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The Three Laws of International Investment - National, Contractual, and International Frameworks for Foreign Capital by Salacuse, Jeswald W. (1st February 2013)

Part I International Investment and the Law, 3 Three Legal Frameworks for International Investment: National, Contractual, and International

From: The Three Laws of International Investment: National, Contractual, and International Frameworks for Foreign Capital

Jeswald W. Salacuse

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved.  Subscriber: null; date: 22 May 2019

Subject(s):
International economic law — Foreign Direct Investment — Settlement of disputes — Applicable law — Law of treaties — Consensual arrangements other than treaties

(p. 35) Three Legal Frameworks for International Investment: National, Contractual, and International

3.1  The Investment Frameworks in General

Host states, international investors, and home states—the three parties with fundamental interests in international investment—have constructed rules to govern international investment transactions and have embodied them in a variety of legal instruments and institutions. The purpose of this complex of legal rules is to influence the conduct of the various parties with respect to investments in desired ways. The three interested parties have adopted legal rules and created institutions as a means to achieve their ends because they consider legal rules and instruments to be a more effective means of influencing behavior than other available methods, such as general statements of encouragement, recommended business plans, and general expressions of good will. These legal rules and instruments thus become the basic structure or framework within which the investment is undertaken and operated.

Upon examining this complex structure of rules applicable to individual international investments, one sees that it is composed of three linked legal frameworks: (1) the national legal framework consisting of the national laws and regulatory systems of the states having jurisdiction over the investment transaction and the related investors; (2) the contractual legal framework composed of the various agreements negotiated by the parties to govern the investment; and (3) the international law framework, the complex of treaties, customary laws, and international institutions that the nations of the world have agreed, either bilaterally or multilaterally, to put in place to regulate international investment. One of the principal factors that distinguish each of the legal frameworks is the differing basic sources from which they are derived. The national legal framework is derived from the law-making authorities of independent sovereign states in accordance with their prevailing constitutional arrangements. The contractual legal framework is the product of negotiation and bargaining among investors or between investors and a relevant government for the purpose of regulating the investment. The effectiveness and enforcement of such contracts and agreements depends crucially on the existence of some national legal system. And finally, the elements of the international framework are derived from agreements and arrangements among sovereign states, either in the form of specific treaties or embodied in generally accepted international customs. Let us now examine the nature of each of the three frameworks in detail.

3.2  The National Legal Framework

The national legal framework consists of the legislation, regulations, administrative acts, and judicial decisions of the governmental authorities of countries and their subdivisions having jurisdiction over the investment or the investor. National legal frameworks are exceptionally diverse. Since there were more than 200 sovereign states in the world in 2012, (p. 36) there were at that time more than 200 national frameworks for foreign investment, without counting subnational systems of law. No two national frameworks are exactly alike, although as will be seen they have many common characteristics.

National legal frameworks express and concretize the policies of states toward foreign capital. In general, national frameworks seek to do two things in varying degrees: to encourage foreign investment and to control foreign investment. They attempt to encourage foreign investment by granting foreign investors and investments increased freedom of action and by providing them with various incentives. National frameworks seek to control foreign investment by imposing rules and restrictions on foreign investors and foreign investment projects. Virtually all national legal systems contain some elements of investment encouragement and some elements of investment control. Thus, for example, host country legislation might offer tax exemptions and subsidized factors of production to encourage investment, but at the same time require that foreign investment projects be approved by a specific government department and restrict the sectors open to foreign capital or limit foreign equity participation to a minority position in certain types of enterprises.

The precise balance between the imperatives of investment encouragement and of investment control varies from country to country. The national legal frameworks of some countries are considered to be highly encouraging while others are found to be highly restrictive and therefore highly controlling.1 The World Bank’s Investing Across Borders initiative (IAB), which examines the degree to which national legal frameworks encourage or control foreign investment, has concluded:

Countries with poor regulations and inefficient processes for foreign companies receive less FDI and have smaller accumulated stocks of FDI … Based on IAB results, countries tend to attract more FDI if they allow foreign ownership of companies in a variety of sectors, make start-up, land acquisition, and commercial arbitration procedures efficient and transparent, and have strong laws protecting investor interests.’

However, the IAB study also offers this important caveat:

But this correlation does not imply existence or direction of a causal relationship. Many other variables—such as market size, political stability, infrastructure quality, or level of economic development—are likely to better explain the relationship.

The degree to which a national legal framework will encourage or restrict foreign direct investment (FDI) may change over time depending on a country’s economic and political circumstances. For example, during the 1960s and 1970s, many developing countries seeking economic independence adopted policies of “self-reliance,” expropriated foreign investments, promoted “import-substitution industries,” restricted the inflow of foreign capital and technology through heavy regulation, and curtailed the import of foreign goods through high tariffs and rigorous exchange controls.2 Thus, for example, (p. 37) annual nationalizations of foreign-owned property grew steadily from 1960 and reached its peak in the mid-1970s.3 Beginning in the mid-1980s, this trend was reversed as countries increasingly enacted legislation and regulations to encourage foreign investment and reduced those regulations that restricted and controlled foreign capital.4 For example, in 2000 alone, seventy countries made a total of 150 legislative and regulatory changes affecting foreign investment, only three of which (ie 2 percent) were considered to be restrictive.5 During the following decade, a new trend emerged in national legislation toward more restrictive provisions so that in 2010 74 countries adopted 149 measures affecting foreign investment, of which forty eight (ie 32 percent) were judged to be restrictive,6 leading the United Nations Conference on Trade and Development (UNCTAD), a close observer of foreign capital movements, to identify a new “ … long-term trend of investment policy becoming increasingly restrictive rather than liberalizing.”7

As important as the restrictions and incentives set down in national laws and regulations are the extent to which national legal frameworks recognize and enforce the two fundamental building blocks of the investment process, property rights and contractual rights. Both of these rights are the creation of some national legal system; both are legal constructs. How the national legal framework conceives of, defines, and enforces these two rights is fundamental to the process of undertaking and operating an investment project. As Nobel Prize-winner Douglass C. North has written:

Property rights are the rights individuals appropriate over their own labor and the goods and services they possess. Appropriation is a function of legal rules, organizational forms, enforcement and norms of behavior–that is, the institutional framework.8

The purpose of property rights is to constrain the behavior of other persons and organizations who would seek to appropriate another person’s labor, goods or services for themselves and against the will of that person. For foreign investors, the importance of effective property rights lies in the extent to which they effectively inhibit the host government, local cartels, business competitors, and criminal gangs, among others, from seizing or otherwise interfering with the investor’s use and benefit of the physical and intangible things incorporated in its investment. In modern economies, and particularly in the realm of investment, the subject of property rights is not limited to physical things. Also important are intellectual property rights, the rights that the law granted to persons over creations of the mind, including inventions, literary and artistic works, designs, and artistic creations.

Countries have developed systems for the recognition and enforcement of property rights because they have come to believe that such systems will bring them economic benefits. Insecure or poorly enforced property rights are seen as inhibiting economic growth in at least four ways. First, insecure or poorly enforced property rights increases (p. 38) the risk of expropriation by governments or seizure by nongovernmental groups of an investor’s assets and thereby reduce the incentive to invest and produce economically. Second, insecure property rights increase the costs of protecting the physical and intangible things in the investor’s possession. Third, insecure property rights prevent or inhibit the most efficient use or deployment of economic resources. For example, an investor may be unwilling to deploy its most advanced technology in a country with inadequate legal protection of intellectual property but would be willing to risk a less advanced and less efficient technology. And finally, insecure property rights prevent or make more costly other useful economic transactions, such as securing financing through the provision of collateral.9

Because of the centrality of property rights to the economy and society, the national legal framework of countries often includes constitutional provisions that recognize and define property rights, thus establishing a foundation for their treatment in other parts of the national legal system. For example, the Fifth Amendment of the Constitution of the United States provides: “No person shall … be deprived of life, liberty or property without due process of law; nor shall private property be taken for public use, without just compensation.”10

The effectiveness and security of property rights under national law depend on much more than constitutional provisions. Above all, it requires the resources and commitment of the political authorities and the courts to enforce and implement them. In this regard, countries throughout the world differ in their willingness and ability to recognize and enforce property rights, a factor that international investors consider in evaluating the political risk to be encountered in individual countries.11

Contractual rights are the second fundamental building block for international investment. For parties concerned with the investment process, two dimensions of contractual rights are particularly important: (1) the scope of contractual freedom and (2) the actual security and enforcement of contractual rights. The first deals with the matters over which individual parties may contract. Thus, certain rules relating to investment may by law be (p. 39) subject to national law exclusively, not contractual arrangements. For example, some national legal frameworks may specify which economic sectors are open and which are closed to foreign investment, they may require investors to have a local partner, and may limit the maximum amount of equity that a foreign national may hold in an investment project. Other countries may leave these matters to whatever arrangements the parties to the investment may make.

The second dimension, the security and enforcement of contractual rights obtained by parties to the investment, also varies from country to country. Like property rights, contractual rights are crucially dependent on the willingness and resources of the political and judicial authorities of the countries concerned. Whereas property rights are threatened by the actions of others who seek to appropriate goods and services held by a person, contractual rights are threatened by the unwillingness of other persons to act in accordance with their contractual promises. Generally speaking, economically advanced countries provide effective means for the enforcement of contracts since contractual transactions have been key factors in their economic development and prosperity. Economically underdeveloped countries, on the other hand, often attach much less importance to them, a deficiency that has impeded their economic advancement. Douglass C. North has written that “ … the inability of societies to develop effective, low-cost enforcement of contracts is the most important source of historical stagnation and contemporary underdevelopment in the Third World.”12 Let us now examine the contractual legal framework for investment.

3.3  The Contractual Framework

An international investment is not only subject to the legal rules set down in national laws, but it is also governed by the rules contained in the provisions of one or more contracts. These contracts, which are given effect and made enforceable by some applicable system of national law, govern numerous important matters relating to the organization, structure, operation and functioning of the investment, and the respective rights and obligations of the investors. Together, they constitute the contractual legal framework of the investment.13 They are also a source of law binding the parties to the investment. As a result, one cannot fully understand and evaluate an investment without examining and analyzing its contractual framework. But unlike the elements of the national legal framework, the provisions of the contractual framework are determined to a significant extent through negotiations of the parties concerned.

Not only is the enforceability of contracts dependent on national law, but the very ability of the parties to make their own rules for their investment is also dependent on that law. Thus, for investors and their lawyers planning an investment, a fundamental question is the extent to which national law will permit them to make rules by contract and the extent to which the national law prohibits such private law-making, a subject often referred to as “party autonomy.” For host governments, the extent to which foreign investors will enjoy party autonomy to shape their own investment rules is an important public policy question. Investors must constantly ask to what extent will a particular facet of an investment be subject to public ordering and therefore be governed by the national legal framework and to what extent will aspects of the investment process be subject to private ordering and (p. 40) therefore fall within the domain of the contractual legal framework. Governments seeking a greater role for state intervention in the economy often implement this goal by removing certain elements of ordering economic transactions from the realm of a country’s contractual framework to the realm of its national legislative framework. Countries seeking to liberalize their economies, on the other hand, often do so by giving greater scope and freedom to the role of contract in ordering economic and investment transactions.

A case from Nigeria illustrates the problem of the interplay between a country’s national and contractual framework. In an effort to indigenize the Nigerian economy, to encourage the development of Nigerian entrepreneurs, and to give Nigerian nationals greater control over the country’s economic resources, the government of Nigeria adopted the Nigerian Enterprises Promotion Act (NEP) of 1977, which required that Nigerian ownership in certain types of enterprises be not less than 60 percent. At the same time, the Nigerian Companies Act gave the incorporators of companies significant scope—that is, contractual freedom—to allocate corporate decision making power according to their discretion and wishes. Following the passage of the NEP Act, a group of Nigerian investors entered into a joint venture with a Japanese company to establish an assembly plant. The Nigerians contributed 70 percent of the venture’s capital and the Japanese 30 percent, thus satisfying the requirements of the NEP Act. However, since the Japanese were also providing technology and management to the enterprise they wanted to be in a position to influence, if not totally control, important decisions made by the joint venture company. The enterprise’s articles of association therefore provided for two classes of shares, Class A Shares held by the Nigerians and Class B shares owned by the Japanese. The article further provided that every resolution of the company had to be supported by a majority of each class, thus giving the Japanese, despite their minority equity position, an effective veto over corporate actions. Furthermore, it also provided that in relation to “special matters,” which included the appointment and terms of service of the managing and assistant managing director, directors elected by Class A shares, held by the Nigerians, would have one vote but that directors elected by Class B shares, held by the Japanese, would have three votes. Thus, by contract the joint venture partners sought to create a control structure for the firm that they believed best served their interests.

The Nigerian Companies Act required that the documents creating the new company be approved and recorded by the Nigerian Registrar of Companies. Upon reviewing the control structure created by the parties, the Registrar declined to register the new company on the grounds that it conflicted with the intent of the NEP Act, a decision that the investors proceeded to challenge in the courts. The court held that the joint venture, being 70 percent owned by Nigerians complied with the NEP Act, despite the control structure agreed by the parties; consequently, the Registrar of Companies could not refuse to register the joint venture company. The court therefore directed the Registrar of Companies to do so.14

Contracts are an inherent part of organizing and operating any foreign direct investment. Even a simple direct foreign investment, for example a joint venture between a United Kingdom company and a Thai firm to manufacture air conditioners in Thailand, will necessitate numerous contracts. Some of the principal types of such contracts, to be considered in subsequent chapters of this book include the following:

(p. 41) a)  Investor Contracts.

Investor contracts include agreements among the investors and between the investors and the investment enterprise. Investors undertaking an investment must first negotiate contracts to set down their agreements as to their respective rights and obligations. Thus, in the case of the joint venture between the UK company and the Thai firm, the parties will conclude at a minimum a joint venture agreement, setting out their understanding of the proposed enterprise, the articles of incorporation and the statutes of the legal entity that is to operate the investment, and a shareholder agreement as to how they will vote their shares and conduct themselves in participating in the management of the company.

b)  Enterprise Supply, Finance, and Sales Contracts.

These are contracts between an investment entity, for example the Thai air conditioner manufacturing company, and various external parties that will provide the entity with resources and services where necessary. Thus, there may be loan agreements with banks to provide debt financing, licensing agreements with other companies to provide, for example, intellectual property or, technology, and components to support the manufacturing process, and long-term supply contracts with Thai and foreign companies for the necessary raw materials. Other contracts may govern the disposition and sale of the products and services of the investment enterprise. Certain of these contracts may require as a condition an additional contract in the form of a guarantee by one or more of the investors to guarantee the performance of the investment enterprise, for example that it will repay its loans to creditor banks as promised.

c)  Insurance Contracts.

The investors or the enterprise in which they have invested may enter into a variety of insurance contracts to protect against various risks faced by their investment. One important type is political risk insurance, which is the subject of Chapter 11. Political risk insurance is offered by three sources: national governments, private insurance companies, and international organizations. For example, many home governments offer foreign investment insurance to their nationals, and such insurance contracts, which are designed to protect the investor against political risks such as expropriation, currency inconvertibility and political violence, become an important part of the investment’s contractual legal framework.

d)  State Contracts.

Contracts between the investors or the investment enterprise on the one hand and government entities of states having jurisdiction over the investment transaction, on the other, constitute a fourth important group of agreements that form the contractual legal framework. They take many different forms and bear many different names: investment accords, development contracts, public service concessions, and tax stabilization agreements, to mention only a few. Generally speaking, such contracts have one or both of two broad purposes: (1) to provide investors or their investments with certain desired guarantees and benefits; and (2) to regulate and control the conduct of the investors or their investment. As an example of the first, a host country government, in order to attract a desired foreign investment, might promise to exempt an investor or an investment enterprise from taxation for a fixed period of time. With regard to the second, a country which had granted a foreign investor a concession to operate a public service for a period of time would ordinarily require that investor to enter into an elaborate contract regulating in detail how that public service is be operated and imposing penalties on the investor for failure to meet its contractual obligations.

Investor–state contracts have been part of the foreign investment process for hundreds of years. Indeed, since the very inception of international investment, foreign investors have (p. 42) sought assurances from the sovereigns in whose territory they have invested that their interests would be protected from negative actions by the sovereign and local individuals and even that the sovereign would grant them certain privileges and benefits that nationals themselves did not enjoy. Often these assurances and grants of privilege would be embodied in some kind of document that the sovereign issued or agreed to. In the era before the formation of states that conducted foreign relations, traders and investors often formed themselves into associations and would negotiate directly with foreign sovereigns to obtain such assurances and grants. For example, in 991 AD, the Byzantine Emperors Basil II and Constantine VIII, in a document known in Latin as a chrysobul, granted directly to the merchants of Venice the rights to trade in the ports and other places of the Byzantine Empire without paying customs duties, as well as the right to a quarter in Constantinople, known as an embolum, for dwelling and trading.15 Various other sovereigns also granted concessions and franchises to individuals or groups of traders and investors. Such developments were also taking place across Western, Northern, and Eastern Europe at the time. For example, King Henry II of England issued a grant, dated 1157 AD, guaranteeing protection to German merchants from Cologne and to their establishment in London.16

While these documents were not called agreements, but rather were designated as “grants” or “concessions,” and usually took the form of a unilateral act by the sovereign, they were normally the product of negotiation to some degree between the sovereign or his representatives and the foreign traders who were their beneficiaries. Sovereigns were motivated to grant protection and privileges to foreign traders out of a desire to secure certain advantages for themselves, such as the promotion of foreign trade or the improvement of relations with other groups in foreign territories. Thus the basis of these early grants and concessions was reciprocity of benefits, a rationalization articulated, for example, by King Erik of Norway in 1296 AD when he granted the Hamburg merchants extensive privileges for the purpose of “ad meliorandum terram nostram cum mercaturis”—“for the amelioration of our territories through trade.”17

3.4  The International Legal Framework

The international legal framework for investment consists of international law and international legal institutions. International law has traditionally been conceived as the law governing relations among states.18 Strictly speaking, in former times, international law did not apply to individuals and private organizations. Thus, rules of international law applied directly only to sovereign states and were not enforceable against private parties except to (p. 43) the extent that they were sanctioned by individual nations and states. In the contemporary era, however, international law has given a growing role to nonstate actors. One authoritative definition states: “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.”19 As will be seen, international law affects private international investment transactions in at least three ways. First, it influences domestic legislation affecting transactions. Many elements of national legislation and regulation governing international business have their origin in or are at least linked to the international system, and individual states enforce them because they are bound to do so by international agreement. Thus, for example, many national regulations on monetary matters or trade questions are determined by prevailing international treaties, such as the Articles of Agreement of the International Monetary Fund20 and the General Agreement on Tariffs and Trade. Second, certain rules of international law apply directly to individuals and companies and may even afford them an international means of redress when a state fails to respect those rules. For example, bilateral investment treaties guarantee foreign investors a specific level of protection under international law and grant them the ability to invoke international arbitration when a host state fails to respect its treaty obligation. Third, international law creates international organizations and institutions, such as the International Centre for Settlement of Investment Disputes (ICSID), which play important roles in many areas of international investment.21

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?

The most generally accepted statement of the sources of international law is found in Article 38(1) of the Statute of the International Court of Justice,22 which provides:

  1. 1.  The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply:

    1. a.  international conventions, whether general or particular, establishing rules expressly recognized by the contesting states;

    2. b.  international custom, as evidence of a general practice accepted as law;

    3. c.  the general principles of law recognized by civilized nations;

    4. 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.23

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. Judicial decisions and the writings of legal scholars are not in (p. 44) 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.24 Since these three sources (in particularized form) constitute the foundations of international investment law, let us examine each briefly. Thereafter, we will also consider another important element of the international legal framework: international organizations.

(a)  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 international investment, important international sources of law include the North American Free Trade Agreement,25 the Energy Charter Treaty,26 and the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States.27 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.28

The basic international law governing treaties and their interpretation and application is the Vienna Convention on the Law of Treaties.29 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 a treaty, that state may not invoke that internal law as a justification for not performing its obligations under the treaty.30 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 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 nonsignatories.31 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, ie customary international and general principles of law.32 It is generally agreed that should a custom of international (p. 45) law conflict with a treaty provision, the treaty provision will prevail unless the custom is determined to fall under Article 53 of the Vienna Convention 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.”33

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 which as of 2011 embodied over 3,100 distinct international agreements.34 Thus, one may say that the international legal framework for investment has undergone a significant treatification in the latter part of the twentieth and the first part of the twenty-first century.35

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 to international investment. 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 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.36

(b)  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 a legal obligation.37 With respect to the first criteria, the practice of states is what 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 (p. 46) by governments in respect of international matters.38 To satisfy this first criterion, the practice, according to the ICJ, must be “both extensive and virtually uniform.”39 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 … ”40

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[] in such a way as to show a general recognition that a rule of legal obligation is involved.”41

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, for example, 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.

(c)  General principles of law,

referred to in the ICJ statute as “general principles of law recognized by civilized nations,” constitute the third and final source of international law.42 This source of law refers to the legal principles that are common to the world’s major legal systems.43 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 there is broad acceptance in the world’s legal systems.44

(d)  International Organizations and Institutions.

In addition to the rules of international law, the international framework for investment also consists of international organizations. They consist of two types: (1) intergovernmental organizations, whose members are states, and (2) non-governmental organizations, whose members are essentially nonstate actors.

Intergovernmental international organizations are institutions, such as the World Bank, the International Centre for Settlement of Investment Disputes, and the International (p. 47) Monetary Fund, by which sovereign states agree to cooperate with one another in a given area of international relations. International organizations are ordinarily created by international treaty and their powers are derived from the authority granted them by their membership. Through the conventions creating them and other acts of delegation of authority, such organizations make rules and decisions that can have an impact on international investment activities. Thus, for example, the World Bank, formally known as the International Bank for Reconstruction and Development,45 along with its affiliates the International Finance Corporation46 and the International Development Association,47 are major investors in development projects throughout the world, and its other affiliate, the ICSID,48 has become a leading forum for arbitrating investor–state disputes. Although many intergovernmental international organizations have a global focus, the scope activity of others, such as the European Investment Bank,49 European Bank for Reconstruction and Development,50 and the North American Free Trade Commission,51 may be limited to particular regions.

International nongovernmental organizations are essentially organizations of private persons and organizations from diverse countries that have joined together to pursue activities that are international in scope. Thus, the International Chamber of Commerce (ICC) is a global institution composed of private business organizations that seeks to foster and strengthen international business activity in a variety of ways, including the development of common rules with respect to international business transactions and the provision of facilities for the settlement of international investment disputes.

3.5  The Interrelationships of the Three Legal Frameworks

The three legal frameworks for international investment, while conceptually distinct, are interrelated. Thus, the contractual framework is shaped and influenced by the national legal framework, and the international legal framework may constrain and influence the content of the national legal framework. For example, a purpose of investment treaty provisions prohibiting expropriation except on payment of just compensation or requiring that investment treatment be “fair and equitable” is to constrain the actions that national governments may take with respect to international investors. At the same time, the (p. 48) applicability of an international treaty provision may depend on the nature of rights gained under national law. For example, if an investor engaged in a transaction that does not result in property rights under national law, treaty provisions on expropriation may be inapplicable since the investor had nothing that was expropriated. As a result of these interrelationships, investors, host government, and home governments must constantly bear in mind all three frameworks as they pursue their interests through the foreign investment process.

Footnotes:

1  See, eg, The World Bank Group, Investing Across Borders 2010—Indicators of Foreign Investment Regulation in 87 Economies (2010), and its related online database that offers “indicators measuring how countries around the world facilitate market access and operations of foreign companies. For each of the 87 countries surveyed, the report identifies sectors with restricted entry for foreign investors, defines roadmaps for companies seeking to create foreign subsidiaries and acquire real estate, assesses the strength of commercial arbitration systems, and presents dozens of other indicators on regulation of foreign direct investment.” Available at <http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/IAB-report.pdf>.

2  For a discussion of legislation and regulation enacted by East African states in the 1970s to reduce foreign influence in their economies, see P Sebalu, “East African Community,” 16 Journal of African Law (1972) 345, 360. “In the recent past, the most significant developments which have affected the growth of the community have been: (a) measures by the Partner States to remove the control of the economy from the hands of noncitizens and putting it into the hands of citizens or of the state by nationalisation [sic] or State trading Corporations; (b) exchange control … ” See generally, AM Akimuni, “A Plea for the Harmonization of African Investment Laws,” 19 Journal of African Law (1975) 134 (discussing numerous examples of governmental interference with foreign economic activity).

3  United Nations, World Investment Report (1993) 17. The United Nations identified 875 distinct acts of governmental taking of foreign property in 62 countries in the period 1960–74. DL Piper, “New Directions in the Protection of American-Owned Property Abroad,” 4 International Trade Law Journal (1979) 315.

4  See JW Salacuse, “From Developing Countries to Emerging Markets: A Changing Role for Law in the Third World,” 33 The International Lawyer (1999) 875, 885–9.

5  UNCTAD, World Investment Report 2011 (2011) at 94.

6  UNCTAD, World Investment Report 2011 (2011) at 94.

7  UNCTAD, World Investment Report 2011 (2011) at 94.

8  DC North, Institutions, Institutional Change, and Economic Performance (1990) 33.

9  T Besley and M Ghatak, Reforming Property Rights (2009) available at <http://www.voxeu.org/index.php?q=node/3484>.

10  Article 25 of the Constitution of South Africa, part of its Bill of Rights, treats the issue of property rights in a more detailed manner. It states in part:

25. 

Property

  1. 1)  No one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property.

  2. 2)  Property may be expropriated only in terms of law of general application

    1. a)  for a public purpose or in the public interest; and

    2. b)  subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court.

  3. 3)  The amount of the compensation and the time and manner of payment must be just and equitable, reflecting an equitable balance between the public interest and the interests of those affected, having regard to all relevant circumstances, including

    1. a)  the current use of the property;

    2. b)  the history of the acquisition and use of the property;

    3. c)  the market value of the property;

    4. d)  the extent of direct state investment and subsidy in the acquisition and beneficial capital improvement of the property; and

    5. e)  the purpose of the expropriation.

11  See, eg, the International Property Rights Index which seeks to evaluate individual countries with respect to the strength of their property rights regime. In 2010, out of 129 economies that were evaluated, the countries with the strongest property rights regimes were Sweden and Finland and the weakest were Zimbabwe and Venezuela. See International Property Rights Index 2011 Report available at <http://www.international propertyrightsindex.org/>.

12  DC North, Institutional Change, and Economic Performance (1990) 54.

13  See, eg, Article 1134 of the French Civil Code: “Agreements legally entered into have the force of law for those who have made them.” (Les conventions légalement formées tiennent lieu de loi á ceux qui les ont faites).

14  Kehinde v. Registrar of Companies [1979] 3 LRN 213. See also OA Osunbur, “Nigeria’s Investment Laws and the State’s Control of Multinationals,” 3 ICSID Review—Foreign Investment Law Journal (1988) 38–78.

15  P Fischer, “Some Recent Trends and Developments in the Law of Foreign Investment,” in K-H Boeckstiegel et al (eds), Völkerrecht, Recht der internationalen Organisationen, Weltwirtschafatsrecht: Festschrift für Ignaz Seidl-Hohenveldern (1988) 97. See also “Concessions granted to the Merchants of Venice, by the Byzantine Emperors Basilius and Constantinus, executed in March 991,” in P Fischer, A Collection of International Concessions and Related Instruments vol I, 15–18.

16  “Concessions granted to the Merchants of Venice, by the Byzantine Emperors Basilius and Constantinus, executed in March 991,” in P Fischer, A Collection of International Concessions and Related Instruments vol I, 97. Hansa societies worked to acquire special trade privileges for their members. For example, in 1157 AD the merchants of the Cologne (Köln) Hansa persuaded Henry II of England to grant them special trading privileges and market rights which freed them from all London tolls and allowed them to trade at fairs throughout England.

17  P Fischer, A Collection of International Concessions and Related Instruments (1976) xix.

18  “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 S.S. Lotus (France v. Turkey) (1927) PCIJ Series A No 10; 2 Hudson, World Ct Rep 20.

19  The American Law Institute, Restatement of the Law, The Foreign Relations Law of the United States (3rd edn 1987) vol I, § 101 at 22.

20  Articles of Agreement of the International Monetary Fund (IMF Articles of Agreement) (Bretton Woods, July 22, 1944, 2 UNTS 39). The text of the Articles of Agreement, as amended, may be found on the IMF website at: <http://www.imf.org/external/pubs/ft/aa/index.htm>.

21  Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (March 18, 1965) 17 UST 1270, TIAS 6090, 575 UNTS 159 (ICSID Convention).

22  Statute of the International Court of Justice (ICJ Statute) (San Francisco, June 26, 1945, 33 UNTS 993, 59 Stat 1055).

23  ICJ Statute, Article 38(1).

24  I Brownlie, The Principles of Public International Law (6th edn 2003) 19, 23.

25  North American Free Trade Agreement (NAFTA) (San Antonio, December 17, 1992, 32 ILM 289, 605).

26  Energy Charter Treaty (ECT) (The Hague, December 17, 1994, 34 ILM 360).

27  Convention on the Settlement of Investment Disputes Between States and the Nationals of Other States (ICSID Convention) (Washington, D.C., March 18, 1965, 575 UNTS 159, 17 UST 1270) available at <http://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf>.

28  I Brownlie, The Principles of Public International Law (6th edn 2003) A Aust, Modern Treaty Law and Practice 15 (2000).

29  Vienna Convention on the Law of Treaties (The Vienna Convention) (Vienna, May 23, 1969, 1155 UNTS 331; 8 ILM 679; 63 AJIL 875; UN Doc A/Conf.39/27).

30  Vienna Convention on the Law of Treaties (The Vienna Convention) (Vienna, May 23, 1969, Article 27); A Aust, Modern Treaty Law and Practice (2000) 144.

31  A McNair, Law of Treaties (1961) 5, 124, 749–52; RR Baxter, “Treaties and Custom,” 129 Rec des Cours (1970-I) 25, 101; RR Baxter, “Multilateral Treaties as Evidence of Customary International Law,” 41 BYIL (1965–66) 275.

32  Brownlie notes that: “[Article 38] itself does not refer to ‘sources’ and, if looked at closely, cannot be regarded as a straightforward enumeration of the sources. They are not stated to represent a hierarchy, but the draftsmen intended to give an order and in one draft the word ‘successively’ appeared. In practice the Court may be expected to observe the order in which they appear: (a) and (b) are obviously the important sources, and the priority of (a) is explicable by the fact that this refers to a source of mutual obligation of the parties.” I Brownlie, The Principles of Public International Law (6th edn 2003) 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 (1970) 86–7.

33  Vienna Convention Article 53.

34  As of the end of 2010, the UNCTAD reported that the nations of the world had concluded 2807 bilateral investment treaties and 309 free trade agreements (FTAs) with investment agreements. UNCTAD, World Investment Report 2011. To this number one must had the Energy Charter Treaty, the North American Free Trade Agreement, and various regional treaties, all of which have significant provisions governing international investment.

35  JW Salacuse, “The Treatification of International Investment Law,” 13 Law and Business Review of the Americas (2007) 155–66.

36  For example, Article 1131 of the North American Free Trade Agreement 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 Article 1105(1) of NAFTA “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” (2001) <http://www.dfait-maeci.gc.ca/tna-nac/NAFTA-Interpr-en.asp>.

37  The American Law Institute, Restatement of the Law, The Foreign Relations Law of the United States (3rd edn 1987) vol I, § 102(2) at 24.

38  The American Law Institute, Restatement of the Law, The Foreign Relations Law of the United States § 102, comment b, at 25. See also I Brownlie, The Principles of Public International Law 6 (6th edn 2003).

39  North Sea Continental Shelf (FRG v. Den; FRG v. Neth) [1969] ICJ Rep 3, 43.

40  North Sea Continental Shelf (FRG v. Den; FRG v. Neth) [1969] ICJ Rep 3, 43.

41  North Sea Continental Shelf (FRG v. Den; FRG v. Neth) [1969] ICJ Rep 3, 43.

42  On their status as a source of law, Brownlie observes that they are “a source which comes after those depending more immediately on the consent of states and yet escapes classification as a ‘subsidiary means.’” I Brownlie, The Principles of Public International Law (6th edn 2003) 15.

43  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 (1991) 50. Brownlie notes: “the view expressed in Oppenheim is to be preferred: ‘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.’” I Brownlie, The Principles of Public International Law (6th edn 2003) 16.

44  Schachter, pp. 50–55.

45  Articles of Agreement of the International Bank for Reconstruction and Development (IBRD Articles of Agreement) (Washington, D.C., December 27, 1945, 2 UNTS 134). The text of the Articles as amended effective February 16, 1989 may be found at <http://siteresources.worldbank.org/EXTABOUTUS/Resources/ibrd-articlesofagreement.pdf>.

46  Articles of Agreement of the International Finance Corporation (IFC Articles of Agreement) (Washington, D.C., May 25, 1955, 264 UNTS 118, 2197 TIAS 3620). The text of the Articles as amended through June 27, 2012 may be found at <http://www1.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc/articles+of+agreement>.

47  Articles of Agreement of the International Development Association (IDA Articles of Agreement) (Washington, D.C., January 26, 1960, 439 UNTS 249). The text of the Articles as amended effective September 24, 1960 is available at: <http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/IDA/0,,contentMDK:20052323~menuPK:115747~pagePK:51236175~piPK:437394~theSitePK:73154,00.html>.

48  ICSID Convention (n 27).

49  Treaty on the Functioning of the European Union (Treaty of Rome) (Rome, March 25, 1957, 289 UNTS 11), Articles 3(j) and 129. The Treaty of Rome contains the Protocol on the Statute of the European Investment Bank (EIB Statute), annexed to the Treaty 289 UNTS 64. The current version of the EIB statute and other relevant governing provisions may be found at <http://www.eib.org/attachments/general/statute/eib_statute_2009_en.pdf>

50  Agreement Establishing the European Bank for Reconstruction and Development (Paris, May 29, 1990, 29 ILM 1077), available at <http://www.ebrd.com/pages/research/publications/institutional/basicdocs.shtml>.

51  NAFTA, Article 2001 available at <http://www.nafta-sec-alena.org/en/view.aspx?conID=590>.