Open Access Research Article
INVESTMENT PROTECTION TREATIES: SAFEGUARDING GLOBAL INVESTMENT
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INVESTMENT
PROTECTION TREATIES: SAFEGUARDING GLOBAL INVESTMENT[1]
AUTHORED BY
- PRIYA RATHORE
INTRODUCTION:
Our world
is becoming more interconnected, and conventional borders are no longer a
barrier to business and enterprise. This era is distinguished by significant
foreign investment. The worldwide trends of globalization and liberalization
that have taken hold across the globe are to blame for the sharp increase in
foreign investments. Today, a country's ability to draw in foreign direct
investments (FDI) is frequently used to measure that country's economic
development. There are a startling 2,946 international investment agreements in
existence, 2,363 of which are in effect, according to data from the United
Nations Conference on Trade and Development (UNCTAD). Therefore, protecting
these investments has become of the utmost importance.
While
Bilateral Investment Treaties (BITs) have significantly broadened the scope of
these restrictions in addition to reaffirming long-standing norms of customary
international law related to foreign investment. To entice and protect foreign
money, these treaties have clauses that have been painstakingly drafted to
offer the highest level of protection to international investors.
However, it
has become clear that a sizable percentage of the BIT-related disputes filed
with the International Centre for Settlement of Investment Disputes (ICSID)
involve claims of host-state liability for actions resembling indirect
expropriation without just compensation or violations of the fundamental
principle of fair and equitable treatment (FET). A system known as
"Investor to State Dispute Settlement" (ISDS), intended to speed up
the resolution of such issues, is present in almost all investment treaties.
It has
become a hotly debated topic to allow investors to sue their host country when
regulatory changes could potentially jeopardize their financial benefits. Many
nations have already had to deal with unforeseen claims resulting from their
attempts to pass new laws or regulations intended to protect their financial
stability, environmental integrity, or citizens' well-being. Essentially, a lot
of disagreements come up when a host state asserts its sovereign power over
foreign investments made within its borders.
The
management of changes in international investment law is causing increasing
worry in the global community, particularly with regard to expropriation
issues. The idea that some investment tribunals have gone too far in
restricting the sovereign powers of host countries is the basis for this worry.
Notably, recent judgements against Argentina in a number of instances
adjudicated by international investment tribunals have brought attention to
this problem.
This
article aims to analyses the fundamental ideas regulating foreign investment by
host states in this context. With the ultimate goal of striking a delicate
balance between the host state's sovereignty and the necessity of preserving
the rights of home states for investment protection, the author's objective is
to critically examine the most recent interpretations and applications of these
principles by international investment courts and tribunals.
The Evolution of the Concept of 'Investment':
The
Development of the Term "Investment" It is crucial to understand the
subtleties of the Investment Protection framework under International
Investment Law by delving into the constantly changing definition of the Term
"Investment." Within the field of investment law, the definition of
"investment" has changed over time. Surprisingly, there isn't a
specific definition of what counts as a foreign investment that is acknowledged
by all parties. When countries join into investment agreements, they frequently
adopt an open-ended approach, which broadens the definition of the word
"investment." It is noteworthy that not even the ICSID Convention
(International Centre for Settlement of Investment Disputes) provides a
detailed definition of "investment."
However, a
number of arbitral tribunals have highlighted some crucial characteristics of
investments made under the ICSID Convention that have come to be recognized
more and more, guided by important instances in the area of investment law.
These characteristics include: (i) the project's longevity; (ii) the project's
regularity of profit and return; (iii) the presence of risks for all parties
engaged; (iv) a significant resource commitment; and (v) the operation's
relevance for the host state's development.
Investment Protection:
(Standards of Investment Protection and Host State
Obligations)
The latter
half of the 20th century saw a substantial evolution in the field of
international investment law, particularly with the end of colonialism.
Concession agreements between host states and investors at first governed
investments. These agreements gave foreign investors significant privileges,
giving host countries little control over the actions of foreign companies. The
establishment of bilateral investment treaties, free trade agreements, and
international investment agreements in the modern world is primarily intended
to protect and promote foreign investments.
These
agreements therefore provide investors with protection within a host state by
covering compensation for a variety of events, including expropriation, armed
conflicts, revolutions, discrimination against foreign investors,
requisitioning, or property destruction by a state's authorities, among other
political, economic, and environmental disruptions. Most agreements provide
that in the event of a dispute, any difference between the state and the
investor on how the treaty should be interpreted or applied that cannot be
settled through negotiations may be sent straight to arbitration.
It is
significant to highlight that these international accords outline the
requirements for host states to protect investors and provide the framework for
safeguarding investments.
The host state's obligations to protect investments:
Transferring
physical or intangible assets across borders with the goal of using them to
create prosperity in the host nation is what is meant by foreign investment.
The owner has either complete or partial authority over these assets. The
concepts of diplomatic protection and state accountability are applicable, and
customary international law serves as the legal foundation for the protection
of physical assets owned by foreign investors. This protection is supported by
the argument that foreign investors syphon off funds that could otherwise be
used to advance the economy of their own nation. As a result, it is decided
that the home state has a legitimate reason to protect the resources that
foreign investors have put in the host state.[2]
Investment
Protection Standards: Specific standards of protection are frequently
established through international investment protection treaties, particularly
bilateral investment treaties (BITs). These requirements include:
·
Fair and Equitable Treatment (FET):
Independent of the legislation of the host State, the FET standard is of utmost
importance and functions as a principle of international law. A breach of the
FET standard may take place even if a foreign investor receives treatment that
is identical to that given to citizens of the host State. This means that even
in the absence of a most-favored-nation clause establishing preferential
treatment for investors of other nationalities, an investor may be considered
to have been treated unfairly and unjustly.
Certain
guiding principles have emerged as a result of investment tribunals applying
the FET standard throughout time. These principles include things like
operating in good faith (bona fide), maintaining freedom from pressure and
harassment, safeguarding the investor's reasonable expectations, adhering to
contractual duties, procedural propriety, and due process. It's significant to
remember that the prospective application of the Fair and Equitable Treatment
requirement is not completely covered by these categories.
·
Comprehensive Investment Protections: These
clauses include the idea that the host State has a duty to actively carry out
measures assuring the protection of investments from negative effects. This
obligation includes providing physical safety and security against incursions
by public or private entities.
·
Protecting Against Arbitrariness and Discrimination: The word
"or" is frequently used to connect the words "arbitrary"
and "discriminatory." Therefore, a particular action need not be both
arbitrary and discriminatory at the same time to violate these requirements.
The International Court of Justice (ICJ) offered the following definition of
"arbitrary" in the Elettronica Sicula Case, which is frequently
cited:
“Arbitrariness
is essentially averse to the very nature of the rule of law. It is not just
against a rule of law. It entails a willful contempt for the rule of law, which
shocks or, at the very least, surprises one's sense of judicial decorum.”
Different
manifestations of discrimination exist. The most frequent problem with how
foreign investments are handled is nationality-based discrimination. Although
not all nationality-based distinctions are automatically prohibited by
international law, the majority of bilateral investment treaties (BITs) include
particular non-discrimination requirements. Most-favored-nation agreements and
clauses ensuring national treatment frequently contain these norms. The
International Centre for Settlement of Investment Disputes (ICSID) decided in
the Lauder v. Czech Republic[3] case that a
determination of discrimination stands independently of a breach of domestic
law, even when domestic legislation can be the main reason for an infringement
of the international standard.
·
National Treatment: The majority of Bilateral
Investment Treaties (BITs) contain the essential principle of national
treatment. Articles 10(3) and (7) of the Energy Charter Treaty (ECT) and
Article 1102 of the North American Free Trade Agreement (NAFTA) both make
reference to this idea. In essence, it states that a foreign investor and their
interests must be treated equally to that accorded to a citizen of the host
State. Furthermore, a foreign investor must be treated even better if
international standards are greater than those that are applied to citizens.
·
Most-Favored-Nation Treatment: Although
it is not a requirement of customary law, almost every BIT includes the Most-Favored-Nation
(MFN) treatment premise. The ECT's Article 10(3) and (7) and NAFTA's Article
1103 both reflect it. MFN clauses in treaties are primarily intended to ensure
that the parties involved treat one another at least as favorably as they treat
outside parties. The level of care varies depending on the benefits provided to
other countries and their citizens. A relevant advantage that a state bestows
immediately extends to the state protected by the MFN clause. The ejusdem
generis principle governs the application of an MFN clause, which implies it
applies to all matters coming under its purview.
·
Transfer Provisions: These rules cover
investors' rights with respect to money transfers, accepted payment methods,
currency convertibility, and exchange rate caps, among other things. They also
place constraints on uncontrolled transfers. Depending on the treaty, the right
to transfer cash may only apply to transfers made from the host nation or it
may also include transfers made to that nation. While the majority of
agreements include both situations, some just deal with outbound payments.
·
Umbrella Clauses: An investment protection
treaty provision known as a "umbrella clause" ensures the host
State's compliance with commitments relating to investments. Contracts and
other commitments are covered by the treaty's safeguards. The degree and
conditions under which umbrella provisions offer protection to contracts
between the host State and the investor are the most divisive issues
surrounding them. Tribunals' opinions on this subject show a significant
difference. According to some tribunals, such a provision "constitutes a
breach of the BIT when the host State fails to fulfil binding commitments,
including contractual obligations, related to particular investments."
In the case
of El Paso Energy v. Argentina, a tribunal attempted to strike a balance by
stipulating that an umbrella clause would only bind a State in the context of
sovereign contracts and not commercial contracts. In the case of SGS Societe
Generate de Surveillance SA v. Islamic Republic of Pakistan[4],
a tribunal sought to reduce the scope of umbrella clauses.
·
Expropriation: When there are foreign investments
and a contract is made between the host state and the foreign investor, the
foreign investor initially has the upper hand in negotiations. This is because
foreign investment has the ability to help the host nation's economy grow
overall and provide employment, money, and technology. However, the dynamics
could alter after the venture is a success. In order to receive the promised
returns on their investments, the investor commits to a long-term partnership
with the state. The investor can find themselves in a hazardous situation if
the government decides to change or end the contract with the foreign investors
for political or other reasons.[5]
The host
state's government is free to use its legislative and executive power to
further its political goals. The contract is thus vulnerable to political risks
within the host state in addition to the typical business risks. As a result,
the goal of international investment law is to balance the rights of the host
state with the interests of the investors.
Expropriation
can occur in a number of ways, such as (i) direct property seizures, (ii) contract
violations or forced renegotiations that make the investment unprofitable for
the company, (iii) extralegal interventions or transfers of ownership carried
out by private entities without government approval, and (iv) forced property
sales. All of these situations involve the investor's ownership rights being
forfeited without just recompense.
Expropriation
is the government's seizure of property, for which the host state is obligated
to reimburse the investor. One can classify expropriation as legitimate or
unlawful. It is seen as legal since states have the authority to expropriate
property located on their soil. Expropriation can also be classified into:
i) Direct
expropriation: This involves nationalizing and transferring the investor's
property's ownership.
ii)
Indirect expropriation: This refers to state actions that significantly lower
the investor's investment's value. Examples include regulatory involvement,
such as the suspension of a license, or the progressive loss of investor rights
over time as a result of a succession of actions.
·
Under international law, necessity and its use in
state actions: A State's activities may be exempt from being deemed
unlawful under customary international law if they are necessary. According to
the widely held belief, customary international law is encapsulated in Article
25 of the UN International Law Commission's Draught Articles on the
Responsibility of States for Internationally Wrongful Acts, adopted during the
ILC's 53rd session in 2001 (known as the "2001 ILC Articles"). There
are provisions relating to necessity in a number of Bilateral Investment
Treaties (BITs), particularly those that involve the United States. For
instance, the US-Argentine BIT's Article XI concerning the reciprocal
encouragement and protection of investment between the United States of America
and the Argentine Republic states:
This Treaty
"shall not prevent either Party from taking such steps as may be required
for the preservation of public order, the performance of its obligations with
respect to the maintenance or restoration of international peace or security,
or the protection of its fundamental security interests."
In numerous
situations relating to the economic crisis in Argentina between 2001 and 2003,
the customary international law norm, which is represented in Article 25 of the
2001 ILC Articles, as well as Article XI of the US-Argentine BIT, have both
been invoked. Tribunals found that the requirements for proving necessity were
not met in the majority of these situations. This was primarily due to the fact
that Argentina's responses were not the only options available and that
Argentina had exacerbated the issue. These requirements are commonly found in
the majority of investment protection treaties.
Using Sovereignty to Control Foreign Investment:
(Juggling Investment Protection and Sovereignty)
The
consequences of international investment agreements have recently come to the
attention of more people than they previously did. The call for the rethinking
of these accords has grown greater as a result of this awareness. Bilateral
Investment Treaties (BITs) have been terminated by a large number of developing
nations, or they are in the process of doing so. For instance, India has
established a new model BIT in response to legal lawsuits brought by foreign
investors under several BITs. For failing to strike a balance between
safeguarding foreign investments and India's right to regulate, this new pact
has drawn criticism. It is considered to be in opposition to the Indian
government's efforts to draw in foreign investment through programmers like
'Make in India' and 'Digital India.'
This
conflict may be caused by difficulties that host countries have in enforcing
their sovereignty while managing foreign investments. The ability of host
states to exercise their sovereign rights over private agreements they engage
into with foreign investors is frequently constrained. Multilateral investment
agreements sometimes prioritize the interests of foreign investors while
ignoring environmental and human rights concerns associated to foreign
investments, which has led to protests against these accords as a result of globalization.
Critics claim that these agreements only effectively satisfy the concerns of
the international community or the host state for the protection of their
essential principles and instead only protect the interests of foreign
companies.
Many
contemporary BITs now include clauses permitting host states to employ their
sovereign rights in controlling foreign investments in order to meet these
problems and circumstances. These sections provide a framework for host
governments to reconcile their sovereign authority with their obligations in
defending the principles that are important to their country and the larger
international community. They address a variety of issues, including
environmental protection and human rights.
·
Multinational Corporations (MNCs) and Environmental
Issues: Environmental advocacy groups have constantly blamed MNCs
for contributing to environmental contamination, particularly in developing
nations where environmental standards are frequently low. In some situations,
MNCs have taken advantage of these lax restrictions in developing countries,
seeing them as lucrative havens where they can conduct business without having
to worry about the costs of compliance and the harsher regulations they face in
their home countries. With some international agreements, such as the
US-Canadian treaties and NAFTA (Article 1114(1)), starting to address
environmental issues, there has been a progressive change in this environment.
The
tribunal's interpretation of such phrases generated issues in the case of S.D.
Myers v. Canada[6]. It
referred to the language in these agreements as "hortatory," implying
that it only provided advice as opposed to binding rules. Despite Canada's
agreement with the Basel Convention on the Transboundary Movements of Hazardous
Wastes, the tribunal did not find merit in its claim that hazardous waste
produced within its borders should be disposed of domestically rather than
being sent across the border into the United States.
In
contrast, the US and Canada's model investment treaties contain far greater
language establishing exceptions to liability in situations where foreign
investments are interfered with for environmental reasons. Even without
explicit treaty provisions, government interference on environmental grounds
should be seen as a justifiable form of regulatory intervention, allowing host
states to exercise their sovereign powers in the regulation of foreign
investments. This is because of the challenges faced by developing and
underdeveloped countries.
·
Bilateral Investment Treaties (BITs) and Human Rights: Human
rights issues are rarely covered in bilateral investment treaties (BITs), much
like environmental issues. Multinational corporations (MNCs) frequently participate
in human rights violations in a number of developing countries, but so do the
state or its ruling class. While successive host state governments might try to
stop these violations, they might be reluctant to step in for fear that it
might be seen as a violation of the investor's rights as outlined in the
treaty. Furthermore, fundamental jus cogens principles are anticipated to
supersede BITs in conformity with the Vienna Convention on the Law of Treaties.
This raises the question of whether the arbitrators chosen to settle investment
disputes are qualified to decide complicated international legal conflicts,
leading to the frequent avoidance of these concerns.
It is necessary to give host governments the
freedom to use their sovereign power to deal with investments that violate
human rights as a result.
·
Emergency and Necessity: As
previously discussed, host states may need to limit foreign investments in
order to protect their national security during times of economic or national
emergencies.
Balancing Investment Protection and Sovereignty:
A
contradiction between two fundamental principles state sovereignty over natural
resources and state duty for protecting the rights of foreign investors has
frequently defined the history of international investment law. This duality
can be seen in a number of ways, including conflicts between local laws and
universally accepted norms of treatment and the Charter of Economic Rights and
Duties of States and restrictions on expropriation. The legitimate expectations
of investors may also be at odds with domestic public policy, and local court
disputes may contradict with arbitral awards made elsewhere.
The parties
participating in the area of foreign investment have a variety of interests.
Investors look for chances to increase their earnings, broaden their market
reach, and create strategic partnerships. States, on the other hand, see
investments as a way to, among other things, encourage economic growth, acquire
cutting-edge technology, increase productivity, generate jobs, and combat
poverty. While states prioritise their sovereignty to control internal affairs,
as was previously discussed, investors prioritize the protection of property
rights as their main defence.
Bilateral
investment treaties (BITs) are not without implications, and both governments
and investors must exercise caution when entering into them, according to the
jurisprudence of investor-state arbitration over the previous ten years. When
states must balance the conflicting interests of their population and
investors, this caution is especially clear. Similar concerns can be present
for investors, and arbitration may be their only option. Due to the fact that
most treaties place restrictions on sovereignty, host states are frequently
forced to offer significant compensation for interfering with foreign
investments.
It is
crucial to understand that every state has the authority to expropriate
property located on its soil in specific circumstances. Legal expropriation
must satisfy the following requirements:
a) avoiding treating investors
unfairly
b) serving a civic function
c) obeying the law as it is
written
d) accompanied by complete,
fast, sufficient, and efficient payment
According
to Tipples v. TAMS-ATTA[7],
constructive expropriation happens when occurrences show that the owner has
been deprived of fundamental ownership rights and that this deprivation is
permanent. Expropriation that is illegal results in state accountability.
nations have the freedom to alter their economic policies, but this freedom has
been limited by the expanding number of trade and investment agreements that
nations are signing on to.
However, as
stated in the Declaration on Principles of International Law Concerning
Friendly Relations and Cooperation Among States, which states that "each
state has the right to freely choose and develop its political, social,
economic, and cultural systems," states continue to have the authority to
alter economic and political policies due to their sovereignty. Various issues,
such as ideological transformations, nationalism, racial factors, changes in
industrial patterns, contracts from the previous regime, burdensome contracts,
economic regulation, human rights, environmental concerns, and preserving law
and order, may cause states to contemplate changing their policies.
As a
result, although host governments retain the right to control foreign
investments made within their borders, current trends have seen states
voluntarily curtail their regulatory authority by signing trade and investment
treaties. Understanding the evolution of international investment law and
policy requires an understanding of the idea of "the right to
regulate." In this situation, there are two basic arguments:
I.
national sovereignty appears to be eroding in the face
of growing commitments related to international trade and investment.
II.
Regulations governing public welfare may be challenged
under trade and investment agreements, where host countries may be held liable
for compensation when seizing foreign property.
Conclusion and Recommendations:
The
cornerstone of international investment law is investment protection, but it
must be balanced with defending the interests of host states. Undoubtedly, the
host country's legal and administrative regulations apply to foreign
investments. These assurances must provide a safe environment for international
investors without undermining a state's rightful regulatory power. The
wellbeing of the local community is at stake in some investment-related areas,
highlighting the crucial role of international investment law in achieving a
careful balance between potentially competing interests.
Bilateral
Investment Treaties (BITs) that promote FDI place a number of structural
pressures on the host countries. The first step in this process is when host
states offer incentives to entice investment, such as tax breaks, tariff
reductions, customs exemptions, environmental credits, infrastructure
improvements, and other advantages. While these actions might have short-term
benefits, the host state's long-term gains are still under consideration.
Therefore, before signing BITs, host countries must carefully consider a number
of factors. Before agreeing to investment treaty agreements, host governments
should engage in vigorous talks to address their concerns. Additionally,
creating a strong administrative framework that is backed by an engaged
legislature and an effective court is essential for protecting their interests
in the complex world of international law.
[1] Priya Rathore (5th year
student, BBA.LLB, The Northcap University, Gurugram)
[3] Lauder v. Czech Republic (Award of
3 September 2001)
[4] SGS Societe Generale de Survellance
SA v. Republic of the Phillipines (Decisions on Objections to Jurisdiction of
29 January 2004)
[5] Sovereignty and Investment
Protection Obligations in International Law (2018 Special Issue IJLIA 28)
[6] (2000) 40 ILM 1408
[7] Iran-U.S.C.T.R. 219 at 225 (1985)
Article Information
INVESTMENT PROTECTION TREATIES: SAFEGUARDING GLOBAL INVESTMENT
Authors: PRIYA RATHORE
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/10/04
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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