes the obligation not to deny
justice in criminal, civil, or administrative adjudicatory proceedings
in accordance with the principle of due process embodied in the
principal legal systems of the world’.
Investment tribunals also have interpreted fair and equitable
treatment in this way. The tribunal in Waste Management v
Mexico, for instance, defined a violation of fair and equitable
treatment as ‘involv[ing] a lack of due process leading to an
outcome which offends judicial propriety—as might be the case
with a manifest failure of natural justice in judicial proceedings
or a complete lack of transparency and candour in an
administrative process’.
The main thrust of the due process requirement in
investment treaty arbitration is to establish procedural
rights for investors in administrative proceedings. This
was emphasized by the tribunal in International
Thunderbird Gaming v Mexico that held that the
proceedings of a government agency ‘should be tested
against the standards of due process and procedural
fairness applicable to administrative officials’.
Fair and equitable treatment, however, is equally
relevant for the discharge of judicial proceedings.86 In
this context the standard can be violated ‘if Claimants
were denied access to [domestic] courts…or if the
Claimants were treated unfairly in those courts (denial
of procedural justice) or if the judgment of those courts
were substantively unfair (denial of substantive
justice)’.
(v) Protection against arbitrariness and discrimination

The protection of foreign investors against arbitrary and discriminatory treatment

also plays a major role in the arbitral jurisprudence on fair and equitable
treatment. While investment treaties sometimes contain specific provisions
prohibiting such treatment, arbitral tribunals also consider the prohibition of
arbitrary and discriminatory treatment as part of fair and equitable treatment. The
connection between arbitrariness and the concept of the rule of law also has been
explicitly drawn by the International Court of Justice in the ELSI case. Dealing
with the government's requisition of a foreign-owned factory in order to prevent
its closure and the lay-off of workers, the Court observed that: Arbitrariness is not
so much something opposed to a rule of aw, as something opposed to the rule of
law. This idea was expressed by the Court in the Asylum case, when it spoke of
‘arbitrary action’ being ‘substituted for the rule of law’. It is wilful disregard of
due process of law, an act which shocks, or at least surprises, a sense of juridical
Although the case arose under a Friendship,
Commerce and Navigation Treaty, the decision
has been accepted widely as being relevant for
the interpretation of fair and equitable treatment
under investment treaties. The reason for this
may be that arbitrary conduct constitutes a
qualified violation of the requirement to act in
accordance with domestic law. Arbitrary
conduct can be seen as a sufficient but not
necessary requirement for breach of fair and
equitable treatment. It can also be linked to the
requirement under fair and equitable treatment
to act in good faith.
The nexus between fair and equitable treatment and the
prohibition of discriminatory treatment has been emphasized in
Loewen v United States. In that case, the tribunal stated that fair
and equitable treatment is violated by‘[a] decision which is in
breach of municipal law and is discriminatory against the
foreign litigant’. Similarly, the tribunal in Waste Management v
Mexico elaborated that ‘fair and equitable treatment is
infringed…if the conduct is arbitrary, grossly unfair, unjust or
idiosyncratic, is discriminatory and exposes the claimant to
sectional or racial prejudice’.
 (vi) Transparency

Some cases have based a violation of fair and equitable treatment on a lack of
transparency. The tribunal in Metalclad v Mexico, for instance, found that the
host state breached Article 1105(1) of NAFTA because it ‘failed to ensure a
transparent and predictable framework for Metalclad's business planning and
investment’. Similarly, the tribunal in Tecmed v Mexico connected the element
of legitimate expectations to the requirement of transparency by stating that:
‘[t]he foreign investor expects the host State to act…totally transparently in its
relations with the foreign investor, so that it may know beforehand any and all
rules and regulations that will govern its investments, as well as the goals of
the relevant policies and administrative practices or directives’.
The decision in Metalclad v Mexico, in particular, has received major
critique for interpreting fair and equitable treatment as including a
transparency requirement and has been set aside for this reason by the
Supreme Court of Columbia, exercising jurisdiction under the British
Columbia International Arbitration Act. Indeed, if transparency is
considered to mean ‘that all relevant legal requirements for the purpose of
initiating, completing and successfully operating investments…should be
capable of being readily known to all affected investors’ and requires the
host state ‘to ensure that the correct position is promptly determined and
clearly stated so that investors can proceed with all appropriate expedition in
the such an onerous standard threatens to ‘overstretch the position and
function of administrative agencies by developing them into consultative
units and insurers for the implementation of foreign investment projects’.
 A more restrictive reading of the transparency requirement seems equally possible
and more closely related to the concept of the rule of law. In Tecmed v Mexico, for
example, transparency mainly referred to procedural aspects of administrative law,
such as the requirement to give sufficient reasons and the obligation to act in a
comprehensible and predictable way. Essentially, these statements only reiterate more
general requirements of the concept of the rule of law that relate to the procedural
position of foreign investors in administrative proceedings. Transparency therefore
does not necessarily have to be viewed as an additional substantive requirement, but
rather as an instrument for procedurally resolving uncertainty in the domestic law,
which closely interacts with the burden of proof. As a matter of procedural fairness,
complete uncertainties of domestic law should not be held against a foreign investor
who is less accustomed to the general legal and political culture of the host state. In
that sense it is fully compatible with a procedural understanding of the rule of law and
does not impose obligations upon host states to counsel foreign investors or to provide
them with comprehensive legal advice.
(vii) Reasonableness and proportionality
The arbitral tribunals often link fair and equitable treatment to the concepts of
reasonableness and proportionality. Such criteria also play an important role as
part of the rule of law in many domestic legal systems, the law of the European
Union and the jurisprudence of the European Court of Human Rights (ECtHR). Its
function mainly consists of controlling the extent to which interferences of host
states with foreign investments are permitted. In this light, the tribunal in Pope &
Talbot v Canada repeatedly referred to the reasonableness of the conduct of an
administrative agency in order to decline a violation of fair and equitable
treatment. The mitigating role of the principle of proportionality has also been
applied in the decision in Saluka v Czech Republic as a way to balance the host
state's interest with the expectations of the foreign investor.
2. Protection against expropriation
The protection against expropriation is also another critical
principle in international investment law. It prohibits host states
from expropriating foreign investments without providing
prompt, adequate, and effective compensation. This principle
safeguards foreign investors from arbitrary or unjust
expropriation by host countries and provides a mechanism for
resolving disputes related to expropriation.
 The process of expropriation occurs where the state or an authority take private property
from its owner for public use or benefit. International law on expropriation has developed
three branches which regulate the scope and conditions of the exercise of this power.

1.Defines the interests that will be protected; most contemporary treaties dealing with
expropriation refer to ‘investments’ and similarly the jurisdiction of arbitral tribunals is
typically restricted to disputes arising from ‘investments’

2. Concerns the definition of expropriation; this matter raises no questions in cases of

formal expropriation, but the issue may be complex where the host state interferes with the
rights of a foreign owner without the formal taking of title, e.g. public health and
environmental matters may prompt a state to regulate investments which leads to claims on
the basis of regulator taking or indirect expropriation has occurred

3. Conditions under which a state may expropriate alien property; the requirements for
lawful expropriation are public purpose, non-discrimination, as well as prompt, adequate
and effective compensation (the latter is the most controversial in practice)
Requirements for the legality of expropriation
The following must be fulfilled cumulatively:

1.The measure must serve a public purpose (this requirement is rarely questioned by
foreign investors due to the broad meaning of ‘public purpose’, however tribunals
stress the limits of this term)

2. The measure must not be arbitrary and discriminatory within the general accepted
meaning of the terms.

3. Some treaties explicitly require that the procedure follow principles of due process
(which is an expression of the min standard under customary intl. law and of the
requirement of fair and equitable treatment)

4. The expropriatory measure must be accompanied by prompt, adequate and effective

compensation (adequate is generally understood to be equivalent to the market value
of the investment)
Compensation shall amount to the actual value of the
investments on the day before the expropriation or before the
impending expropriation became public knowledge.
Compensation shall be paid without delay and be freely
transferable. It shall be paid in the currency of the state of
which the investor is a national or in any other convertible
currency
Civil disturbance Remedies
If investments are harmed by war, revolution, a state of national emergency...,
compensation has to be paid. The investor will be treated in accordance with
the standards laid down in the BIT (most-favored-nation standard or national
treatment standard: most-favorable standard will be used)

Civil disturbance create uncertainty and instability, which can deter foreign
investments and harm economic development. International plays a pivotal
role in promoting stability by providing mechanisms for resolving conflicts
peacefully and restoring order in situations of unrest.
Advantages of a BIT for the foreign investors:
Provided protections that they would not otherwise have
National treatment, fair & equitable treatment, protection from expropriation and
performance requirements for investments, and access to neutral dispute settlement
Better access to the markets
Better opportunity to expand
BIT avoids long and often inconclusive (without results) disputes as to what rules of
customary intern. law govern investments, how the rules should be applied, and how an
unresolved dispute between an investor and host state can be resolved
Treaties give foreign investors the right to take host states to intern. arbitration, and they
do not have to exhaust local remedies first quicker & surer
Free transfer of capital & earnings

Foreign investor has the right to submit the dispute to intern. mixed arbitration
4. Investor-State dispute settlement mechanisms

Investor-state dispute settlement mechanisms play a crucial role in

enforcing the protection of international investments. These
mechanisms provide a forum for resolving disputes between
foreign investors and host states through arbitration or other legal
means. They offer a neutral and independent process for
addressing investment disputes and upholding the rights of foreign
investors under international law.
The following are mechanisms of the settlement of
investor-state disputes:
Diplomatic protection:
The investor’s state will act on behalf of the investor
Under traditional intern. law, investors did not have direct access to intern. remedies
to pursue (verfolgen) claims against foreign states for violation of their rights
They depended on diplomatic protection by their home state  a state exercising
diplomatic protection support the claim of its national against another state and
pursue it in its own name

Diplomatic protection depends on a number of factors: individual or corporation

must be national of the protecting state
The investor must have exhausted (ausgeschoepft) the local remedies in the state
that has allegedly (vermeintlich) committed the violation
The investor is never in control of the process:
According to the International Court of Justice, Barcelona Traction case (1970):
a company was established under Canadian law, in 1911 in connection with the
development of electricity supplies in Spain. In 1948, the company was declared
bankrupt by Spanish. Canada intervened on its behalf but later withdrew. At all
relevant times, 88% of the company shares were owned by Belgium nationals.
Belgium brought a claim in respect of the injury to its nationals who were
shareholders in the company but Spain objected that the injury was done to the
company not to the shareholders. Consequently, that Belgium lacks locus standi
(to bring to bring an action) to bring a claim. The court stated that the issues of
diplomatic protection rest on two suppositions: (1)that the defendant state had
broken an obligation towards the national state in respect of its nationals and (2)
that only the party to whom an intern. obligation is due can bring a claim in
respect of its breach, that is the company’s state of nationality
ELSI case (1989):
A case between USA and Italy. The Italian corporation wholly
owned by the US (99 %) and by Sicilia (1%). ELSI had been in
economic financial problems since the 60s, asked for
governmental support, no success ,US owner wanted to close the
plant, but Italian authorities pressed ELSI not to close. The
Mayor of Italy issued an order, effective immediately,
requisitioning (in beschlag nehmen) ELSI’s plant and related
assets for six months Italy wanted to protect the his citizen,
claiming (fordern) debts & labor disputes. The US says Italy
violated ‘friendship, commerce & navigation’-treaty by not
letting the US organize, control, manage its corporation. The
Court said there was no violation because it was really in its way
to bankruptcy – hard to show appreciable damage.
 Conclusively, protecting international investments is crucial for
fostering economic growth and stability in the global market. By
adhering to principles, such as fair and equitable treatment, non
discrimination, transparency and dispute resolution mechanisms,
countries can create a conducive environment for investors.
Implementing these principles does not only benefit the investors
only, but also contributes to the overall development of the host
countries by attracting capital, technology, and expertise. It is
essential for governments to uphold these principles to build trust
with investors and promote a mutually beneficial relationship that
drives sustainable economic progress on a global scale.