By

Nida MahmoodLL.B (Hons), LL.M (Law & Development) London

Ad Hoc development of International Investment Law

Lopsided

Weak Bargaining power of Capital Importing States

MNEs immensely powerful and have a profound impact on the economies

Solution: ‘new national minimum standard of protection’ on the basis of social contract

European Empires and British Colonies

Trading with local communities in Asia, Africa and Latin America

Focus: Investment Protection & Protection of Aliens

Basis: Diplomatic Protection & State Responsibility

International Courts, Scholars began to proclaim, develop & assert these principles◦ PCIJ, Mavromatis Palestine Concessions Case (1924)

◦ See Writings of Grotius, Vattel

During early 20th century, colonial States began to exert their Political & Economic Sovereignty

Nationalization, National Treatment (as it then was)◦ Carlos Calvo: “It is certain that aliens who establish

themselves in a country have the same right to protectionas nationals, but they ought not to lay claim to a protectionmore extended”

Some attempt for balance

Need for protection intensifiedBegan to assert ‘International Minimum Standard of Protection’◦ Elihu Root: “if any country’s system of law does not

conform to that general international standard, althoughthe people of that country may be content or compelled tolive under it, no other country can be compelled to accept itas furnishing a satisfactory measure of treatment to itscitizens”

◦ See also: writings of E Borchard, S.K.B Asante & General ClaimsCommission in the ‘Roberts Claim (1926)

Result: pro investment and investor friendly principles & policies

Consensus between South began to diminish

Political & Economic conditions compelled developing countries to attract foreign investment

Chance to seek greater protection than ever

new standards of protection such as MFN, NT (as it now is), Fair & Equitable Standard etc

No corresponding principle for host Statesthat could offer minimum protection to theircitizens from foreign firms could bedeveloped

My Contention: Such a status quo conflictswith the very foundations of democracy,social contract and other competingprinciples of international law such as humanrights, environment and labor standards.

How the Regulatory freedom of the host States has been curbed by:

a) The Expansive Interpretation of Customary Standards of Treatment

b) The Extensive Application of the Principles contained in BITs

1. International Minimum Standard

Called for basic standards of justice, non-discrimination, due process, fairness, equity& basic human rights including right toproperty to be accorded to foreigninvestors.

This ensured protection against politicalrisks such as that of expropriation.

Two meanings:1. Elaboration of International minimum Standard

If so: test = objective, standard based onexisting body of customary internationallaw of state responsibility for injury to aliens

Neer Case: “treatment of aliens in order to constitute aninternational delinquency should amount to anoutrage, to bad faith, to willful neglect of duty or toan insufficiency of governmental action so far short ofinternational standards that every reasonable andimpartial man would recognize its insufficiency”

Threshold: very high, not capable of being easilybreached

2. If plain and ordinary meaning is adopted

Test = subjective, such that it will suffice that a country either commits an action found to be unfair & inequitable or one that unreasonably interferes or impairs the investments

Threshold: much lower, numerous governmental regulatory actions can be in conflict with this

Trend: to adopt the plain meaning

Carlos Calvo: “It is certain that aliens who establishthemselves in a country have the same right to protection asnationals, but they ought not to lay claim to a protectionmore extended”

Calvo Doctrine [Per Verwey & Schrijver (1984)]

• The principle of absolute equality before the lawbetween nationals & foreigners

• The exclusive subjection of foreigners & theirproperty to the laws & juridical regimes of hostState

• Strict abstention from interference by othergovernments in disputes

Then, Essentially = a standard of subjection

Today however:

UNCTAD Report (1999) defines NT as, “a principle

whereby a host country extends to foreign investorstreatment that is at least as favorable as the treatment that itaccords to national investors in like circumstances”

i.e. NT = more along the lines of securing a levelplaying field and equality of competitiveopportunities

Hence: notion of NT has been reduced to a mere‘standard of treatment’ instead of a ‘standard ofsubjection’ under international investment law.

MFN in the context of foreign investmentmeans that a “a host country treats investorsfrom one foreign country no less favorably thaninvestors from any other foreign country”

Basic idea: to secure equality of competitive opportunities amongst foreign investors inter se

The scope of its application however subject of much controversy, courtesy: Maffezini Case

Traditionally: MFN applicable to substantive provisions only.

Post Maffezini v Kingdom of Spain (2003):

MFN extended to cover even dispute resolution provisions

Decision: potential to render technically bilateral obligations of a BIT into obligations ‘erga omnes’ (binding against all)

Impact: states have begun to expressly extend MFN to dispute Resolution in their BITs (see Austria-Saudi Arabia BIT 2001)

Expropriation: (limited) right of the host States to

nationalize or take away the property of investors provided that certain conditions are met.

In that; expropriation must be for:

Public purpose

Non discriminatory basis

Due process of law

Prompt, adequate and effective compensation

The meaning and scope has however been extended through FTAs, BITs and Cases such as Metalclad Corporation v United Mexican States (2000)

These now cover:

indirect expropriation, or

measures that tantamount to expropriation or

Measures that have the effect equivalent to that of expropriation

Impact: not just actual undertakings but also any regulatory measure that has the effect of undermining the profitability of the foreign business is likely to be caught.

Provide framework in which the investment is to be received and managed within the host State

Imposes obligations on the host States as regards standards of treatment and protection

Codify the customary law principles

New innovative provisions

1. Section on Definitions (Scope/Control)

2. Entry of Investments (ACM or REM)

3. Investment Promotion Provisions (absolute v probable)

4. Umbrella Clauses (elevation of contractual claims to international breaches of BIT)

5. Stabilization Clauses (freeze the law)

Part 1 illustrated ‘how’ foreign investment law curbs the regulatory freedom of the host States.

Part 2 will illustrate ‘what’ the impact of this limitation has been on the local economies and nationals of host States.

Corporate strategies such as transfer pricing can reduce thelevel of corporate tax received by host governments (UNCTAD1999)

Importation of intermediate goods, management fees,royalties, profit repatriation, capital flight & interestrepayments on loans can limit the economic gain to hosteconomy (UNCTAD 1999)

Increased wages and employment may only benefit smallportion of population i.e. wealthy elite (Rosalie Gardiner withref to OECD 1999)

‘Crowding out’ impact/ local business that cannot competeforced to sell/go out of business (e.g. polka/walls)

Subjected to reverse discrimination

nationality shopping

Impact on Social Contract

Market has effectively supplanted democracy

States= agents of MNEs

In direct conflict with the basic purpose of true democracy

The State owes a fundamental duty to its citizens whichcannot and should not be displaced or curbed bydevelopments in international investment law

State has a duty under:◦ International human rights law◦ Regional human rights protection regimes◦ Domestic laws and Constitution

Previously under: ‘Diplomatic Protection’ and ‘StateResponsibility’

This paper revisiting ‘State Duty’ under: ‘social contract’& ‘human rights’ law

The basis for asserting the new ‘NationalMinimum Standard of Protection for HostStates’ can be found in tracing the duty of theState in the notions of social contract andhuman rights law.

Purpose: so that host States have a basisupon which to rely and assert theirsovereignty, regulatory freedom and a basisupon which they can fulfill their democraticmandate i.e. to capacitate the host States

This standard of protection allows the host States the ability and freedom to extend ‘minimum protection’ to the rights of their citizens.

Protection sought from corporate excesses

To capacitate the government to take bare minimum measures needed for the survival of their citizens…

Key word: ‘survival’

Convergence of competing international legal principles may be achieved

Allow States their regulatory freedom without risking arbitration/litigation

Allow States to fulfill their democratic mandate vis a vis their citizens

Achieve level playing field in real sense of the term

Capital importing States often not in the best bargaining position to secure their interests

As a customary standard, will not have to be negotiated independently

It is time to reconsider and revisit the foreign investment law, not in isolation but within the democratic context as well as within human rights and environmental laws

In this regard: the new ‘National Minimum Standard of Protection for Host States’ can be instrumental.

Nida MahmoodInvestment Law Consultant

LL.B (Hons), LL.M (Law & Development) London

For comments and feedback: nidamahmood@yahoo.com