19 International economic law

19 International economic law

The forgotten man at the bottom of the economic pyramid.1

Lowenfeld, International Economic Law, Oxford, 2003

Sornarajah, The International Law of Foreign Investment, 2nd edn, Cambridge, 2004

Collier and Lowe, The Settlement of Disputes in International Law, Oxford, 1999

International economic law is a convenient term to cover mainly the multitude of bilateral and

multilateral treaties made since the Second World War on trade, commerce and investment. That

does not mean that it is a new subject. There are numerous bilateral treaties on trade from earlier

centuries, an Anglo/Portuguese treaty of 1353 providing for mercantile intercourse.2 In the

nineteenth and twentieth centuries there were many treaties on trade, customs, establishment and

navigation. The last fifty years has seen important multilateral treaty-making in these areas and the

conclusion of numerous bilateral investment treaties (BITs). A detailed description of the various

new international and regional economic organisations is beyond the scope of this chapter. One can

give only a brief overview of the subject, principally BITs and the WTO and similar organisations,

concentrating more on the settlement of economic disputes. Dispute settlement in general is dealt

with in Chapter 22 below.

Most countries that achieved their independence after the Second World War were developing,

and most remain so. During the colonial era, the imperial powers controlled trade and investment

between their colonies and themselves and third states. With independence, the new states could

have more control over trade and the activities of foreign investors, but they also needed to

encourage foreign investment. Initially, the considerable problems caused by the expropriation of

foreign businesses had discouraged investors.

1. Franklin D. Roosevelt, broadcast, 7 April 1932.

2. 1(2) Dumont 286.

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Most businessmen are not that aware of treaties, which they may see as the concern only of

governments. Even when a treaty is seen as relevant to business, it may appear too difficult to

enforce. Many treaties have dispute settlement clauses, but such clauses usually require diplomatic

negotiations and, if that fails, international arbitration or recourse to an international tribunal such as

the International Court of Justice (ICJ). Such settlement procedures may also depend on a further

agreement between both parties. Even on the relatively rare occasions that a dispute goes to

international arbitration or the ICJ, it can take many years, and action will remain in the hands of

ministers, diplomats and other officials. Some businesses may therefore regard treaties as largely

irrelevant to finding quick, practical solutions to commercial problems. They are wrong.

Bilateral investment treaties

One of the answers to a problem of lack of foreign investment was for a developing state to enter

into a bilateral investment treaty (BIT) which, because it guarantees protection of foreign

investments, also promotes such investments.3 The Federal Republic of Germany and Pakistan

concluded the first BIT in 1959. In the 1970s, concern by foreign investors for the need to establish

and maintain a stable climate for investment grew. Expropriation and nationalisation by countries as

diverse as Chile, Iran, Jamaica and Libya demonstrated the need for more effective protection and

led to a growing number of BITs. Capital-exporting nations like France, Japan, The Netherlands, the

United Kingdom and the United States have entered into many BITs. There are now over 2,000,

compared with around 300 in 1990. More recently, the World Bank has been organising fresh

rounds of BIT-making, so bringing into being what is rapidly becoming a homogeneous (but not yet

common) set of rules to govern the global investment market.

A BIT has at least seven distinct advantages for the foreign investor. The first, and most obvious,

is that it avoids interminable and often inconclusive disputes as to what rules of customary

international law govern investment, how the rules should be applied, and how an unresolved

dispute between an investor and the host state can be resolved. (For this

3. This is reflected in the name by which the treaties are called by the United Kingdom, for example the

TurkmenistanUK Investment Promotion and Protection Agreement (IPPA) 1995, UKTS (2003) 47.

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purpose, host state includes the various executive, legislative and judicial organs of the state, right

down to local authorities and local courts.) Without a BIT, an investor in a dispute with a host state

would normally first have to exhaust his local remedies using local law and going through the

local courts up to the final court of appeal before his own state could pursue his rights in

international law, such as they may be.4 Without a BIT, there are no relatively easy (or indeed any)

means of resolving the dispute.

The second advantage is that, if the host state is alleged to be in breach of the BIT, the investor

does not have to ask his own government to take up the claim. Although investors are not parties to

BITs, the treaties give foreign investors the right to take host states to international arbitration, and

they do not have to exhaust local remedies first. In fact, the investor does not have to involve his

own government at all. Nor does the host state have to agree to the arbitration; the process is

compulsory once the investor invokes it. This means that it is quicker and surer, the disgruntled

investor keeping control of the procedure. Nor is there any risk of the dispute becoming just one on

the list of bilateral disputes (including other commercial issues) between the two states. If it were, it

might have to take its turn, or might not be pursued at all by the investors state.

If the dispute is decided in favour of the investor, the BIT requires the award to be enforceable in

the courts of the host state. If a host state were not to legislate for this, or if it were interfere in the

enforcement process, not only would this give rise to a separate claim by the investors state,5 but it

would badly affect the host states standing in the eyes of other states and their investors. The fact

that BITs have such an effective dispute settlement mechanism means that the initiation, or mere

threat, of the arbitration process may well persuade the host state to resolve the dispute without the

need for it to go to trial.

A typical BIT6

Most investor states have model BITs which they follow to varying degrees, depending on the

negotiating strength of the other state. Although the obligations are expressed as reciprocal, in

practice the two parties are a developed state and a developing state, the first representing the

investor, the other the state hosting the investment. No two BITs are identical,

4. See p. 441 below.

5. See Chapter 21 on state responsibility.

6. See Dolzer and Stevens, Bilateral Investment Treaties, The Hague, 1995. See also http://ita.law.uvic.ca.

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but they normally have fairly similar definitions of investor and territory and provisions on fair

and equitable treatment; national or most-favoured-nation treatment (MFN) with regard to taxes,

repatriation of investments, payments, income, profits etc.; expropriation; national or MFN

treatment for losses due to war, revolution, insurrection etc.; the settlement of disputes; and the

duration of the BIT and its continued application to investments made before termination.

The entities protected

BITs protect investments made by nationals of one state in the territory of the host state. Nationals

are defined as natural persons having the nationality of the investors state, and legal persons as

corporations, partnerships, firms or associations incorporated under its laws.7 A third advantage of

BITs is that they often provide that investor companies include also those incorporated under the law

of the host state, but controlled, directly or indirectly, by a company incorporated under the law of

the investors state. An investment made in the Philippines by a local company controlled by a

company incorporated in The Netherlands would be protected under the NetherlandsPhilippines

BIT 1985.8

Investments are often made through companies incorporated in the most favourable jurisdiction

for protection (strategic incorporation), although other important factors must also be considered,

including tax advantages. Thus investments can be made abroad through companies incorporated in

third states. Protection will be further increased when the state of incorporation of the investor

company and the host state are parties to a BIT. A German investment made through a Luxembourg

company would be protected if the host state has a BIT with Luxembourg. Companies also make

investments through subsidiary companies incorporated in the overseas territories of their own or

another state. It is therefore important that the relevant BIT also protects investments made by

companies incorporated in such territories.

Types of investment protected

BITs define investment in broad terms. For example, the UKVenezuela BIT 19959 defines

investment as every kind of asset held and in

7. See p. 182 above on the customary international law problems of determining the nationality of

corporations.

8. 1488 UNTS 304 (No. 25565).

9. UKTS (1996) 83.

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particular, though not exclusively, includes movable and immovable property, shares, contractual

rights, intellectual property rights, and business concessions, including concessions to search for,

cultivate, extract or exploit natural resources (the latter being commonly included).

Two approaches are used to determine which investments will be protected. The more usual is to

protect all aspects of an activity that meet the definition of investment. The other, although much

less often found, is to add a requirement that the investment must be approved in writing by the

other state in order to qualify for protection.

Contractual disputes, whether with a company in the host state or with the host state itself, are not

covered by the BIT, except in so far as the host state has done something that goes beyond a mere

breach of contract, such as operating the contract in a way that benefits local company rivals to the

detriment of the foreign investor.

Treatment of investments

Since BITs have two basic purposes to encourage investments and to protect them they require

the host state to accord fair and equitable treatment to inward investment. This is a basic and

general standard recognised in customary

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international law and is not related to the domestic law of the host state. To give substance to the

concept of fair and equitable treatment, certain BITs list the activities that are to be protected against

injurious measures. This could be said to be the fourth advantage of BITs.

In addition, investments enjoy most-favoured-nation or national treatment. MFN treatment gives

the foreign investor the same rights as those granted by the host state to investors from the mostfavoured

third state. Under national treatment, the investor is granted treatment equal to that

accorded to local nationals. Often, a BIT provides for the standard to be whatever is most favourable

to the investor, which is not necessarily national treatment.

BITs also encourage investment by providing for the free transfer abroad of earnings and capital:

this is the fifth advantage of BITs.

Expropriation and compensation

There are, even now, controversial issues in customary international law relating to the expropriation

of foreign investments. These include even such basic questions as: to what extent does international

law, rather than the legislation of the host state, govern expropriation? Do the rules of international

law prohibit expropriation which is discriminatory or which is not done for a public purpose? How

is compensation to be determined? A BIT resolves these issues as between the parties by regulating

the conditions under which expropriation may be carried out and compensation awarded (the sixth

advantage). Expropriation is prohibited if it is done in a discriminatory way or is not done for a

public purpose, some specifying that the purpose must be related to internal needs. But payment of

compensation for expropriation is required in any event. Because BITs are quite tightly drafted,

some host states have tried to get around the restrictions on expropriation by indirect means. Naked

expropriation is now unusual: physically taking over an oil field is just too crude. But discriminatory

treatment, or expropriation by indirect means, is still a problem, even in some developed

economies.10 Onerous environmental requirements or discriminatory or penal tax regimes can also

amount to expropriation. Some governments have imposed new taxes which in practice apply only

to foreign investments, or which bear more heavily on foreign investors than on local businesses and

which significantly affect the value of the foreign investment. Arbitral awards have found such

methods amount to expropriation.11

But the tables have been turned. Originally, BITs were seen as protecting investors from the

developed world from the governments of the third world. Now some developed countries, in

particular the United States, are being challenged by developing country investors over the

imposition of taxes or other unfair treatment of their investments. And they are using BITs to do

this.

BITs establish in broad terms the basis on which compensation is assessed. The UKVenezuela

BIT 1995 (Article 5(1))12 requires that compensation be prompt, adequate and effective, and

amount to the genuine value of the investment immediately before the expropriation or before the

impending expropriation became public knowledge, whichever is the earlier, and include interest at

a normal commercial rate. The reference to the value immediately before the expropriation became

public knowledge is most important since the very fact of expropriation may well affect the value of

an investment, and there may be no formal announcement, or there may be creeping expropriation.

This will also complicate the determination of the value of the investment.

10. See Reisman and Sloane, Indirect Expropriation and Its Valuation in the BIT Generation (2003)

BYIL 115.

11. See, for example, Metalclad v. Mexico, ILM (2001) 35; 119 ILR 615.

12. See n. 9 above.

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The date when compensation must be paid is another issue. BITs also provide that payment must be

made without delay, and be effectively realisable and freely transferable. Some BITs permit transfer

payments by instalment if the compensation is large.

Civil disturbance etc.

BITs also prescribe a standard of treatment if investments are harmed by war, revolution, a state of

national emergency, revolt, insurgency or riot. If compensation has to be paid, the investor will be

treated in accordance with the standard laid down in the BIT. In some BITs, this will be MFN or

national treatment, or whichever is more favourable.

Dispute settlement

However well drafted, the interpretation and application of the provisions of a BIT may not be easy.

With so much at stake, it is vital that the investor has a sure and effective way of resolving any

dispute. A valuable aspect of BITs is that they provide that, if a dispute between the investor and the

host state cannot be settled within a specified period, the foreign investor has the right to submit the

dispute to international mixed arbitration:13 the seventh advantage. A number of arbitration fora

may be available, the BIT sometimes specifying two or more. The International Centre for the

Settlement of Investment Disputes (ICSID)14 is the obvious choice if both states are parties to the

ICSID Convention. Other fora include the Stockholm Chamber of Commerce, ad hoc tribunals

operating under the UN Commission on International Trade Law (UNCITRAL)15 or the

International Chamber of Commerce.16 Where a BIT gives the investor a choice of forum, in

selecting it the investor will consider the expertise of the administering institution and, among other

factors, its independence, impartiality and confidentiality. However, many BITs specify only one

forum.

Duration of BITs

The initial term of a BIT tends to be ten to fifteen years. When that expires, the BIT either continues

in force indefinitely until terminated by notice

13. See p. 445 below on mixed arbitrations.

14. See p. 379 below.

15. www.uncitral.org.

16. www.iccwbo.org.

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(usually twelve months), or is renewed tacitly for specified periods, unless notice is given before the

end of each (usually ten-year) period. But, even when a BIT has been terminated, it will continue in

force, for a period that can range from ten to twenty years, with respect to investments made before

the actual date of termination.

ICSID

The International Centre for the Settlement of Investment Disputes (ICSID) was established by the

(Washington) Convention on the Settlement of Investment Disputes between States and Nationals of

Other States 1965,17 which entered into force in 1966. Although a separate international

organisation, ICSID, has close links to the World Bank, collaborating with it in meeting requests by

states for advice on investment and arbitration law. The ICSID Secretary-General also acts as the

appointing authority of arbitrators for ad hoc arbitrations. ICSIDs publications include a multivolume

and periodically updated collection of Investment Laws of the World, Investment Treaties,

the bi-annual ICSID Review-Foreign Investment Law Journal (which has the full texts of ICSID

awards),18 and the ICSID Annual Report. The expenses of the ICSID Secretariat are financed out of

the World Bank budget, although the costs of individual proceedings are borne by the parties.

ICSID was specially designed to facilitate the settlement of certain investment disputes but, like

the Permanent Court of Arbitration,19 it is not a tribunal. ICSID merely provides facilities and

procedures for arbitration between a member state and an investor who is a national of another

member state. The Convention does not define an individuals nationality, which is, in principle,

determined by the law of the state of nationality, and a person who is also a national of the host state

(dual national) cannot therefore invoke the ICSID procedure.20 Nor does the Convention define the

nationality of an investor which is

17. The best source of basic documents and of up-to-date information is at www.worldbank.org/icsid/. See

also C. Schreuer, The ICSID Convention: A Commentary, Cambridge, 2001, and Collier and Lowe, The

Settlement of Disputes in International Law, Oxford, 1999. Each has the text of the Convention, which is

also in 575 UNTS 159 (No. 8359); ILM (1965) 524; UKTS (1967) 25.

18. The text of awards from 1991 onwards are available on the ICSID website, www.worldbank.org/icsid/.

See also the ongoing comprehensive collection in International Convention on the Settlement of Investment

Disputes Reports, Cambridge, 1993.

19. See p. 444 below.

20. On dual nationality, see p. 179 above.

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a legal person, although this will often be determined in the agreement under which the two states

have consented to ICSID jurisdiction. But, where the investor is a legal person with the nationality

of the host state, but controlled by nationals of another member state (typically shareholders), the

investor is not regarded as a national of the host state (Article 25(2)(b)).21

Recourse to ICSID arbitration is entirely voluntary, but once a member state and a foreign

investor have given their written consent to ICSID arbitration, neither can unilaterally withdraw it

(Article 25(1)). Consent to ICSID arbitration is commonly found in investment contracts between

member states and foreign investors, and ICSID has produced Model Clauses for this purpose.22

Member states can also give prior consent in their own investment laws (only some twenty have

done so) or, most importantly, in BITs. Consent excludes resort to any other remedies, including

domestic, unless otherwise agreed by the parties to the dispute.23 Consent may be made subject to

the investor exhausting local remedies, but this is unusual for BITs.24 When adhering to the

Convention, or afterwards, a state may inform ICSID that it would not consider submitting certain

classes of disputes (Article 25(4)).25 China has accepted only disputes about compensation for

expropriation or nationalisation. Saudi Arabia excludes disputes about oil or acts of sovereignty, and

Turkey excludes disputes about land. But such exclusions should not have the effect of taking

disputes on those matters out of ICSID jurisdiction if they are otherwise clearly within the scope of

the dispute settlement clause of a contract or a BIT.26

Where an investor and a member state have consented to a dispute being submitted to ICSID, the

state of nationality of the investor is prohibited from giving diplomatic protection to, or bringing an

international claim in respect of, the investor unless the other member state fails to comply with the

award (Article 27). ICSID arbitration is also one of the main mechanisms for the settlement of

investment disputes under four recent multilateral trade and investment treaties: NAFTA, the Energy

Charter

21. This reflects a common provision in BITs: see p. 375 above and Collier and Lowe, The Settlement of

Disputes in International Law, Oxford, 1999, pp. 658.

22. See www.worldbank.org/icsid/.

23. As to the problems this can cause, see C. Schreuer, The ICSID Convention: A Commentary,

Cambridge, 2001, pp. 34596.

24. See p. 374 above.

25. See www.worldbank.org/icsid/pubs/icsid-8/icsid-8-d.htm.

26. Collier and Lowe, The Settlement of Disputes in International Law, Oxford, 1999, p. 62.

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Treaty, the Cartagena Free Trade Agreement and the Colonia Protocol of MERCOSUR (see below).

Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings (Institution

Rules) govern the early stages of the proceedings. After that, the Rules of Procedure for

Conciliation or for Arbitration take over and apply, subject to any changes agreed by the parties to

the dispute.27 Either party to a dispute can invoke the procedure, although it is usually the investor.

An ICSID arbitration can be held anywhere the parties agree, not just at ICSIDs headquarters.

ICSID arbitral tribunals usually have three arbitrators (see the complex provisions of Articles

3740). A tribunal applies either such law as is agreed by the parties or, in the absence of agreement,

the law of the member state party (including its conflict of law rules) and the applicable rules of

international law (Article 42). Failure of a party to appear or present his case is not regarded as an

admission of liability, so the tribunal may proceed with the case and make an award (Article 45).

There is no appeal against an award, but the tribunal may be asked to interpret or revise it

(Articles 5051). Under Article 52, an application to annul an award on the ground of procedural

irregularities is heard by an ad hoc committee of three. Two awards have been annulled on the

ground that the tribunal had manifestly exceeded its powers, although in both cases the committee

has been criticised for going beyond procedural matters and deciding points of law.28 All ICSID

member states, even if they are not parties to the dispute, are required by the Convention to

recognise and enforce an ICSID award as if it were a final judgment of their own courts, but state

immunity from execution is not affected.29 In that event, the matter would have to be dealt with

under the law of state responsibility. The number of ICSID cases has increased significantly in

recent years. By the end of 2004, eighty-six cases had been concluded, with a similar number

pending.

In 1978, ICSID promulgated the Additional Facility Rules authorising the Secretariat to

administer certain types of proceedings between states and foreign nationals that fall outside the

scope of the Convention. The Facility is also available for cases where the dispute is not about

investment, provided it relates to a transaction which has features that distinguish it

27. For both sets of rules, see www.worldbank.org/icsid/.

28. Collier and Lowe, The Settlement of Disputes in International Law, Oxford, 1999, pp 703; Schreuer,

The ICSID Convention: A Commentary, Cambridge, 2001, pp. 8811075.

29. See p. 173 above.

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from an ordinary commercial transaction. The Facility has rarely been used.