Unit 2 Evolution of Foreign

investment- Lecture 3
K M SIMFUKWE
 Prescribed reading
• Surya Subedi. 2008. International Investment
Law Reconciling Policy and Principle
• OECD (2004), “Fair and Equitable Treatment
Standard in International Investment Law”,
OECD Working Papers on International
Investment, 2004/03, OECD Publishing.
http://dx.doi.org/10.1787/675702255435
(referred to- footnote 32 &34 on application
of international minimum standard)
 The early years
Subedi (2008) observes the following :
• ‘When the Europeans began to trade and invest in Africa and
Asia they held that the local law could not be applied to them
since they were already subject to the law of their countries
• The contention was that these businessmen carried the law of
their nationality with them wherever they went and was not
subject to local law
• Implication- no expropriation or nationalisation could be
applied
• States could not do this because of the notion of an
international minimum standard
 The early years contd
• Subedi notes International investment law has
its origins in the International law concerning
the protection of aliens- a legal regime based
on international human rights law and public
international law principles of:
Fairness
Equity
Justice
Non discrimination
 National Treatment v international
minimum standard
• National Treatment
• Once developing countries began to gain
independence they began to challenge the
legitimacy of the idea that an investor’s home
country laws were superior to those of the
host country
• These arguments were premised on the
doctrines of sovereignty and sovereign
equality
 sovereignty
• Foreigners residing in the boundaries of the
should obey the laws of the host country
• Foreign investors were not entitled to greater
protection than those accorded to the
nationals of the host country
• IMPLICATION: Expropriation of assets of
foreign companies was permissible with
compensation. Sovereignity allowed for such
an activity
 National treatment standard
• The national treatment standard ensures
competitive equality and prohibits
discriminatory treatment between domestic
and foreign investors and investments. In
general, it is irrelevant whether the
discriminatory treatment is prescribed by law
(de jure) or exists only in fact (de facto).17
Mar 2023
• National Treatment - Jus Mundi
 International minimum standard footnote
32
• The international minimum standard is a norm
of customary international law which governs
the treatment of aliens, by providing for a
minimum set of principles which States,
regardless of their domestic legislation and
practices, must respect when dealing with
foreign nationals and their property.
 Distinguishing national treatment from
international minimum standard
• While the principle of national treatment
foresees that aliens can only expect equality
of treatment with nationals, the international
minimum standard sets a number of basic
rights established by international law that
States must grant to aliens, independent of
the treatment accorded to their own citizens.
 Consequences of violation of minimum
international standard
• Violation of this norm engenders the
international responsibility of the host State
and may open the way for international action
on behalf of the injured alien provided that
the alien has exhausted local remedies.
 Areas to which the international standard
applies (Footnote 34p.9
• Case law points to a number of areas across
which the notion of an international minimum
standard applies. They include: a) the
administration of justice in cases involving
foreign nationals, usually linked to the notion
of denial of justice, (see US and Mexico
General Claims Commission, Janes Claim,
United Nations, Reports of International
Arbitral Awards, 1926, IV, p.82
 Areas to which the international standard
applies
• b) the treatment of aliens under detention : in this
case the United States and Mexico General Claims
Commission maintained that the equality of treatment
with national detainees “is not the ultimate test of the
propriety of the acts of the authorities in the lights of
international law. That test is, broadly speaking,
whether aliens are treated in accordance with ordinary
standard of civilisation” (see US and Mexico General
Claims Commission, Harry Roberts Claim, United
Nations, Reports of International Arbitral Awards, 1927,
IV, 77);
 Areas to which the international standard
applies
• c) full protection and security, which is usually
understood as the obligation for the host State
to adopt all reasonable measures to physically
protect assets and property from threats or
attacks which may target particularly foreigners
or certain groups of foreigners, (see G.
Sacerdoti, “Bilateral Treaties and Multilateral
Instruments on Investment Protection”, Recueil
des Cours, Tome 269, 1997, p.347).
 Areas to which the international standard
applies
• Doctrine generally supports the view that the
latter standard provides “a general obligation for
the host State to exercise due diligence in the
protection of foreign investment as opposed to
creating ‘strict liability’ which would render a
host State liable for any destruction of the
investment even if caused by persons whose acts
could not be attributed to the State”. See R.
Dolzer and M. Stevens in Bilateral Investment
Treaties, ICSID, 1995.
 Areas to which the international standard
applies
• d) although the general right of expulsion by
the host State has never been questioned,
minimum standards have been invoked
concerning the way in which it is carried out,
which should be the least injurious to the
person affected; the classical case is Boffolo,
United Nations, Reports of International
Arbitral Awards, 1903, X, p.528.
 Arguments in favor of international
minimum standards
• Schwarzenberger cited in Subedi noted:
‘The national standard cannot be used as a means of
evading international obligations under the minimum
standard of international law. Even if the standard of
national treatment is laid down in a treaty, the
presumption is that it has been the intention of the
parties to secure to their nationals in this manner
additional advantages but not to deprive them of such
rights as in any case they would be able to enjoy under
international customary law or the general principles of
law recognised by civilised nations.’
 Basis of the justification
• The doctrine of state responsibility which provided
protection against injury to aliens and alien
property
• Barcelona Traction Case ICJ stated that:
• ‘When a State admits into its territory foreign
investments of foreign nationals whether natural
or juristic persons it is bound to extend to them
the protection of the law and assumes obligations
concerning the treatment to be afforded them.’
The Roberts, Hopkins and British claims in
the Spanish Zone of Morrocco cases
(1926), RIAA
• The General claims commission held that:
• Facts with respect to the equality of treatment of
aliens and nationals may be important in
determining the merits of a complaint of
mistreatment of an alien, But such equality is not
the ultimate test of the propriety of the acts of
authorities in the light of international law. The
test is broadly speaking whether aliens are treated
in accordance with ordinary standards of
civilisation
 Challenges
• No internationally negotiated treaty outlining the terms
and conditions of protecting foreign investment
• Reliance therefore on customary international law which
is the product of the practice of investor countries ( a
source of conflict)
• Currently the rights to regulate foreign investment must
be balanced by human rights observation. This recognised
the right to own property. Where expropriation occurs it
must be done without discrimination, for a public purpose
against the payment of appropriate compensation and in
accordance with due process of law
 The Calvo doctrine
• Is a doctrine that was opposed to the principle
of international minimum standards
• Verwey and Schrijver quoted from Subedi
summarised the doctrine as follows:
• The Calvo doctrine basically stipulates that the
principle of territorial sovereignty of the State
entails
 Summary of Calvo doctrine
1. The principle of absolute equality before the law
between nationals and foreigners
2. Exclusive subjection of foreigners and their
property to the laws and juridical regimes of the
state in which they reside or invest
3. Strict abstention from interference by other
governments notably the governments of the states
of which the foreigners are nationals in disputes
arising over the treatment of foreigners or their
property (abstention from diplomatic protection)
 Subedi p. 15 on Calvo doctrine
• ‘In simple terms according to the Calvo
doctrine land and other resources belong to
the state by virtue of the doctrine of
sovereignty and no foreign entity can
permanently own land in the host states.’
 Application of the Calvo doctrine
• Subedi notes that after the communist
revolution in Russia in 1917 and the agarian
revolution in Mexico, the governments in
those countries declared that land belonged
to the State; took assts of foreign companies
and expropriated them and nationalised them
without proper compensation on the ground
of state sovereignty and national treatment
 Response of western countries to these
actions
• Opposed to the actions taken by Russia and
Mexico
• Acknowledged the right of States to
expropriate assets of foreign companies
subject to certain restrictions in international
law
 Restrictions in international law
• Expropriation in restricted situations
• Payment of compensation
• This must be prompt adequate and effective
compensation
• These arguments gave rise to the Hull formula
 Hull Formula
• US Secretary of State Cordell Hull sent a
message to Mexico regarding the
expropriation of US oil company . His
contention was that international law required
that if expropriation takes place an investor
was entitled to:
• Prompt/ adequate and effective payment
 Prompt payment
• Schefer defines it as- the temporal element;
an investor should not need to wait for years
for payment of its lost investment
 Adequate payment
• Schefer notes- Quantum element
• An investor should receive the proper value
for its loss, one which reflects the value of the
assets put in and the expected profits that
would result from the investment had it not
been taken
 Effective payment
• Functional element; the investor should
receive compensation in a form that benefits
the former owner; this generally means that
the compensation needs to be paid in a
readily convertible currency to allow the
money to be able to flow back out of the
country
 Conclusion
• Foreign investment law evolved over time by:
• Recognising the rights of states to expropriate
foreign company’s assets albeit in a restricted
sense- public interest/ without discrimination
accompanied by payment of compensation
• Requiring that in these circumstances-
prompt, adequate and effective compensation
for the victims of expropriation