- Investment defined in treaties — Investor — Claims — Creeping expropriation — Public purpose (expropriation and) — Investment ‘in accordance with host state law’ — Sources of international law — Standards of treatment — Takings, legal and illegal (confiscatory measures)
The movement to negotiate the approximately 3,300 investment treaties that have reshaped international investment law did not arise suddenly and miraculously the way Athena sprang from the head of Zeus. The movement finds its origins in nations’ diverse economic interests and the state of international investment law of an earlier time. Those interests and that law shaped and influenced the growth of investment treaties. It is necessary to understand that background not only to comprehend how and why investment treaties have become important instruments of international economic relations but also to interpret and apply the treaty provisions themselves. Moreover, where treaty provisions are silent on particular issues of international investment law, reference must be made to traditional non-treaty principles of international law. The purpose of this chapter is to examine the state of international investment law that exists in the absence of an applicable treaty, as that law remains an important foundation for the international law governing investments.
One of the purposes of law is to protect the legitimate interests of persons, groups, and states and to provide a mechanism for resolving disputes when those interests are in conflict. In any international investment transaction, there are three primary parties in interest: the investor, the host country in which the investment is made, and the home country of the investor. Each party ordinarily uses laws and legal devices to advance its perceived interests.1 Let us examine briefly the interests of the three key participants in the investment process and then consider how those interests have shaped the law.
Since an international investment results in placing a foreign person’s assets under the sovereignty of another country, that country (the host state) ordinarily considers itself to have sole authority over the investment and the activities of the investor in its territory. In its view, the host country’s law is the primary, if not the exclusive, source of rules applicable to international investments and international investors in its territory.
The host country (sometimes referred to as the ‘capital-importing country’) may have a variety of interests in the investment process. Like foreign investors, host country governments view foreign investments in terms of their costs and their benefits, their risks and their rewards. For example, a host country may perceive the benefits of foreign investment as including the creation of new jobs for its nationals, the transfer of new technology and skills to its territory, the creation of improved linkages between the host country and world markets, the development of its natural resources, the strengthening of local industries and means of production, the improvement of its balance of payments—especially when the investment project will yield export earnings—and increased taxes and other revenue resulting from the activities of the foreign investor’s enterprise.
Similarly, most host countries are not unmindful of the potential costs of foreign investment. These costs may include damaging competitive effects on local industries, possible interference in the domestic political process, security risks posed by the foreign ownership of strategic industries and companies, and the introduction of potentially injurious technologies and practices to the local environment, indigenous cultures, and the health and safety of its other inhabitants.
Few host countries, therefore, view foreign investment as an unmixed blessing. Most recognize that it has benefits and costs. As a result, through a variety of devices, a host country government will ordinarily attempt to maximize its perceived benefits and minimize its perceived costs, while still seeking to attract capital from abroad to a greater or lesser extent. Indeed, this is the primary objective of the investment legislation and regulatory schemes of most countries throughout the world.2
Moreover, a host country’s interest in and approach to international investment may change over time. The government of a host state may actively seek foreign capital to achieve national objectives one year, and another government, for ideological or practical reasons, may decide to restrict, curtail, or even seize these very same foreign investments a year later. Thus, promises made to investors through laws and contracts may be changed or cancelled entirely when, acting in what it considers the national interest, a host government repeals those laws and abrogates or demands changes to those contracts.3
The basic interest of any investor is to maximize the returns from its investment and to protect itself from risks to those returns and the investment itself. While a foreign investor has no power to make laws and regulations, it can often invoke existing laws and regulations and construct legal devices to maximize its returns and minimize its risks. Thus, investors make contracts and agreements with agencies in host country governments in order to obtain special privileges and benefits that they would not otherwise have—a dynamic that seems to have existed since the advent of foreign investment.4 For example, foreign investors may request tax exemptions, customs duties privileges, access to natural resources, and even subsidies from host governments in order to encourage them to make an investment.
Such special treatment is not limited to poor developing countries. State and local governments in the United States, for example, grant incentives to foreign investors worth nearly US$50 billion each year.5 If a proposed investment is large enough and important enough, virtually any country, wealthy or poor, will offer incentives to induce the investor to make the investment. Such agreements between investors and host governments become part of the legal framework of the investment and may even be legally enforceable against the granting government. Indeed, it is not an exaggeration to say that concession contracts (allowing foreign investors to operate public services), natural resource agreements, industrial development contracts, stabilization agreements, and infrastructure construction contracts are all intended to be part of the ‘law of the investment’.6 Moreover, powerful investors with especially desirable investment projects may even induce a host government to adopt regulations and legislation designed to favour their particular interests.
(c) Investor home country interests
An investor’s home country may have a variety of interests at stake in investments undertaken by its nationals and companies in other countries. On the positive side, foreign investments by nationals may lead to increased trade with countries in which they invest, secure needed natural resources, lead to a repatriation of profits to the home country from the investor’s foreign operations, and strengthen economic and political relations between the two countries. To the extent that the home country’s government views foreign investment by their nationals as being (p. 49) in the national interest, it is likely to want to facilitate the investment process and assure the protection of those nationals and their investments abroad. As we shall see, one way that home countries have pursued this interest is by concluding investment treaties with host states.
On the other hand, home country governments may also view foreign investments by their nationals as a mixed blessing. They may be concerned that the outward flow of capital could be used more fruitfully at home, or worried about the negative economic impact of industries moving overseas, closed local factories, and discharged workers. In addition, they may fear the loss of tax revenues as a result of foreign investment by their nationals. For strategic reasons, a home country may want to avoid allowing the investment process to strengthen a country it considers an adversary. Accordingly, home countries may seek to limit or curtail investments by their nationals in countries with which they are in conflict—particularly in strategic sectors.7 More generally, large investments by nationals in other countries can ultimately complicate diplomatic relations. For example, their investors may allege that a foreign government has not treated them fairly or properly. In those situations, an investment by a country’s nationals in another country can become the basis for a diplomatic conflict. In response to these concerns and interests, home countries may use their legislative and regulatory powers to foster certain foreign investments by their nationals and curtail others.
(d) Conflicts of interest and their settlement
The potential for conflict among the three parties is ever present. In most instances, conflicts arising out of a foreign investment result in disputes between the investor, on the one hand, and the host country government, on the other. The home country of the investor may become engaged in those conflicts at the request of its national. In such conflicts, the host country often considers the dispute to be subject to host country law and host country legal and judicial processes. Thus, if a host country expropriates an investment owned by a foreign national, it normally considers the question of the legality of the seizure and the amount of compensation due, if any, to be a matter exclusively for its own national law and its own national courts. Host governments tend to see foreign laws and foreign courts as irrelevant to any issues of disagreement with foreign investors and may view any potential interference as an outright challenge to national sovereignty.
Aggrieved foreign investors are often sceptical about the impartiality and quality of justice that they will receive in host country courts and agencies. They often fear that such courts will be subject to the influence of the host government or will be prejudiced against the investor. On the other hand, if the aggrieved (p. 50) investor should try to seek redress in the courts of its home country, not only would the host country be likely to challenge the jurisdiction of such courts, but the home country court may decide of its own accord that it has no jurisdiction on the grounds of sovereign immunity, the act of state doctrine, or for some other reason.8
In view of the perceived limitations of national law and legal processes to resolve investment disputes, investors, with the support of their home countries, have sought to find additional protection in international law and international legal processes, as well as in foreign law. For example, an investor may specifically agree with the host country government prior to an investment that the law applicable to its investment will be international law, general principles of law, or the law of a specified foreign country.9 Even if there is no such specific agreement, if a court or international tribunal finds that the host country’s law includes international law, it may conclude that international law governs the investment.10 In order to enforce such agreements, the investor and the host government may agree to submit any dispute arising out of the investment to an international arbitration tribunal outside the jurisdiction of the host country. Without such an agreement, an arbitration tribunal would have no jurisdiction over either the parties or their dispute.
Similarly, a home country that believes that its nationals have not been treated fairly or properly may have recourse to international law in pursuing claims against the host country. While the home country could not invoke the assistance of an international court or tribunal without a pre-existing agreement with the host country, it could rely on international law in making representations to the offending host country through diplomatic channels, a process known as ‘diplomatic protection’. Consequently, to fully understand the legal framework that may apply to international investment and international investors, one needs to examine the applicable international law.
References(p. 51) 3.3 The Sources of International Law
(a) In general
International law has traditionally been conceived as the law governing relations among states.11 Strictly speaking, in former times, international law did not apply to individuals and private organizations. In the contemporary era, however, international law has given a growing role to non-state actors. One authoritative definition provides:
International law … consists of the rules and principles of general application dealing with the conduct of states and of international organizations and with their relations inter se, as well as with some of their relations with persons, whether natural or juridical.12
As will be seen, international investment law is the area of international law in particular that has given an increasing role to legal and physical persons.
The world is organized on the basis of sovereign and equal states and has no supranational legislature or court with authority to make rules governing such states. As a result, the rules of international law are those that have been accepted as such by the international community. Where is one to find those rules? What are the sources of international law?
d. subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.13
According to this provision, there are three fundamental sources of international law: (1) international conventions; (2) international custom; and (3) general principles of law recognized by states. The basic norm that underlies all three of References(p. 52) these sources of law is state consent. States are sovereign, which means that a state has complete and absolute power and authority over its affairs, its existence, and its territory; however, a state may consent to yield sovereignty to another power. That consent may be manifested in a state’s agreements and its practices.
In addition to these three sources of law, one may refer to two other sources of legal information, ‘judicial decisions’ and the ‘teaching of highly qualified publicists’ as subsidiary means to determine applicable rules of international law. Judicial decisions and the teachings of publicists are not in themselves autonomous sources of international law. They are supplemental or secondary sources, which are used by courts, tribunals, governments, and others to establish what a specific rule of international law is.14 As these three basic international sources of law (in particularized form), as explicated by the two subsidiary sources, constitute the foundations of international investment law, let us examine each briefly.
(b) International conventions
International conventions are binding agreements between or among states. International conventions have a variety of designations in their titles: treaty, agreement, protocol, pact, convention, and covenant, among others. Thus, in the field of investment law, important international sources of law include the North American Free Trade Agreement,15 the Energy Charter Treaty,16 and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.17 Despite their differences in name, each of these three documents has the same binding effect on the states that have consented to them. The particular name given to an international agreement has no consequence as to its legal force or the binding effect it has on its parties.18
The basic international law governing treaties and their interpretation and application is the Vienna Convention on the Law of Treaties (VCLT).19 Like contracts, treaties bind only the state parties which have consented to them. If a state’s internal law is inconsistent with its obligations under the treaty, that state may not invoke that internal law as a justification for not performing its obligations under the treaty.20 Thus, for example, if a state has entered into a treaty in which it promises not to expropriate property without payment of full compensation, it may not in an international proceeding use a domestic law that authorizes the taking of property without compensation as an excuse for failing to live up to its References(p. 53) treaty obligations. On the other hand, states that are not signatories to an international agreement or treaty are usually not bound by its terms. But, if a treaty gains wide enough acceptance among states, it will be deemed to constitute international customary law and will have binding effect even on non-signatories.21
Article 38 of the ICJ Statute cites international conventions first in its listing of the sources of international law, but it does not specifically state that they will have precedence over the other two sources, that is, customary international and general principles of law.22 It is generally agreed that should a custom of international law conflict with a treaty provision, the treaty provision will prevail unless the custom is determined to fall under Article 53 of the VCLT, which describes ‘peremptory norm[s] of general international law’, sometimes referred to as jus cogens. A peremptory norm of international law is one that is ‘accepted and recognized by the international community of States as a whole as a norm from which no derogation is permitted and which can be modified only by a subsequent norm of general international law having the same character’.23
Just as national legislation and regulation have increasingly supplanted custom and common law to become the legal foundation of domestic economies, international treaties have increasingly become the foundation for international economic relations. As will be seen, this shift has been particularly clear in the area of international investment, and the reasons for it will be explained in more detail in Chapter 4. At the same time, the existence of a treaty does not mean that the other sources of international law, namely custom and general principles of law, are not relevant or applicable. Often treaties incorporate concepts whose full meaning cannot be understood without reference to customary international law. Moreover, treaties may specifically declare that the other sources of international law are to supplement the treaty if its provisions are silent about a particular issue or problem. Thus, for example, if an investment treaty declares that an investor References(p. 54) is to be given ‘full protection in accordance with international law’, an arbitration tribunal would have to refer to customary international law to determine the extent of protection provided.24 More generally, virtually all investment treaties specifically provide that international arbitration tribunals—in deciding investor state disputes—are to apply, in addition to the treaty text, ‘the applicable rules of international law’,25 a term that encompasses all of international law derived from all its sources. As will be seen in Chapter 16, tribunals must refer to customary international law in determining the consequences of and the compensation for investment treaty violations.
(c) International custom
International custom is a second source of international law under Article 38 of the ICJ Statute. International custom is defined simply as ‘a general practice accepted as law’. Thus, a customary rule of international law must meet two criteria: (1) it must be a general practice of states; and (2) states must engage in that practice out of a sense of legal obligation.26 With respect to the first criterion, the practice of states consists of the actions states undertake to carry out government business. These can include policy pronouncements, statements at international conferences, diplomatic communications and correspondence with other states, national legislation, decisions of domestic courts, and other actions taken by governments in respect of international matters.27 To satisfy this first criterion, the practice, according to the ICJ, must be ‘both extensive and virtually uniform’.28 The practice need not be particularly long-standing to be a custom, for as the Court has also stated, ‘the passage of only a short period of time is not necessarily, or of itself, a bar to the formation of a new rule of customary international law’.29
Just because states act in a particular way does not mean that such actions automatically constitute customary international law. States must act in a particular way out of a sense of legal obligation. This is the second requirement under Article 38, the requirement of opinio juris sive necessitatis, that state practice should ‘occur[ ] References(p. 55) in such a way as to show a general recognition that a rule of legal obligation is involved’.30
These two requirements for international customary law can make it difficult to establish a particular rule of customary law even under the best of conditions. Where there is significant disagreement among states or significant differences in practice, finding a rule of customary international law may be next to impossible. As will be seen, the field of international investment law has generated significant disagreement among nations as to the nature and content of applicable international rules. As a result, in many forums the very existence of customary international investment law has been questioned, if not challenged outright, over the years.
(d) General principles of law
The third and final source of international law is the ‘general principles of law recognized by civilized nations’.31 This source of law refers to the legal principles that are common to the world’s major legal systems.32 These ‘general principles’ are often seen as a source to help fill in gaps where no applicable treaty provision or international custom exists. While certain general principles, such as pacta sunt servanda, have emerged to become custom, tribunals will generally be hesitant to find such a general principle, unless it is clear that there is broad acceptance in the world’s legal systems.33
(e) Subsidiary sources
Article 38(1)(d) of the ICJ Statute states that the Court may apply ‘judicial decisions’ and ‘the teachings of the most highly qualified publicists of the various nations’ as ‘subsidiary means for the determination of rules of law’. It is clear that ‘judicial decisions’ and the ‘teachings of publicists’ are not themselves sources of international law but merely means for ascertaining the content of the three specified sources of law. The usual dictionary definition of ‘subsidiary’ is ‘functioning in the provision of aid or support’;34 therefore a ‘subsidiary means’ is something that aids or supports the determination of rules of international law.
References(p. 56) A further question concerns the precise meaning to be given to these two specified subsidiary means. The ICJ Statute does not define the term ‘judicial decisions’ or limit it to the decisions of any particular type of judicial body. Thus, the decisions of domestic courts as well as those of international tribunals would be included within the term. Similarly, since the term ‘judicial’ may be defined as ‘the function of judging’,35 one may interpret a ‘judicial decision’ as one that emanates from the process of judging. Thus, the decisions of arbitrators would be included within the definition of ‘judicial decision’ for purposes of interpreting Article 38(1)(d) of the ICJ Statute. International practice supports this interpretation. In fact, the pleadings by advocates before international tribunals and the decisions of the tribunals themselves are filled with references to decisions by courts, arbitration tribunals, and similar bodies throughout the world.
While the term ‘publicist’ may have other meanings in ordinary parlance, it has only one meaning in the international domain: ‘an expert in international law’.36 The ‘teachings of … publicists’ referred to in Article 38(1)(d) of the ICJ Statute may take many forms, including books, articles, lectures, legal opinions, and testimony before official and academic bodies. Moreover, they may include the collective, as well as the individual, work of international law experts, such as the decisions of the International Law Commission and professional bodies such as the American Law Institute. For example, the Draft Articles on Responsibility of States for Internationally Wrongful Acts, issued by the International Law Commission,37 is widely cited by advocates and arbitrators in treaty-based investor–state arbitrations as stating principles of customary international law applicable to such cases.
Investment treaties, as will be seen, have evolved and are interpreted against a background of customary international law and general principles of law relating to foreign investment. As a result, in order to understand the history of investment treaties and in order to interpret current treaty provisions, it is necessary to refer to the history of customary international law as well as to its current status. The purpose of this section is to provide that background.
At the outset, it must be acknowledged that this area of international law has been fraught with disagreement among states, particularly between developed, capital-exporting states, on the one hand, and developing, capital-importing References(p. 57) states, on the other. Doctrines and rules that seemed settled in earlier times, particularly during the era of colonialism, have been challenged as the territories formerly under colonial rule emerged as fully independent and sovereign states after the end of World War II. In that earlier era, the effort to develop principles of customary international law respecting the rights of investors abroad evolved out of the law of state responsibility for injury to aliens and alien property.38 The basic questions asked by this area of international law are: (1) What is the legal standard that states must respect in their treatment of aliens living and working in their territories? (2) What means are available for aliens and their home governments to ensure that host countries live up to those standards? (3) How specifically do those standards and means of enforcement apply to investment activities of aliens in host countries? We consider each of these questions in turn.
(b) Standards of treatment owed to aliens by host states
There is a fundamental, recurring issue in international law and international relations: What is the standard of treatment that a host country government owes to aliens residing and working in its territory? One possible answer is that a host government need not treat aliens any better than its own nationals. This view incorporates the principle of equality. This principle draws its justification from the fact that as an equal, sovereign state in the international system a host country is not subject to any legislative authority other than its own. Moreover, a foreigner who voluntarily takes up residence in a host country must accept that he or she is subject to host country law and is assumed to understand the risks that such a situation entails. In a famous exchange of correspondence between US Secretary of State Cordell Hull and Mexican Foreign Minister Eduardo Hay concerning the expropriation of agricultural land in Mexico that was owned by US citizens but that equally affected Mexican owners, the Mexican Foreign Minister argued the principle of equality quite forcefully: ‘the foreigner who voluntarily moves to a country which is not his own, in search of a personal benefit, accepts in advance, together with the advantages he is going to enjoy, the risks to which he may find himself exposed. It would be unjust that he should aspire to a privileged position’.39
An opposing view, which evolved in the nineteenth century among European countries and the United States, was that a host state has an obligation under international law to observe an international minimum standard that provides for a minimum set of principles which states, regardless of their domestic legislation and practices, must respect with regard to the treatment of aliens and their property. This doctrine takes into account the possibility that the standards prevailing in a given state may be so low that, even if nationals and aliens are treated alike, the norms of international law may be violated.40
There is a standard of justice, very simple, very fundamental, and of such general acceptance by all civilized countries as to form a part of the international law of the world. The condition upon which every country is entitled to measure the justice due from it to an alien by the justice which it accords to its own citizens is that its system of law and administration shall conform to this general standard. If any country’s system of law and administration does not conform to that standard, although the people of that country may be content or compelled to live under it, no other country can be compelled to accept it as furnishing a satisfactory measure of treatment to its citizens.41
On the question of the treatment of aliens by host states, including foreign investors, there is thus a fundamental tension between the equality principle and the minimum international standard principle. This tension has in varying degrees pervaded the evolution and content of international investment law over the years. While the partisans of each view often justify their positions by reference to abstract notions of justice, the fundamental interests of nations have also shaped the debate and influenced positions on the question. Countries that had expanding foreign economic interests have quite naturally sought to protect those interests by advancing the principle of a minimum international standard of protection. Countries that had few foreign interests and saw themselves as the target of other countries’ expansionist activities quite naturally asserted the equality principle as a means to protect themselves and to assure their full sovereignty over foreign economic actors in their territory.
During the nineteenth and the first half of the twentieth centuries, with the expansion of western economic powers, the spread of European colonialism, and American influence in Latin America and Asia, the principle of a minimum international standard became dominant, at least among western states. For example, Lauterpacht, in the fifth edition of Oppenheim, International Law, stated:
It is a well-established principle that a State cannot invoke its municipal legislation as a reason for avoiding its international obligation. For essentially the same reason a State, when charged with a breach of its international obligations with regard to the treatment of aliens, cannot validly plead that according to its Municipal Law and practice the act complained of does not involve discrimination against aliens as compared with nationals. This applies in particular to the question of treatment of the persons of aliens. It has been repeatedly laid down that there exists in this matter a minimum standard of civilization, and that a State which fails to measure up to that standard incurs international liability. (emphasis added)42
Despite this affirmation of a minimum standard of international law, legal scholars and government officials in the countries subject to the intervention of (p. 59) European and American influence continued to assert that customary international law did not recognize such a standard. Probably the most important formulation of this position was that of the Argentine jurist and foreign minister Carlos Calvo (1824–1906), whose ‘Calvo doctrine’ was adopted throughout Latin America at a time when many countries felt threatened by US domination. Calvo argued that a sovereign independent state was entitled by reason of the principle of sovereign equality to complete freedom from interference by other states in any form, whether by diplomacy or by force. Therefore, according to the Calvo doctrine, when an alien suffers an alleged injury his or her only remedies are local ones. In the absence of a denial of justice, which Calvo defined narrowly, diplomatic protection is unavailable to an injured alien. Calvo argued that aliens and nationals are entitled in principle to equal treatment, but once equality of treatment is granted, the host state has fulfilled its obligations regardless of whether the alien or his or her state is dissatisfied with the treatment received. Thus, Latin America’s response to the international minimum standard was the doctrine of national treatment.43 European governments, the United States, and many international forums and tribunals tended to dismiss this approach as not representing customary international law. Nevertheless, as will be seen later in this chapter, individual Latin American countries took significant measures to implement the Calvo doctrine through the inclusion of ‘Calvo clauses’ in their constitutions, legislation, and contracts with foreign companies.
(c) The application and enforcement of a minimum standard
The debate between the minimum standard and national treatment principles was by no means a purely theoretical one. It had its application in diplomatic relations between nations and in various forums of international adjudication in the nineteenth and twentieth centuries.
Investors, for example, had little effective means to press claims directly against offending host governments based on the international minimum standard of treatment. Customary international law did not give individuals or companies the right to press such claims directly against an offending host government nor did it provide them with any other enforcement mechanism. Rather, investors had to rely on their home governments to give them ‘diplomatic protection’.
The interest of investor home governments in protecting their nationals abroad was not just to satisfy powerful domestic constituencies but also to advance (p. 60) important economic and political interests abroad. Their investors were one means of achieving that goal. Aliens have always been subject to discrimination and abuse in foreign countries. What right under international law did their home governments have to protect them? Drawing on the work of the eighteenth-century Swiss philosopher, diplomat, and jurist Emerich de Vattell (1714–67), who declared ‘[w]hoever ill-treats a citizen injures the state, which must protect that citizen’,44 countries developed the concept of the diplomatic protection of aliens. Thus, under international law a host country that injured an alien was simultaneously injuring the state of that national and that state had the right to protect itself from such injurious acts.45
It is an elementary principle of international law that a State is entitled to protect its subjects, when injured by acts contrary to international law committed by another State, from whom they have been unable to obtain satisfaction through the ordinary channels. By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights—its right to ensure, in the person of its subjects, respect for the rules of international law. … Once a State has taken up the case on behalf of one of its subjects before an international tribunal, in the eyes of the latter the State is sole claimant.48
The concept of ‘diplomatic protection of aliens’ by their home states did not receive universal acclaim. As one might imagine, certain states, notably those in Latin America, viewed the concept as another tool by which the United States and European powers could undermine their national sovereignty. As noted earlier in this chapter, the Calvo doctrine represented an opposing view, holding that in pressing a claim against a host government a foreigner had no right to seek the diplomatic protection of its government and that customary international law did not allow a home country to extend diplomatic protection to its nationals living and working in another sovereign state.49
Governments of injured aliens nonetheless sought redress through diplomatic representations for injuries suffered by their nationals in host countries. A famous example of such a representation was the exchange of diplomatic correspondence, referred to earlier in this chapter, between Mexico and the United States concerning the expropriation of agricultural land owned by Americans in Mexico. In its note of 3 August 1938, the Mexican government, through its minister of foreign affairs, not only contested the right of the United States to demand compensation for the agricultural lands expropriated by Mexico but also argued that the United States had no right at all to intervene on their behalf.50 In support of his position, the Mexican minister of foreign affairs invoked Article 9 of the Convention on the Rights and Duties of States, which was signed at Montevideo in 1933. This Convention gives complete jurisdiction to states over inhabitants within their national territory, meaning that ‘nationals and foreigners are under the same protection of the law and the national authorities, and foreigners may not claim rights other than or more extensive than those of nationals’.51 US Secretary of State Cordell Hull in his reply asserted that ‘when aliens are admitted into a country the country is obligated to accord them that degree of protection of life and property consistent with the standards of justice recognized by the law of nations’.52 He denied that this was a claim of special privilege in contravention of References(p. 62) the Montevideo Treaty and maintained that confiscation could not be excused by the ‘inapplicable doctrine of equality’.53
During the nineteenth and twentieth centuries, various international tribunals applied the minimum international standard to protect aliens in foreign countries and to recognize the right of home countries to extend diplomatic protection to their nationals injured abroad. For example, in 1926 the Permanent Court of International Justice, in the famous Chorzów case, recognized ‘the limits set by generally accepted principles of international law’ regarding the treatment of aliens, and stated that ‘the only measures prohibited are those which generally accepted international law does not sanction in respect of foreigners’.54
it not infrequently happens that under the rules of international law applied to controversies of an international aspect a nation is required to accord aliens broader and more liberal treatment than it accords to its own citizens under municipal laws. The reports of decisions made by arbitral tribunals long prior to the Treaty of 1923 contain many such instances. There is no ground to object that this amounts to a discrimination by a nation. It is not a question of discrimination but a difference in their respective rights and remedies. The citizens of a nation may enjoy many rights which are withheld from aliens, and, conversely, under international law aliens may enjoy rights and remedies which the nation does not accord to its own citizens.55
Other claim cases reached similar conclusions, finding that the test, broadly speaking, is whether aliens are treated in accordance with ‘the ordinary standards of civilization’56 and whether the ‘international minimum standard has been extended References(p. 63) to cover the instances of discrimination against aliens, denial of justice and injuries to aliens’ economic interests (eg expropriation)’.57
Despite the pronouncements of diplomats and international tribunals, foreign investors considered diplomatic protection to be far from a complete protection for their property and activities in host countries. For one thing, the existence of diplomatic protection depended entirely on the willingness of the investor’s home country to extend it in any given situation. Home country governments were not then, and are not now, required to take up or ‘espouse’ a claim against an offending host state, no matter how egregious its conduct might have been. The decision to take a claim up or not, and to pursue it with vigour or not, is completely within the discretion of the home government.
Second, once the home country government has espoused the claim, it effectively ‘owns’ it. It controls how the claim will be made, what settlement if any to accept, and whether any portion of that settlement should be paid to its aggrieved national. Thus, for example, the home country might settle or abandon a claim for injury to its nationals if it judged that this is justified by other factors in its relations with the host country, such as security or broader economic concerns. In such a situation, the injured investor is left with no redress either against the offending host country or its unsympathetic home country.
A further complication involved a home country’s ability to extend diplomatic protection to nationals who are shareholders in foreign corporations. In the famous Barcelona Traction case,58 Belgium sued Spain in the ICJ on behalf of injured Belgian shareholders of a Canadian corporation, Barcelona Traction. Barcelona Traction was supplying electricity to that Spanish city when it was expropriated by the government of Spain. The Court ruled that Belgium had no right to make a claim on behalf of the Belgian shareholders, since the primary party injured by the expropriation was the Canadian corporation, not the Belgian shareholders. Although this decision has been strongly criticized over the years,59 it remains difficult for shareholders of one nationality to press claims for injuries to a corporation that was incorporated in a country other than that of their nationality—an obstacle that is particularly problematic, since investors commonly purchase shares in companies and corporations organized or with headquarters in other countries.
And finally, once the era of gunboat diplomacy ended, the process of diplomatic protection of aliens and foreign investors in many cases did not necessarily result in a meaningful remedy. Often, nothing more than an exchange of oral or written statements took place between the two states, and the injured investor received no compensation. The investor’s home state could bring the matter to an international tribunal only if the offending state agreed to submit the case References(p. 64) to that tribunal, whose jurisdiction always depended on the consent of the states concerned. Thus, diplomatic protection proved to be a very uncertain and often ephemeral remedy for injured international investors.
(a) In general
Traditionally, foreign investors in host countries have had two primary concerns: (1) the protection of their investments from expropriation or other unjustified interference by host governments with their property rights; and (2) the assurance that host country governments will respect the contracts and other commitments they have made with investors. During the nineteenth and twentieth centuries, when western states dominated the international system, their governments sought to develop customary international law to deal with both problems.
With respect to expropriation, international law has always recognized the state’s power of eminent domain to take property—at least for public purposes and on payment of compensation. Indeed, this power, which is derived from the sovereignty of the state over all things within its boundaries, is an essential attribute of state sovereignty. In fact, a state may not validly bind itself not to exercise it. The justification for this principle is that a state’s fundamental purpose is to safeguard the public interest of its citizens and, if such interest will be properly safeguarded by nationalization, the state must be free to pursue that course of action.60
At the same time, western governments and jurists appeared to agree that even though a government taking of foreign property may be legal under host country law, such a taking was also subject to certain minimum standards of international customary law. One example of such a standard was that customary international law permitted expropriation of an alien’s assets provided it was for a public purpose, was non-discriminatory, and was accompanied by compensation to the injured alien.61 In the 1903 Upton case, the Mixed Claims Commission held that ‘the right of the State … to appropriate private property for public use is unquestioned, but always with the corresponding obligation to make just compensation to the owner thereof’.62 In the De Sabla case, the United States–Panama General Claims Commission held: ‘It is axiomatic that acts of a government in depriving an alien of his property without compensation impose international responsibility.’63 And in one of the leading pre-World War II cases on the subject, the References(p. 65) Permanent Court of International Justice in the Chorzów Factory case,64 which involved the expropriation by Poland of German-owned industrial property in Upper Silesia, declared that in the event of expropriation the expropriating state had the obligation to pay the ‘just price of what was expropriated’. This meant ‘the value of the undertaking at the moment of dispossession, plus interest to the day of payment’.
A consideration of this principle requires a discussion of the meaning of its constituent elements.
(b) Taking under international law
In any case of an alleged interference by the host country with a foreign investment, one must first of all determine whether such interference constitutes a ‘taking’ under international law that would thereby give rise to the application of international legal principles of expropriation. In years past, such a determination was not difficult to make, since the host country government, in effecting an expropriation or nationalization, would specifically transfer title of the foreign investor’s assets to the government or a public agency. Such instances were References(p. 66) clearly an exercise of the power of eminent domain. In recent years, however, governments have engaged in more subtle means of interference—often through the arbitrary or discriminatory exercise of their police power—by imposing onerous regulations and taxation upon the investor or the investment project. This approach, sometimes referred to as ‘creeping expropriation’ or ‘regulatory taking’, may gradually achieve the same result that a formal act of expropriation achieves immediately. Thus, through the imposition of discriminatory taxes or various forms of regulation, the host country government may induce the investor either to abandon the investment entirely or to transfer it to the host country government at a bargain price.65
While western views of international law hold such use of state regulatory power to be a taking in certain situations,66 they also recognize that a state is not responsible for losses resulting from the bona fide exercise of regulatory or taxation authority. So long as such action is not exercised discriminatorily, that authority is commonly accepted as part of a state’s police powers.67 Determining whether a specific governmental regulation is an ordinary exercise of police power or is instead a disguised form of expropriation is not an easy matter, since the precise boundary between the two situations is not always clear. For example, the commentary to the ALI Restatement (Third) asserts that regulatory action that is ‘confiscatory’ or ‘unreasonably interferes with’ a foreign national’s use of his property is to be considered a taking. These concepts, of course, are subject to a variety of interpretations. In the Reporters’ Notes, the Restatement (Third) further contends that the distinction between a taking requiring compensation and a lawful exercise of police power not requiring compensation ‘is similar to that drawn in United States jurisprudence for purposes of the Fifth and Fourteenth Amendments to the Constitution in determining whether there has been a taking requiring compensation’.68
In determining the nature of a regulatory action, one might also consider the government’s intent. A determination of such intent could be established, for example, if the government issued a series of discriminatory regulations making continued profitable operation impossible, purchased the property from the investor at a low price, and then later rescinded the regulations.
A government can also effect a taking under international law if it nullifies important contractual relationships with the investor. Cancelling a concession agreement or investment contract with an investor could constitute a taking, since the contractual right to operate a concession or carry out an investment project is (p. 67) a valuable property right. Moreover, if a host country, in order to raise revenues, imposes a levy upon a mining concession in violation of an agreement, that levy might constitute a taking even if the investor continues to control the mining investment.69
A taking can also occur where a government, instead of asserting property rights in foreign-owned property, merely seizes control of an investment. For example, a government might appoint a new manager to administer a property or operate the investor’s business. Provided the deprivation of the investor’s right of control is not merely ephemeral, this might also qualify as a taking.70
(c) Public purpose
The traditional rules of international law require that the taking be for a public purpose; however, this requirement has not figured prominently in international claims in recent years. For one thing, the concept is extremely broad and is not subject to precise definition. Indeed, it can be argued that virtually any expropriation by a government is done for a public purpose, such as developing the national economy, executing development plans, or protecting foreign currency reserves. On the other hand, a mere assertion by an expropriating government that the expropriation was for a public purpose or ‘in the public interest’, without specifying the nature of that public purpose or interest, would seem not to be sufficient to establish the existence of the public purpose requirement to justify the legality of the government taking.71 The principal problem for investors challenging an expropriation for lack of the requisite public purpose is that there is to be no effective means under customary international law for reviewing whether or not a particular expropriation is for a public purpose.72
References(p. 68) (d) Discrimination
Although traditionally international law has prohibited discriminatory taking, the application of this principal also poses considerable difficulties. Often, the investor stands in a class by itself within the host country because nationals or other foreigners do not own comparable investments. Consequently, it is difficult to establish whether or not an act of expropriation directed against a foreign investor is discriminatory in nature. For example, if a foreign consortium owns the only mine in a small developing country, it is difficult to show that the nationalization of that mine was discriminatory. Unlawful discrimination requires the government of the host country to make arbitrary or unreasonable distinctions among investors. It may well be that the reasons for the expropriation bear a reasonable relationship to the security interests or economic policy of the host government. As a practical matter, injured investors will only claim discrimination or lack of public purpose if the host country government does not provide adequate compensation.
In contemporary international economic life, the essential objective of an injured investor is to secure adequate compensation for its expropriated investment. Even though the taking may not have been for a public purpose, and even though it may have been grossly discriminatory, no investor has a realistic hope—through legal, diplomatic, or other means—of obtaining restitution of the nationalized property, unless, of course, a radical change of regime takes place in the country of expropriation. Indeed, even if the expropriation has been discriminatory and not for a public purpose, most investors would not raise a claim if they received adequate compensation.
Generally speaking, almost all of the nations in the world today would claim to recognize the principle that a state which has expropriated the property of a foreign investor has the obligation to pay compensation to that investor. However, all nations do not agree on the appropriate standard of compensation for expropriation or on its application in specific cases. One traditional formulation of the appropriate standard is the ‘Hull formula’, which was derived from the correspondence, previously referred to, between US Secretary of State Cordell Hull and Mexican Minister of Foreign Affairs Eduardo Hay. In that correspondence, Hull declared that the property of aliens was protected by an international standard under which expropriation was subject to limitations, which required that there be ‘prompt, adequate and effective compensation’.73 In its international relations, the US government has consistently maintained that the standard to be applied in cases of expropriation is the ‘prompt, adequate, and effective standard of compensation’.74 As will be seen, the United (p. 69) States and various European countries have at times incorporated the Hull formula into their investment treaties.
Even if the present case should be regarded as one of legal expropriation, the fact remains that the effect was to dispossess private persons from their rights and privileges of a private nature conferred upon them by the concession, and that … the State, which is the author of such dispossession, is bound to make full reparation for the injuries done by it.77
The fundamental ground of this claim as presented is that the claimant was deprived of valuable rights, of moneys, properties, property and rights of property by an act of the Government which he was powerless to prevent and for which he claims reimbursement. This act of the Government may have proceeded from the highest reasons of public policy and with the largest regard for the state and its interests; but when from the necessity or policy of the Government it appropriates or destroys the property or property rights of an alien it is held to make full and adequate recompense therefor.78
References(p. 70) In the Norwegian Claims case, the Permanent Court of Arbitration held that the claimants were entitled to ‘just compensation … under the municipal law of the United States, as well as under the international law’.79 One commentator noted:
Some sixty international claims tribunals sat between the early nineteenth century and the Second World War, many dealing with claims arising out of takings of alien property. Although their reasoning is sometimes obscure, none held that the appropriate measure of compensation was less than the full value of the property taken, and many specifically affirmed the need for full compensation.80
As far as rules regarding determination of the precise amount of compensation to be paid in specific cases are concerned, other commentators observed that ‘it is extremely difficult, if not entirely impossible, to set out systematically the criteria which seem to have been observed in practice’.81 Although the Permanent Court of International Justice in the Chorzów Factory case set down, albeit indirectly, the criterion of the ‘value of the undertaking at the moment of dispossession, plus interest to the day of payment’,82 this formula has not been followed in the same way in all cases.83
Following more general usage, the Restatement (Third) of the Foreign Relations Law of the United States, unlike its predecessor, does not use the formulation ‘prompt, adequate, and effective compensation’. Rather, it simply provides for the payment of ‘just compensation’. For compensation to be just, ‘it must, in the absence of exceptional circumstances, be in an amount equivalent to the value of the property taken and be paid at the time of taking, or within a reasonable time thereafter with interest from the date of taking, and in a form economically usable by the foreign national’.84 The Restatement’s view would seem to represent the current position of most western states on the standard of compensation due to investors for the illegal acts of host states under international law. More recently, that view is reflected in Article 31(2) of the Draft Articles on Responsibility of States for Internationally Wrongful Acts,85 which provides that a state responsible for an internationally wrongful act is ‘under an obligation to make full reparation for the injury caused by [its] internationally wrongful act’.
Under traditional principles of customary international law, a state that is a party to a contract with a foreign national may be liable for its repudiation or breach in certain instances. According to the Restatement (Third) of the Foreign Relations References(p. 71) Law of the United States, a state is liable: (a) if the repudiation or breach is discriminatory or motivated by non-commercial considerations and compensation is not paid; or (b) if the foreign national is not given an adequate forum to hear his or her claim or is not compensated. On the other hand, if a state repudiates or breaches a commercial contract with a foreign national for commercial reasons, for example, where performance becomes uneconomical, international law will not be applicable. In such cases, where the state is acting as any private contractor might, the state is only liable under the law applicable to the contract.86 Nonetheless, breaches of concession agreements, development contracts, and investment contracts may be akin to an expropriation, since through such a breach the investor is effectively deprived of its investment.87
As a general rule, contracts between a state and a foreign private investor are governed by the law of that state.88 At the same time, the parties to that contract may agree to a choice of law clause expressly stipulating that the contractual relationship shall be governed, either wholly or in certain particulars, by a legal system or specified legal rules other than the municipal law of the contracting state, including the principles of international law. Often in major contracts involving large projects or long-term concessions, in order to gain added protection against unjustified cancellation by the host country government, the foreign investor will include a clause stating that the contract is to be governed by general principles of international law or general principles of law common to the world’s legal systems.89 The purpose of this type of clause is to ‘internationalize’ the contract and thus protect it from attempts by the state party to cancel or modify it without the consent of the investor. In order to give additional assurance of the enforceability of their contract, the parties might also agree to settle any dispute arising under the agreement by international arbitration rather than in the courts of the host country.
References(p. 72) By analogizing between treaties among states and contracts between a state and an alien, various jurists and tribunals have argued that the principle of pacta sunt servanda is applicable to such contracts as a matter of international law. The basis of this view lies in the contracts’ international character and also the fact that failure to apply the principle would place the validity and effectiveness of obligations made to aliens at the mercy of the unilateral decisions of the host country government. Moreover, it has also been argued that the principle of pacta sunt servanda is applicable as one of ‘the general principles of law recognized by civilized nations’. Thus, once a state has entered into an international agreement with an investor, such state must abide by that agreement. Various tribunals have confirmed that the principle of pacta sunt servanda underlies contracts entered into by states and foreign investors.90 The Permanent Court of International Justice, in the Chorzów case, also confirmed that a lawfully concluded public contract is a property or ‘vested’ right in the technical sense.91 Contractual rights, like any other property rights, are protected by international law against confiscation by the state party to the contract. According to the traditional view of international law prevailing in western countries, a state that breaks its obligations of non-interference with a public contract violates both the minimum standards of international law and the general principles of law recognized by civilized nations.
Not all countries meekly accepted the western position on the customary international law governing foreign investments. Indeed, there were numerous challenges to western views, and those challenges had an impact on the investment treaty movement that emerged after World War II. The three most notable challenges were: (1) the Soviet challenge; (2) the Latin American challenge; and (3) the post-colonial challenge. Each of these challenges is considered briefly.
References(p. 73) (b) The Soviet challenge
The October Revolution of 1917 in Russia and the subsequent establishment of the Dictatorship of the Proletariat resulted in the confiscation of foreign private property on a vast scale.92 The new Soviet government refused to make restitution or pay compensation for the seized foreign property. In response, the western governments of nationals affected by the seizures lodged vigorous protests with the Soviet government. For example, on 13 February 1918, the US Ambassador protested in the name of fourteen Allied powers and sixteen neutrals, stating: ‘In order to avoid any misunderstandings in the future, the representatives at Petrograd of all the foreign powers declare that they view the decrees relating to the repudiation of the Russian state loans, the confiscation of property and other similar measures as null and void insofar as their nationals are concerned.’93
At the Brussels Conference on Russia of October 1921, the delegates passed a resolution stating what they perceived as a well-established principle of international law on the question of expropriation: ‘The forcible expropriations and nationalizations without any compensation or remuneration of property in which foreigners are interested is totally at variance with the practice of civilised states. Where such expropriation has taken place, a claim arises for compensation against the Government of the country.’94
In the 1920s, the Soviet Union, still unrecognized by the major powers and with an economy in ruins, launched its New Economic Policy and actively sought to obtain international recognition and economic assistance. As part of this effort, it expressed a readiness to consider foreign claims arising out of the expropriations that followed the Russian Revolution.95 However, the offer was conditioned on a satisfactory settlement of the Soviet Union’s own claims against the western countries that had militarily intervened in Soviet territory after the October Revolution. Throughout this period, the Soviet Union refused to recognize the duty of a state, as a principle of customary international law, to make restitution or pay compensation for foreign property it had seized.96
(p. 74) After the failure of the 1922 Cannes and Hague conferences seeking a possible multilateral settlement of the various claims and counter-claims between Soviet Russia and western countries, individual western governments, desiring access to the large Russian market, began to conclude bilateral agreements with the Soviet government. The result of these efforts was generally little compensation compared to investors’ actual losses. In 1924, for example, the British concluded a treaty in which they agreed in principle to Russian counter-claims based on the British intervention that occurred after the Russian Revolution and recognized the possibility of setting them off against claims by British nationals arising out of Soviet confiscations. The British also promised a financial loan, while the Soviet Union, in its turn, undertook to open negotiations for these purposes with interested parties in the United Kingdom. A separate agreement was reached between the Soviet government and one of the nationalized British enterprises, Lena Goldfields Limited, whereby the enterprise renounced its claims in return for the concession of its former properties.97 A subsequent change in Soviet policy led to a revocation of the concession and, ultimately, to one of the first investor–state arbitrations, the Lena Goldfields case.98
A similar development took place between the United States and the USSR. In an exchange of communications by which the United States recognized the Soviet government on 16 November 1933, the government of the Soviet Union released and assigned to the US government all amounts due to the Soviet government from American nationals.99 This agreement, known as the Litvinov Assignment, formed the basis of a fund out of which some of the claims against Russia made by American nationals for confiscation of their property could be paid. Although the Litvinov Assignment was only intended to be a temporary measure preceding a final settlement of the claims and counterclaims, subsequent negotiations between the two governments on an overall settlement proved unsuccessful. As of the early 1960s, only a portion of the claims of American nationals had been paid from the Litvinov Assignment funds. Those that were paid were distributed by the Foreign Claims Settlement Commission under title III of the International Claims Settlement Act of 1949.100
References(p. 75) Reviewing the history of efforts to secure compensation from the Soviet Union for foreign property seized by the Soviet government, one commentator concluded: ‘One after another, States ceased to press their claims arising out of the Soviet socialization measures. They even went so far as actually renouncing these claims, either expressly as in the case of Germany, or tacitly as in the case of the United States.’101
Thus, by its actions and inactions, the Soviet Union, one of the world’s great powers, expressed its clear opposition to the traditional western position on expropriation and the enforcement of state contracts under international law.
(c) The Latin American challenge
Property, whoever may be the owner, is governed exclusively by the laws of the Republic and is subject to the taxes, charges and limitations established in the laws themselves. The same provisions regarding property apply to aliens as well as [nationals], except that in no case may said aliens make use of their exceptional position or resort to diplomatic appeals.102
A similar provision was incorporated into the Bolivian Constitution: ‘Foreign subjects and enterprises are, in respect to property, in the same position as Bolivians, and can in no case plead an exceptional situation or appeal through diplomatic channels unless in case of denial of justice.’103
Another approach was to implement the Calvo doctrine through legislation. Thus, for example, in 1938, Article 26 of a 1938 law of Ecuador provided that ‘the foreigners, by the act of coming to the country, subjected themselves to the local laws without any exception and may in no case, nor for any reason, avail themselves of their status as foreigners against laws, jurisdiction and police’. Furthermore, Article 30 of the law subjected the contractual rights of foreigners ‘to exclusive jurisdiction of the national judges and courts’, while Article 31 flatly stated that ‘the renunciation of diplomatic claims will be an implicit and essential condition of all contracts concluded by foreigners with the state’ and ‘foreigners who have been employed or carried out a commission subjecting them to the Ecuadorian laws and authorities may not claim indemnification through diplomatic channels’.104
(p. 76) A third approach to implementing the Calvo doctrine was to include ‘Calvo clauses’ in contracts with foreign companies by which the companies agreed to pursue claims only in local courts and to relinquish the right to diplomatic protection in any dispute arising out of the contractual relationship.105 In such cases, the enforceability of the Calvo clause gained additional force because the foreign company had specifically agreed to it.106
The widespread use of the Calvo clause in Latin America raised the question of whether such use was compatible with international law. Some opponents argued that the right to protect investors under international law belonged to the investors’ states of nationality and so only those states, not the investors, could waive the right to diplomatic protection.
The issue of the Calvo clause’s compatibility with international law was considered in the decision of the United States–Mexican Claims Commission in the North American Dredging Company case,107 which is regarded as the leading case on the subject.108 The Commission stated that, for the clause to be declared void, one would have to prove that a generally accepted rule of international law exists that condemns the Calvo clause and that denies ‘an individual the right to relinquish to any extent, large or small, and under any circumstances or conditions, the protection of the government to which he owes allegiance’. After declaring that no such rule exists, the Commission held that because of its Calvo clause contractual commitment, ‘the present claimant is precluded from presenting to its Government any claim relative to the interpretation or fulfillment of this contract’. References(p. 77) The claimant, because it violated its contractual renunciation, ‘has not put itself in a position where it may rightfully present this claim to the Government of the United States for its interposition’. The Commission, in enunciating this rule, asserted:
Under Article 18 of the contract [the Calvo clause] … the present claimant is precluded from presenting to its government any claim relative to the interpretation or fulfillment of this contract. … As the claimant voluntarily entered into a legal contract binding itself not to call as to this contract upon its Government to intervene on its behalf, and as all of its claim relates to this contract, and as therefore it can not present its claim to its Government for interposition or espousal before this Commission, the second ground to the motion to dismiss is sustained.109
Summarizing the international jurisprudence dealing with the Calvo clause from the Dredging decision of 1926 through to the 1950s (a period when the clause gained significant use), one commentator observed that in five out of seven cases international tribunals applied the rule to bar claims that would have been otherwise admissible in the absence of the renunciatory provision (among them are the International Fisheries Company,110 Mexican Union Railway,111 Interoceanic Railway,112 and Veracruz Railways113 cases). Two cases held that the Calvo clause did not bar claims: in the MacNeill114 case the clause’s wording was found to be so vague that the intent of the parties was not clear to the Commission, and in El Oro Mining and Railway Company115 the case was based on claims of a flagrant denial of justice.116
In 2002, the International Law Commission issued its Third Report on Diplomatic Protection to the UN General Assembly. The Special Rapporteur on Diplomatic Protection referred to several considerations concerning the Calvo clause’s purpose and scope. First, the Calvo clause was of limited effect in that it did not constitute a complete bar to diplomatic intervention. It applied only to disputes relating to the contract between the alien and host state containing the clause, but it did not apply to breaches of international law. Second, the Calvo clause confirmed the importance of the rule requiring the exhaustion of local remedies. Some writers had suggested that the clause was nothing more than a reaffirmation of that rule, but most saw it as extending beyond that principle. Third, international law placed no bar on the right of an alien to waive his right to request his state of nationality to exercise diplomatic protection by contract. Fourth, an alien could not waive rights that under international law belonged to his government through a Calvo clause. Fifth, the waiver in a Calvo clause References(p. 78) extended only to disputes arising out of contract or out of a breach of contract. The waivers did not cover disputes that constitute a breach of international law and, in particular, did not extend to breaches that represented a denial of justice.117
In the aftermath of decolonization in the post-World War II era, the legitimacy and content of traditional principles of the law regarding states’ international responsibility for injuries to investors came under increased attack from the newly emerging states. Developing countries challenged its legitimacy by arguing that customary international law had been shaped exclusively by western countries and that developing countries, being under colonial or imperialist domination at that time, played no part in its formation and evolution. One commentator aptly summarized their position with respect to the international law on this point:
The law of responsibility … is not founded on any universal principles of law or morality. Its sole foundation is custom, which is binding only among states where it either grew up or came to be adopted. It is thus hardly possible to maintain that it is still part of universal international law. Whatever the basis of obligation of international law in the past, when the international community was restricted to only a few states … the birth of a new world community has brought about a radical change which makes the traditional basis of obligation outmoded.118
Developing countries also viewed the content of traditional international law—with its emphasis on the protection of foreign investment—as playing an important role in their economic underdevelopment and continued dependence on western countries. In short, they saw international law as an obstacle to their economic advancement. International law, as shaped by their former colonial masters, elevated the protection of foreign-owned property and contracts over the right to nationalize ownership of property on their territories and prioritized the commercial and economic freedom of foreigners over the right of the state to regulate economic activities in its own territory.119
To deal with this problem, developing countries sought to use their numerical superiority in the United Nations to shape the international law of state responsibility to foreign investors in a way that was more in keeping with their interests. An early effort in this respect was the 1962 UN General Assembly Resolution 1803 on Permanent Sovereignty over Natural Resources.
Establishing sovereignty over the natural resources in their territories was a prime concern for developing countries. They therefore sought to secure international recognition of their right to nationalize and re-establish sovereignty over the natural resources contained in their territories, without regard to the necessity References(p. 79) or adequacy of compensation. Developed nations, for their part, were willing to recognize such a right only if the developing nations abided by established rules of international law providing for the payment of adequate compensation.120
In fact, investors’ home countries had good reason to emphasize the importance of adequate compensation. From 1960 to mid-1974, some sixty-two different developing countries engaged in 875 nationalizations or takeovers of foreign enterprises. The majority of the cases (591) took place in ten states.121 As a result, disputes about the existence and nature of obligations to pay compensation for the expropriation of alien property under international law increased dramatically.122
Beginning from the 1960s and continuing through the 1970s, developing countries attempted to revise the established principles regarding compensation and to bring about what they termed the ‘New International Economic Order’ (NIEO). They did this through a series of UN General Assembly resolutions dealing with the issue of permanent sovereignty over natural resources and the economic rights and duties of states.
3. In cases where authorization is granted, the capital imported and the earnings on that capital shall be governed by the terms thereof, by the national legislation in force, and by international law. The profits derived must be shared in the proportions freely agreed upon, in each case, between the investors and the recipient State, due care being taken to ensure that there is no impairment, for any reason, of that State’s sovereignty over its natural wealth and resources.
4. Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law. In any case where the question of compensation gives rise to a controversy, the national jurisdiction of the State taking such measures shall be exhausted. However, upon agreement by sovereign States and other parties concerned, settlement of the dispute should be made through arbitration or international adjudication . …
8. Foreign investment agreements freely entered into by or between sovereign States shall be observed in good faith.123
References(p. 80) Some observers interpreted the Declaration as not being too radical a departure from the traditional international customary law understood by western nations.124 The Declaration incorporated by reference the international law requirement that foreign capital not be subject to discriminatory treatment and it affirmed the binding character of foreign investment agreements. Although the stipulation that compensation need only be ‘appropriate’ was ambiguous, the legislative history was said to support the US interpretation that ‘appropriate compensation’ meant ‘prompt, adequate, and effective compensation’.125 Adopted by a vote of 87 to 2 with 12 abstentions, the Declaration has been viewed as the last consensus on the issue of expropriation under international law.126
3. … the application of the principle of nationalization carried out by States, as an expression of their sovereignty in order to safeguard their natural resources, implies that each State is entitled to determine the amount of possible compensation and the mode of payment, and that any disputes which might arise should be settled in accordance with the national legislation of each State carrying out such measures.127
The Resolution omitted language concerning the guarantee of compensation for foreign investors and also references to international law. This left the host state with wide discretion in determining what, if any, compensation was due through its municipal law without regard to the objective standards under international law.
In the following year, developing countries pushed the UN General Assembly to adopt resolutions departing even further from the traditional western positions on the international law governing foreign investments. In May 1974, the General Assembly adopted Resolution 3201 containing the Declaration on the Establishment of a New International Economic Order.128 Resolution 3201 declared the right of each state to exercise control over and exploit its natural resources, ‘including the right to nationalization or transfer of ownership to its nationals’.129 It was followed on 12 December 1974 by Resolution 3281 containing References(p. 81) the Charter of Economic Rights and Duties of States.130 Resolution 3281 was adopted by a vote of 120 to 6, with 10 abstentions (the states voting ‘against’ included Belgium, Denmark, the German Federal Republic, Luxembourg, the United Kingdom, and the United States).131 This Resolution reiterated the urgent need ‘to establish generally accepted norms to govern international economic relations systematically’. It also recognized that ‘it is not feasible to establish generally accepted norms to govern international economic relations systematically’ and ‘to establish a just order and a stable world as long as a charter to protect the rights of all countries and in particular the developing states is not formulated’. It further noted that the Charter was designed as ‘the first step in the codification and development’ of the norms for ‘the development of international economic relations on a just and equitable basis’.
(a) To regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and regulations and in conformity with its national objectives and priorities. No State shall be compelled to grant preferential treatment to foreign investment;
(c) To nationalize, expropriate or transfer ownership of foreign property, in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent. In any case where the question of compensation gives rise to a controversy, it shall be settled under the domestic law of the nationalizing State and by its tribunals, unless it is freely and mutually agreed by all States concerned that other peaceful means be sought on the basis of the sovereign equality of States and in accordance with the principle of free choice of means.
Even among States which, like Canada, hold the view that there are principles of customary international law which are relevant to the treatment of foreign investments, there is disagreement about the precise content of those principles. Where the old law is unjust or ineffective, it must be changed to reflect the present economic interdependence of States and the need for the development of the developing countries, which are the two most important facts of economic life in our generation. It had been the hope that this charter would command the consensus necessary to enable it to contribute to the codification and progressive development of law in this area; unhappily, this is not the case.132
References(p. 82) The United States joined Canada in criticizing the Charter as unbalanced: ‘Many of the provisions on which agreement had been lacking were fundamental and were unacceptable in their present form. They included the treatment of foreign investment in terms which did not fully take into account respect for agreements and international obligations.’133
Two basic reasons prevented developed countries from accepting the Charter. First, the document was an attempt to assert principles of international law, or at least opinio juris, without specific reference to established international legal doctrine and practice. Second, the Charter failed to formulate and articulate propositions that would give predictability to international economic transactions. The developed states, therefore, had no assurance that their economic relations with the developing states would be subject to a predictable or stable legal regime,134 which was a fundamental requirement for their nationals to undertake international investments.
Commentators argued that Article 2 of the Charter departed dramatically from the existing international law in several important respects. Critics claimed that its most fundamental weakness was its general failure to state clearly that the economic rights and duties of states are subject to international law, or, at a bare minimum, that international law is a relevant consideration. In dealing with the compensation of an alien whose property has been seized, Article 2(2)(c) provided only that ‘appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent’.
In analysing its text, critics noted that Article 2 is prefaced with the precatory ‘should’ rather than the mandatory ‘shall’. Thus, they argued that if there is an obligation, it is solely to grant whatever compensation a host state subjectively believes ‘appropriate’, with consideration given only to local law and circumstances and not necessarily to international law, which may not be ‘pertinent’. They also pointed to the fact that the text contains no requirement that a taking must be for a public purpose and that Article 2 is also silent on the traditional principle that any taking of alien property by a state must not be discriminatory. They found this to be particularly strange because the Charter stipulates that ‘no state shall be compelled to grant preferential treatment to foreign investment’, which is the natural corollary of non-discrimination. The Charter also denied the inviolability of contracts by boldly proclaiming without limitation that ‘every state has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities’.135
References(p. 83) The Charter also departed significantly from traditional international law with respect to the settlement of disputes between aggrieved investors and host countries. First, instead of exhausting local remedies and then proceeding to arbitration and international adjudication, cases were to be decided nationally (in the host country) or possibly by other peaceful means. Second, any agreement to utilize other peaceful means was required to be between ‘states concerned’ rather than ‘upon agreement by sovereign states and other parties’, which effectively excluded private companies as parties. Developed countries exerted strong pressure to include the following language from the 1962 Resolution in Article 2: ‘foreign investment agreements freely entered into by’ or construed the phrase ‘international obligation’ to apply only to agreements between states, not between governments and foreign investors.136
The adoption of the Charter provoked a vehement debate not only regarding its content but also its legal nature and effect on existing international law. The original intent of the Charter’s sponsors was for it to be a legally binding document. However, as the divergence of opinion between the developing and developed nations became apparent, the latter grew increasingly opposed to creating legally binding obligations in the Charter.137 The question of the legal nature of the Charter was left to the General Assembly, but it never reached any determination on the matter, leaving developing countries free to try to bring the document into line with their preferences.138
Commentators’ views on the legal effect of the Charter varied greatly. Some emphasized the norm-making power of the Charter, equating the instrument to ‘a constitution’ that served the dual purpose of codifying existing customary law and progressively developing new rules to address the current and future needs of international society.139 Others asserted that the Charter expressed both traditional principles of international law that were binding on all states and also new principles that were a stage in the progressive development of international law, but possessed no more weight than an unratified treaty.140 Still others, primarily from developed References(p. 84) countries, emphasized the General Assembly’s lack of law-making authority141 and concluded that the Charter ‘is not a legally binding instrument’.142
The TOPCO arbitration143 considered the legal validity of the various UN resolutions on the New International Economic Order and the possible existence of a custom resulting from them. Sole Arbitrator Dupuy, by looking at the circumstances under which the resolutions were adopted and analysing the principles that they stated, concluded that only Resolution 1803 (XVII) of 1962 reflected the state of existing customary international law.144 He further stated that ‘Article 2 of this Charter [ie the Charter of Economic Rights and Duties of States] must be analyzed as a political rather than as a legal declaration concerned with the ideological strategy of development and, as such, supported only by non-industrialized States’.145 Moreover, as will be seen, state practice among developing countries, particularly their subsequent willingness to consent to investment treaties giving strong protection to investor interests, demonstrated that customary international law had not evolved in the direction developing countries had hoped in the 1970s.146
Regardless of its legal effect, the Charter of Economic Rights and Duties of States, even though it did not create international law, was a clear challenge to the traditional western view of international law.147 That challenge, to a greater or lesser extent, served to undermine the solidity of the traditional international legal framework for foreign investment and led both investors and their home References(p. 85) countries to search for means to strengthen it in order to protect their economic interests in a new era.
As can be seen from the preceding sections of this chapter, foreign investment gained momentum as an increasingly important international economic activity in the period after World War II when new states joined the international community. Foreign investors and their home governments seeking the protection of international investment law in this period encountered an ephemeral structure consisting of scattered treaty provisions, a few questionable customs, and contested general principles of law. The resulting legal structure was seriously deficient in several respects. First, the applicable international law failed to take into account contemporary investment practices and to address important issues of concern to foreign investors.148 For example, customary international law had virtually nothing to say about the right of foreign investors to make monetary transfers from a host country or to bring foreign managers into the host country to manage their investments. Second, the principles that did exist were often vague and subject to varying interpretations. Thus, although there was strong evidence that customary international law required the payment of compensation upon nationalization of an investor’s property, no specific principles had crystallized as to how that compensation was to be calculated.
Third, the existing framework prompted disagreement between industrialized countries and newly decolonized developing nations. For example, as we have seen, capital-exporting states claimed that international law imposed an obligation on host countries to accord foreign investors a minimum standard of protection and required that states expropriating the property of foreign investors needed to provide compensation. Many developing countries, believing that the existing international rules served only to maintain their poverty, rejected this view and, beginning in the 1970s, demanded that their particular needs and circumstances be taken into account.149 Their position on foreign investment was References(p. 86) incorporated into Article 2 of the 1974 UN Charter of Economic Rights and Duties of States, which was adopted by the UN General Assembly.
Finally, existing international law offered foreign investors no effective enforcement mechanism to pursue claims against host countries that seized their investments or refused to respect their contractual obligations. As a result, investors had no assurance that investment contracts and arrangements made with host country governments would not be subject to unilateral change at some later time. Although an affiliate of the World Bank, the International Centre for Settlement of Investment Disputes (ICSID), was formally established in 1966 to resolve disputes between host countries and foreign private investors,150 it required the specific consent of the parties to exercise jurisdiction over an investor–state dispute. As a result, the Centre did not hear its first case until 1972.151 Injured foreign investors who were unable to negotiate a satisfactory settlement, secure an arbitration agreement with a host government, or find satisfaction in the local courts had few options other than to seek espousal of their claims by their home country governments. By its very nature, this process was more political than legal and, in any event, yielded results that were always uncertain and invariably slow.
In summary then, as global economic expansion began to accelerate in the years following World War II, the existing international law on foreign investment was for most investors incomplete, vague, contested, and without an effective enforcement mechanism. Because of these defects, investors and their home governments needed to find another means to protect their investments abroad from the injurious actions of host country governments. That means would lie in negotiating investment treaties.
2 JW Salacuse, ‘Host Country Regulation and Promotion of Joint Venture and Foreign Investment’ in DN Goldsweig and RH Cummings (eds), International Joint Ventures: A Practical Approach to Working with Foreign Investors in the U.S. and Abroad: A Case Study with Sample Documents (2nd edn, American Bar Association, 1990) 107–36.
3 eg D Smith and L Wells, Negotiating Third World Mineral Agreements: Promises as Prologue (Ballinger Pub Co, 1975); JW Salacuse, ‘Renegotiating International Project Agreements’ (2001) 24 Ford Int’l LJ 1319.
4 eg ‘Concessions Granted to the Merchants of Venice, by the Byzantine Emperors Basilius and Costantinus, Executed in March 991’ in P Fischer, A Collection of International Concessions and Related Instruments (Oceana Publications, 1976) vol 1, pp 15–18.
6 Note that the French Civil Code, Art 1134 declares: ‘Agreements legally entered into have the force of law for those who have made them’ (‘Les conventions légalement formées tiennent lieu de loi a ceux qui les ont faites.’).
8 See eg Banco Nacional de Cuba v Sabbatino, 376 US 398, 425 (1964), in which the US Supreme Court stated: ‘The courts of one independent government will not sit in judgment upon the validity of the acts of another done within its own territory, even when such government seizes and sells the property of an American citizen within its boundaries.’
9 See eg the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) of 18 March 1965, Art 42(1) which provides: ‘The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on conflict of laws) and such rules of international law as may be applicable.’ Convention on the Settlement of Investment Disputes between States and Nationals of Other States (18 March 1965), 17 UST 1270; 575 UNTS 159.
10 See eg Southern Pacific Properties (Middle East) Ltd [SPP(ME)] v Arab Republic of Egypt ICC Award No YD/AS No 3493 (11 March 1983); (1983) 22 ILM 752, ¶ 49, in which the tribunal found that ‘International law principles such as “Pacta Sunt Servanda” and “Just compensation for expropriatory measures” can be deemed as part of Egyptian law.’
11 ‘International law governs relations between independent States. The rules of law binding upon States therefore emanate from their own free will as expressed in conventions or by usages generally accepted as expressing principles of law and established in order to regulate relations between these co-existing independent communities or with a view to the achievement of common aims.’ The Case of the SS Lotus (France v Turkey) (1927) PCIJ Series A, No 10; 2 Hudson, World Ct Rep 20.
17 ICSID Convention (n 9 above).
18 Crawford (n 14 above) 30–1; A Aust, Modern Treaty Law and Practice (Cambridge University Press, 2000) 15.
20 ibid Art 27; Aust (n 18 above) 144.
21 McNair, Law of Treaties (Clarendon Press, 1961) 5, 124, 749–52; RR Baxter, ‘Treaties and Custom’ (1970) 129 Recueil des Cours 25, 101; RR Baxter, ‘Multilateral Treaties as Evidence of Customary International Law’ (1965) 41 BYIL 275.
[Article 38] makes no reference to ‘sources’ and, on close inspection, cannot be regarded as a straightforward enumeration of the sources. The first question is whether paragraph 1 creates a hierarchy of sources. There is no express hierarchy, but the draftsmen stipulated an order and in one draft the word ‘successively’ appeared. In practice sub-paragraphs (a) and (b) are the most important: we can explain the priority of (a) by the fact that this refers to a source of obligations which will ordinarily prevail as being more specific.
Crawford (n 14 above) 5. Lauterpacht has a similar view:
The rights and duties of States are determined in the first instance, by their agreement as expressed in treaties—just as the case of individuals their rights are specifically determined by any contract which is binding upon them. When a controversy arises between two or more States with regard to a matter regulated by a treaty, it is natural that the parties should invoke and the adjudicating agency should apply, in the first instance, the provisions of the treaty in question.
H Lauterpacht, International Law: Collected Papers (Cambridge University Press, 1970) 86–7.
24 eg NAFTA, Art 1131 empowers the Free Trade Commission of NAFTA to make binding interpretations of NAFTA provisions on investment arbitration tribunals. In the exercise of that power, the Commission issued an interpretation holding that NAFTA, Art 1105(1) ‘prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded investments of investors of another Party’ and that ‘the concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens’. NAFTA Free Trade Commission, ‘NAFTA Commission Notes of Interpretation of Certain Chapter 11 Provisions’ (31 July 2001).
25 eg Agreement between the Government of the Republic of Korea and the Government of Japan on the Liberalization, Promotion, and Protection of Investment (22 March 2002), Art 14(2); ASEAN Comprehensive Agreement (2009), Art 40(1).
26 The American Law Institute (n 12 above) vol 1, § 102(2), at 24.
31 On their status as a source of law, Brownlie observes: ‘This source is listed after treaty and custom, both of which depend more immediately on state consent.’ Crawford (n 14 above) 34.
32 O Schachter distinguishes five categories of general principles that have been invoked and applied in international law discourse and cases. O Schachter, International Law in Theory and Practice (Martinus Nijhoff, 1991) 50. Crawford notes: ‘[T]he Oppenheim’s view is preferable: “The intention is to authorize the Court to apply the general principles of municipal jurisprudence, in particular of private law, in so far as they are applicable to relations of States.”’ Crawford (n 14 above) 34.
33 Schachter (n 32 above) 50–5.
35 ibid vol II, p 1223.
36 ibid vol II, p 1836.
37 United Nations, Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, 2001 (2008), adopted by the International Law Commission at its fifty-third session, in 2001, and submitted to the General Assembly as part of the Commission’s Report covering that session, available at <http://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf> accessed 11 January 2015.
40 ‘The prevailing rule [is] that such national treatment is not always sufficient, and that there is an international standard of justice that a state must observe in the treatment of aliens, even if the state does not observe it in the treatment of its own nationals, and even if the standard is inconsistent with its own law.’ The American Law Institute, Restatement (Second) of Foreign Relations Law (1965) § 165, comment (a), at 502.
43 R Lillich, The Human Rights of Aliens in Contemporary International Law (Manchester University Press, 1984) 16–17; SKB Asante, ‘International Law and Investments’ in M Bedjaoui (ed), International Law: Achievements and Prospects (UNESCO, 1991) 670. Crawford, in Brownlie’s Public International Law, observes: ‘The controversy surrounding the national and international standards has not been finally resolved, and this is not surprising as the two viewpoints reflect conflicting economic and political interests.’ Crawford (n 14 above) 614. The most complete exposition of the Calvo doctrine by the jurist himself is C Calvo, Le Droit international théorique et pratique (5th edn, 1896) vols 1–6. See also A Freeman, ‘Recent Aspects of the Calvo Doctrine and the Challenge to International Law’ (1946) 40 AJIL 121.
45 RB Lillich, ‘The Current Status of the Law of State Responsibility for Injuries to Aliens’ in Lillich (n 38 above) 1.
46 ‘In precise language, diplomatic protection can be defined as a procedure for giving effect to State responsibility involving breaches of international law arising out of legal injuries to the person or property of the citizen of a State. With the expansion of economic and commercial intercourse between nations, diplomatic protection evolved into a rule of customary international law.’ J Cuthbert, Nationality and Diplomatic Protection (AW Sijthoff, 1969) 1.
The history is full of examples of the use of military force on a massive scale to redress alleged wrongs which, in retrospect, seem quite minor. Probably the most notorious such incident involved a British military action against Greece in 1850, what is known as the Don Pacifico incident. … This affair was a particularly egregious one for a number of reasons, the most important perhaps being that the alien had not exhausted his local remedies, as the traditional international law rule that had developed by the mid-19th century required. … The most common arena for the fulsome application of the doctrine of diplomatic protection [during the nineteenth century] was Latin America, where there were numerous forcible interventions by the various European powers, as well as by the United States. … [T]he most noteworthy of these incidents was the blockading of Venezuela by the combined forces of Germany, Italy, and Great Britain in 1902–03 on behalf of various persons with claims against the Venezuelan government.
Lillich (n 43 above) 14–15, 24.
48 Case Concerning Mavromatis Palestine Concessions (1924) PCIJ Series A, No 2, at 2. See also A Bagge, ‘Intervention on the Ground of Damage Caused to Nationals, with Particular Reference to Exhaustion of Local Remedies and the Rights of Shareholders’ (1958) 34 BYIL 162.
52 cf Borchard (n 50 above) 446, citing (1938) 32 AJIL Supp 198.
53 ibid. Another example of diplomatic protection was the Tinoco Case in 1923, in which Great Britain asserted claims of a British company and the Royal Bank of Canada, both of which had allegedly made contracts with the government of Costa Rica during the regime of Frederico Tinoco, who had come to power as a result of a coup in January 1917. Within two years Tinoco was forced from power, elections were held, and a Constitutional Congress began to function. In 1922, the Constitutional Congress adopted legislation invalidating all contracts made by the executive power during the Tinoco regime. The effect of this action was to invalidate an oil concession granted to the British company and loan obligations to the Royal Bank of Canada. Since the shareholders in both entities were British subjects, the government of Great Britain vigorously brought a claim against Costa Rica, which, under significant pressure, agreed to arbitrate the British claims and to accept the US Chief Justice William Howard Taft, the former American president, as sole arbitrator. Tinoco Case (Great Britain v Costa Rica) 1 R Int’l Arb Awards 369, 375–85 (1923), available at (1924) 18 AJIL 147.
54 The American Law Institute, Restatement of the Law, The Foreign Relations Law of the United States (1965) § 165, reporters’ note 1, at 505, citing the Case Concerning Certain German Interests in Polish Upper Silesia (1926) PCIJ Rep Series A, No 7, at 22.
57 The American Law Institute, Restatement of the Law, The Foreign Relations Law of the United States (1965) citing ‘France v Great Britain (1931)’ (1933) 27 AJIL 153, 160. See also A Freeman, The International Responsibility of States for Denial of Justice (Longmans Green and Co, 1938) 502 et seq.
The essential principle contained in the actual notion of an illegal act—a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals—is that reparation must, as far as possible, wipe out all consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if that is not possible, payment of a sum corresponding to the value which a restitution in kind would bear [must be made].
In contrast, lawful expropriation, the PCIJ held, did not require restitution but only payment of ‘the just price of what was expropriated’, measured as ‘the value of the undertaking at the moment of dispossession, plus interest to the day of payment’. This distinction between illegal and lawful expropriation would have significant practical effect in the evolution of customary international law on expropriation.
As will be seen in Ch 12, section 12.10, however, the tribunal in ADC Affiliate Ltd and ADC & ADMC Management Ltd v Republic of Hungary, ICSID Case No ARB/03/16 (Award) (2 October 2006), (Cyprus–Hungary BIT), applied this distinction in determining the applicable compensation standard in an expropriation that it found to be illegal.
65 See generally D Vagts, ‘Coercion and Foreign Investment Rearrangements’ (1978) 72 AJIL 17; B Weston, ‘“Constructive Takings” under International Law: A Modest Foray into the Problem of “Creeping Expropriation”’ (1975) 16 Va J Int’l L 103.
66 eg Restatement (Third) of the Foreign Relations Law of the United States, § 712, comment g, at 200 states: ‘A state is responsible for an expropriation of property when it subjects alien property to taxation, regulation, or other action that is confiscatory or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien’s property or its removal from the state’s territory.’ The American Law Institute, Restatement of the Law, The Foreign Relations Law of the United States (3rd edn, 1987) vol 2.
68 ibid, vol 2, § 712, at 211.
69 See Revere Copper and Brass, Inc v Overseas Private Investment Corp (OPIC) (1978) 17 ILM 1321, particularly the majority and minority opinions as to whether the Jamaican government’s repudiation of its agreement with the investor on taxation prevented the investor from exercising effective control of its investment.
In the Tribunal’s opinion, a treaty requirement for ‘public interest’ requires some genuine interest of the public. If mere reference to ‘public interest’ can magically put such interest into existence and therefore satisfy this requirement, then this requirement would be rendered meaningless since the Tribunal can imagine no situation where this requirement would not have been met.
The argument that the ‘prompt, adequate and effective’ formula is ‘traditional’ international law finds little support in state practice or authoritative treatises and monographs. For example, Judge Charles De Visscher, a past President of the International Court of Justice, concluded that state practice in cases of nationalization on a broad scale has substantially qualified the right to full and prompt indemnification for the taking of alien property. He observed that ‘nationalization hardly ever permits more than partial compensation calculated less by the extent of damage than by the capacity and good will of the nationalizing State.’ Rousseau points out that the ‘prompt, adequate and effective’ formula has not won general acceptance in cases or state practice. Oppenheim, as edited by Sir Hersch Lauterpacht, states an important qualification to the duty to compensate ‘in cases in which fundamental changes in the political system and economic structure of the State or far-reaching social reforms entail interference, on a large scale, with private property.’ In such cases, Lauterpacht concluded, a solution must be sought in the grant of ‘partial compensation.’ Similar views were reflected in the resolution and discussions of the Institut de Droit International in 1950 as well as in detailed studies by Western European jurists.
77 Delagoa Bay and East African Railway Co (US and Great Britain v Portugal) (1900) in A Moore, Digest and History of the International Arbitrations (US Government Printing Office, 1908) vol 2, p 1875.
82 Factory at Chórzow (n 64 above) 47.
83 Garcia-Amador et al (n 81 above) 55.
85 Draft Articles (note 37 above).
87 It is for this reason that the Multilateral Investment Guarantee Agency (MIGA) includes as one of its covered, non-commercial risks ‘any repudiation or breach by the host government of a contract when the investor has no access to a competent forum, faces unreasonable procedural delays, or is unable to enforce decisions made in its favor’. Convention Establishing the Multilateral Investment Guarantee Agency (11 October 1985) 24 ILM 1598, 1605 (The MIGA Convention), Art 11(a).
In view of the diverse nationalities of the parties to this Agreement, it shall be governed and interpreted and applied in accordance with principles of law common to Iran and the several nations in which the other parties of this Agreement are incorporated, and in the absence of such common principles, then by and in accordance with principles of law recognized by civilized nations in general, including such of those principles as may have been applied by international tribunals.
JC Hurewitz, Diplomacy in the Near and Middle East, A Documentary Record: 1914–1945 (Macmillan Press, 1956) vol 2, p 48. This provision is also cited in Garcia-Amador et al (n 81 above) 62.
90 eg in the Sapphire case the tribunal stated: ‘It is a fundamental principle of law, which is constantly being proclaimed by international courts, that contractual undertakings must be respected. The rule of pacta sunt servanda is the basis of every contractual relationship.’ Sapphire International Petroleum Ltd (Sapphire) v National Iranian Oil Co (1953) 35 ILR 136, 181. In TOPCO, sole arbitrator Dupuy reiterated that ‘the maxim pacta sunt servanda should be viewed as a fundamental principle of international law’. Texaco Overseas Petroleum Co and California Asiatic Oil Co (TOPCO) v Government of the Libyan Arab Republic (1978) 17 ILM 1.
92 The Decree of 26 October 1917, adopted by the Second All-Russian Congress of Soviets, abolished private property in land without compensation. The Decrees of 14 December 1917 and 26 January 1918, socialized the banks ‘in order to liberate the workers and peasants and the whole population from the exploitation of the capitalist banks’ and provided that the assets of the former private banks were to be confiscated. By June 1920 most industry had been socialized in the USSR. S Friedman, Expropriation in International Law (Stevens, 1953) 17–23; BA Wortley, Expropriation in Public International Law (Cambridge University Press, 1959) vol 1, 61–2; Legislative Reference Service, Library of Congress for the Committee on Foreign Affairs, 88th Congress, 1st Session, Report on Expropriation of American-Owned Property by Foreign Governments in the Twentieth Century (19 July 1963) 8–10.
93 Friedman (n 92 above) 18, quoting Correspondence between His Majesty’s Government and the French Government respecting the Anglo-Russian Trade Agreement, 1921.
94 Wortley (n 92 above) 9.
95 Friedman (n 92 above) 19, citing Correspondence between the British and Russian Governments concerning Russia’s Foreign Indebtedness (1921) 114 British and Foreign State Papers 380.
97 Friedman (n 92 above) 21.
98 In accordance with the concession agreement, the company holding the concession instituted arbitration proceedings against the USSR. The Lena Goldfields arbitral award of 1930 decided in favour of the company after the abrupt withdrawal of the Soviet government from the arbitral proceedings. It was not until 1934, when the Anglo-Soviet Trade agreement was signed, that the Soviet Union, after protracted diplomatic negotiations, gave the company transferable but non-interest-bearing notes payable over 20 years. This sum (£3 million) was considerably less than the arbitration award (£13 million); however, even this compensation arrangement was repudiated by the USSR in 1940. Wortley (n 92 above) 62. The circumstances surrounding the Lena Goldfields case have prompted one commentator to note: ‘Historically, the Lena case remains a baleful monument to the absolute power of a State.’ VV Veeder, ‘The Lena Goldfields Arbitration: The Historical Roots of the Three Ideas’ (1988) 47(4) ICLQ 747.
100 Report on Expropriation of American-Owned Property (n 92 above) 9.
101 Friedman (n 92 above) 23.
103 ibid Art 35.
The Contractor and all persons, who as employees or in any other capacity may be engaged in the execution of the work under this contract either directly or indirectly, shall be considered as Mexicans in all matters, within the Republic of Mexico, concerning the execution of such work and the fulfillment of this contract. They shall not claim, nor shall they have, with regard to the interests and the business connected with this contract, any other rights or means to enforce the same than those granted by the laws of the Republic to Mexicans, nor shall they enjoy any other rights than those established in favor of Mexicans. They are consequently deprived of any rights as aliens, and under no conditions shall the intervention of foreign diplomatic agents be permitted, in any matter related to this contract.
Shea (n 104 above) 29, quoting United States (North American Dredging Co) v United Mexican States, Opinions of Commissioners, I at 21–2.
106 Shea (n 104 above) 28. The commentator asserts that the Calvo clause differs from the Calvo doctrine in one very important respect: the enforcement of the latter was a unilateral act, whereas in the case of the former the individual has consented of his own free will to surrender the right of recourse to his government in case of contractual controversies or disputes.
108 UNGA, ‘Diplomatic Protection’, Report of the International Law Commission Fifty-fourth Session (29 April to 7 June and 22 July to 16 August 2002) GAOR 57th Session Supp No 10 (A/57/10) Ch V, ¶ 253, at 160. The Special Rapporteur noted, in particular: ‘[In the case] it had been shown that the Calvo clause was compatible with international law in general and with the right to diplomatic protection in particular, although the decision in that case had been subjected to serious criticism by jurists.’
109 Shea (n 104 above) 263, citing Opinions of Commissioners, vol 1, pp 30–3.
116 Shea (n 104 above) 255–6.
117 UNGA, ‘Diplomatic Protection’ (n 108 above) ¶ 256, at 162.
There are few if any issues in international law today on which opinion seems to be so divided as to the limitations on a State’s power to expropriate the property of aliens. … The disagreement as to relevant international law standards reflects an even more basic divergence between the national interests of capital importing and exporting nations and between the social ideologies of those countries that favor state control of a considerable portion of the means of production and those that adhere to a free enterprise system.
Banco Nacional de Cuba v Sabbatino, 376 US 398, 428–9 (1964).
125 ibid 463, 469. Steven Schwebel, later to become a judge of the ICJ, wrote at the time:
Cast in the form of a declaration, which in United Nations usage is meant to give a resolution a particular weight, it represents a consensus of the economically developed and less developed countries. The fact that that consensus includes positive recognition of the obligation to pay compensation where property is taken, to observe investment agreements and agreements to arbitrate and to abide by other requirements of international law should contribute to the enhancement of the international investment climate.
133 ibid 335.
135 CN Bower and JB Tepe, ‘The Charter of Economic Rights and Duties of States: A Reflection or Rejection of International Law?’ (1975) 9 Int’l Lawyer 295, 304–7. But cf EJ de Arechaga, ‘Application of the Rules of State Responsibility to the Nationalization of Foreign-Owned Property’ in K Hosena (ed), Legal Aspects of the New International Economic Order (F Pinter, 1980) 225–7.
136 RF Meagher, An International Redistribution of Wealth and Power: A Study of the Charter of Economic Rights and Duties of States (Pergamon Press, 1975) 53–4. Meagher summarized the thrust of the Charter as follows:
there has been an expansion of the concept of permanent sovereignty; nationalization is now an unqualified right; transnational corporations have become a special category of institutions subject to particular rules; the standards for compensation are determined by national laws based upon what the nationalizing state considers pertinent; and disputes over compensation are to be decided by national tribunals utilizing national laws, unless states agree on other peaceful means.
137 UN Doc, TD/B/AC.12/4, at 2. See also Bower and Tepe (n 135 above) 295, 300.
138 Meagher (n 136 above) 89.
139 ibid 90, citing J Castaneda, ‘La Charte des Droits et Devoirs Economique des Etats’ (1974) XX Annuaire Français de Droit International 39.
140 Meagher (n 136 above) 90, citing G Feuer, ‘Reflexions sur La Charte des Droits et Devoirs Economique des Etats’ (April/June 1975) Revue Generale de Droit International Public 274.
141 ‘[A]part from its control over the budget, all the General Assembly can do is to discuss and recommend and initiate studies and consider reports from other bodies. It cannot act on behalf of all members, as the Security Council does, and its decisions are not directions telling the member states what they are or are not to do.’ JL Brierly, The Law of Nations (OUP, 1963) 110.
142 Bower and Tepe (n 135 above) 295, 301.
146 See eg BH Weston, ‘The New International Economic Order and the Deprivation of Foreign Proprietary Wealth: Some Reflections upon the Contemporary International Law Debate’ in RB Lillich (ed), International Law of State Responsibility for Injuries to Aliens (University of Virginia Press, 1983) 106, stating:
Because the UN majority did not actually assume they were creating law in the binding or codificatory sense when they adopted the NIEO Charter, because a substantial and critical segment of the international economic community refused to endorse the Charter as written, and, most importantly, because State practice since the Charter’s creation and adoption demonstrates a continued adherence to the customary international law principle of compensation (at least as interpreted since World War II), it is appropriate—necessary—to conclude that Article 2(2)(c) is not presently an authoritative statement of existing international law, i.e., not lex lata.
See also Crawford (n 14 above) 626.
These declarations and charters are not neutral principles. They are, by and large, challenges to the existing order and their leading motif is the demand for a wider distribution of wealth. Moreover, their adoption by large majorities through parliamentary and conference voting procedures is seen as an attempt to impose obligatory norms on dissenting minorities and to change radically the way in which international law is created.
148 In 1970, the ICJ, in the Barcelona Traction case, found it ‘surprising’ that the evolution of international investment law had not gone further and that no generally accepted rules had yet crystallized in the light of the growth of foreign investments and the expansion of international activities by corporations in the previous half-century. Barcelona Traction, Light and Power Co Ltd (Belgium v Spain)  ICJ Rep 3, 46–7 (5 February). As recently as 2010, a leading commentator on international investment law stated: ‘There are few customs in this sense in the field of foreign investment.’ M Sornarajah, The International Law on Foreign Investment (3rd edn, Cambridge University Press, 2010) 82.
149 Inspired by the success of the oil-producing countries in raising petroleum prices in 1973–4, developing countries had hoped that by building a numerically strong coalition among themselves, they would be able to bring about desired change in various international forums. As a result of the debt crisis in the early 1980s, the internal economic restructuring demanded by international financial institutions, such as the International Monetary Fund (IMF) and the World Bank, and the abandonment of command economy models by developing countries, the movement for a ‘New International Economic Order’ lost steam and was virtually dead by 1990. Wälde (n 119 above) 771. See generally J Hart, The New International Economic Order (Macmillan Press, 1983); JN Bhagwati (ed), The New International Economic Order: The North-South Debate (MIT Press, 1977).
150 The ICSID Convention (n 9 above).
151 ICSID, ‘List of Concluded Cases’, available at <https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/AdvancedSearch.aspx?cs=CD28> accessed 12 January 2015 (listing concluded cases in chronological order).