The sources of international investment law

Foreign investment law consists of general international law, of standards more specific to
international economic law, and of distinct rules peculiar to the protection of investment. In
addition, the law of the host state plays an important role. Depending upon the circumstances of
an individual case, the interplay between relevant domestic rules of the host state and applicable
rules of international law may become central to the analysis of a case. The domestic rules on
nationality may determine jurisdiction in a particular case. Other areas of domestic law that may
become relevant in a particular case include property law, commercial law, labour law, zoning
law, and tax law to name just a few.

Not only is the distinction between international law and domestic law becoming blurred by the
modern regime of foreign investment law, but also the classical separation between public and
private law, as emphasized especially in continental European legal orders, cannot be
accommodated in neat categories in this field. The broader question whether international
economic law allows for a useful distinction between private law and public law is particularly
acute in foreign investment law. The rules governing contracts between an investor and a host
state draw on both private and public law. In fact, these rules establish a link between domestic
law and public international law. To a certain extent, the rules of domestic law are being
confronted and superseded by rules of public international law, and in relevant international
cases, the decision of arbitrators will turn on their understanding of domestic law, possibly
accompanied by a process of review of domestic law under the international standards contained
in treaties and in general international law.

(a) The ICSID Convention

The Convention on the Settlement of Investment Dispute between States and Nationals of other
States is a multilateral treaty. It provides a procedural framework for dispute settlement between
host states and foreign investors through conciliation or arbitration.47 The Convention does not
contain substantive standards of protection for investments. Also, participation in the ICSID
Convention does not amount to consent to arbitration.

(b) Bilateral investment treaties

BITs are the most important source of contemporary international investment law. Some
countries, such as Germany, Switzerland, and China, have concluded well over 100 BITs with
other countries; and it is estimated that close to 3,000 BITs are in existence worldwide.

BITs provide guarantees for the investments of investors from one of the contracting states in the
other contracting state. Traditionally, BITs are relatively short with no more than 12 to 14
articles. They typically consist of three parts.

The first part offers definitions, especially of the concepts of ‘investment’ and ‘investor’.

The second part consists of substantive standards for the protection of investments and investors.
Typically these contain: a provision on admission of investments; a guarantee of fair and
equitable treatment (FET); a guarantee of full protection and security; a guarantee against
arbitrary and discriminatory treatment; a guarantee of national treatment and a guarantee of
most-favoured-nation treatment (MFN clause); guarantees in case of expropriation; and
guarantees concerning the free transfer of payments. These various standards and guarantees are
described in some detail in Chapters V, VI, and VII.

The third part deals with dispute settlement. Most BITs contain two separate provisions on
dispute settlement. One provides for arbitration in the event of disputes between the host state
and foreign investors (investor-state arbitration). Most BITs contain advance consent of the two
states to international arbitration with investors from the other state party either before an ICSID
tribunal or through some other form of arbitration. The other provision on dispute settlement in
BITs provides for arbitration between the two states parties to the treaty (state-state arbitration).
Whereas investor-state arbitration under BITs is very common, state-state arbitration has
remained rare.

The classical BIT of the past decades has addressed only issues of foreign investment. More
recently there is a trend to negotiate provisions on foreign investment in the context of wider
agreements, called free trade agreements (FTAs). As the name indicates, these FTAs also address
trade issues. This trend seems to have started with the agreement between Canada and the United
States in 1989, which formed the basis for the NAFTA concluded in 1994 between these two
states and Mexico. With the recent tendency to conclude bilateral or regional trade agreements in
addition to the global rules of the WTO, states have been inclined to conclude broad agreements
on economic cooperation regionally or bilaterally, instead of agreements specifically aimed at
matters of trade or foreign investment. The number of these FTAs also covering rules on foreign
investment has increased in recent years. The European Commission is negotiating FTAs with
third countries, containing provisions on trade as well as on investment.

At times, it has been argued that some BITs are negotiated in haste and without detailed
consideration of their implications. Typically, capital-exporting states have formulated a model
treaty for their own purpose, and have presented this informal document to capital-importing
states at the beginning of negotiations as a basis for the subsequent negotiations. However,
developing states have gradually developed their own preferences for a certain scheme of
treaties, sometimes with their own model draft. Also, treaties have been negotiated between
developing countries.

As more and more treaties have been concluded, and as the international discussion on the nature
and the details of these treaties has progressed, including the contours and substance of
individual clauses, any argument to the effect that host states have de facto accepted investment
obligations without proper knowledge of their scope and significance will become less
convincing. Investment treaties are today seen as admission tickets to international investment
markets.51 Their limiting impact on the sovereignty of the host state, controversial as it may be in
the individual case, is in this sense a necessary corollary to the objective of creating an
investment-friendly climate.
(c) Sectoral and regional treaties: the Energy Charter Treaty and NAFTA

The first multilateral treaty containing substantive rules on foreign investment is of a sectoral
nature and not meant for universal membership. The ECT of 199453 essentially grew out of the
desire of European states to cooperate closely with Russia and the new states in Eastern Europe
and Central Asia in exploring and developing the energy sector, which is of crucial political,
economic, and financial importance for both sides. Membership was open to all states committed
to the establishment of closer cooperation and an appropriate international legal framework in
the energy sector.

The scope of the ECT is not limited to investments but covers a wide range of issues such as
trade, transit, energy efficiency, and dispute settlement. The chapter on investment is mostly
patterned along the lines of bilateral investment treaties concluded by the member states of the
European Union. Its substantive standards are similar to those contained in BITs.54 However, the
Treaty also contains some innovative features, such as special provisions concerning state
entities and sub-national authorities,55 and a ‘best-efforts’ clause concerning non-discrimination
in the pre-establishment phase,56 coupled with an expression of intent to transform it into a
legally binding obligation in the future.57

The Treaty entered into force in 1998. So far, 51 states and the European Union have ratified the
Treaty. Russia has signed, but currently does not intend to become a party.58 Under the Treaty,
investors have the right to bring a suit before ICSID, before an arbitral tribunal established under
the UNCITRAL arbitration rules, before the Arbitration Institute of the Stockholm Chamber of
Commerce, or before the courts or administrative tribunals of the respondent state.59 Thirty
investment disputes were initiated between 2001 and 2011 under the framework of the ECT.

The NAFTA between Canada, Mexico, and the United States (1994)60 addresses matters of both
trade and investment. The Treaty aims at the free movement and liberalization of goods,
services, people, and investment. Chapter Eleven of the NAFTA specifically addresses the
treatment of investments. References(p. 16) The objective enunciated in Article 102 is to
increase substantially investment opportunities in the territories of the parties.61

The trade provisions in the NAFTA are largely built on the rules of the WTO, of which all three
NAFTA countries are members. Chapter Eleven on investment amounted to a bold and
innovative scheme inasmuch as it tied Mexico as a developing country to its two northern
developed neighbours against a history replete with conflict, especially in investment matters.62
In substance, Chapter Eleven builds upon the treaty practice of the United States, including the
treaty with Canada concluded in 1989.

The tripartite structure of Chapter Eleven contains substantive obligations in Section A (Arts
1101 to 1114), rules on dispute settlement in Section B (Arts 1115 to 1138), and a number of
definitions in Section C (Art 1139).

The substantive obligations cover traditional issues such as national treatment, MFN treatment,
performance requirements, the selection of senior management and board of directors, transfers,
and possible denial of benefits to investors owned or controlled by investors of non-NAFTA
states. In practice, the rules on expropriation (Art 1110) and on the ‘Minimum Standard of
Treatment’ (Art 1105) have received most attention and have led to a number of legal disputes
and public controversies.

Dispute settlement is governed by Section B of Chapter Eleven. Under Article 1120 an investor
may bring a suit against the host state under the ICSID Convention. But this provision is
operative only if both the home state and the host state have ratified the ICSID Convention. In
fact, only the United States—and not Canada or Mexico—is party to the ICSID Convention. A
second choice is to submit the dispute to arbitration under the ICSID Additional Facility Rules of
1978 which do not require that both states are ICSID parties—only that one of the two states is a
party. Therefore, the Additional Facility is available if the United States is either the respondent
or the claimant’s home state. The Additional Facility follows rules different from ICSID
regarding the applicable law (no reference to the law of the host state), annulment (no annulment
under ICSID rules, but review by References(p. 17) domestic courts), and enforcement (no
enforcement under ICSID rules). The third possibility open to the investor is to have the
arbitration governed by the UNCITRAL Arbitration Rules.

The right of the investor to file a suit against the host state under Section B is limited to breaches
of the rules contained in Section A. The governing law is limited to the NAFTA itself and to
applicable rules of international law (Art 1131(1)).

As regards rules in other parts of the Agreement, such as those on transparency, only the member
states may bring them before an arbitral tribunal (Chapter 20, Art 2004). The member states also
have the right to make a submission on a question of interpretation if they are not a party to a
dispute (Art 1128).

From a broader perspective of international economic law, the most remarkable feature of the
dispute resolution scheme contained in the NAFTA lies in the fact that while it addresses matters
of both trade and investment, it contains separate rules on dispute resolution and, in accordance
with the practice of previous decades, recognizes the right to bring a suit for an investor but not
for a trader. This dualism now seems to be entrenched in state practice, some divergences and
concerns notwithstanding.

(d) Customary international law

Although international investment law is dominated by treaties, customary international law still
plays an important role. The treaty-based rules have to be understood and interpreted, like all
treaties, in the context of the general rules of international law. Article 31(3)(c) of the Vienna
Convention on the Law of Treaties provides that together with the Treaty’s context ‘any relevant
rules of international law applicable in the relations between the parties’ shall be taken into
account.

Customary international law remains highly relevant for the practice of investment arbitration.
Rules on attribution and other areas of state responsibility as well as rules on damages illustrate
the point. Other relevant areas of customary international law are the rules on expropriation, on
denial of justice, and on the nationality of investors.
In fact, the growing case law in the area of foreign investment has led to a situation in which
some general rules of international law find their major practical expression in foreign
investment law. The consequence is that a full contemporary understanding of these rules
requires knowledge of their interpretation and application in foreign investment law cases.

A basic doctrinal issue that has arisen pertains to the impact of the large number of bilateral
investment treaties on the evolution of customary law.63 This linkage between customary law and
treaty law has been at the forefront of comments which have addressed the state of customary
law regarding expropriation and compensation of foreign property.64

(e) General principles of law

General principles of law played a significant role in the formative period of international
investment law, prominently in the oil concession arbitrations and in the pre-BIT era (such as in
the Iran-US Claims Tribunal) but recent empirical studies indicate that they are largely neglected
by contemporary arbitral tribunals. The relative insignificant role of general principles of law in
contemporary investment jurisprudence may be explained by the interrelationships between the
various sources of international investment law (the growing numbers of treaties and tribunals'
pronouncements regarding customary rules) as well as inherent vague character of this source of
law.

General principles of law in the sense of Article 38(1)(c) of the Statute of the International Court
of Justice have received increasing attention in recent practice.65 General principles of law will
acquire importance in the context of investment rules especially in the case of lacunae in the text
of treaties and in the interpretation of individual terms and phrases.

Examples of general principles relied upon by tribunals include good faith,66 nemo auditur
propriam turpitudinem allegans,67 estoppel,68 onus probandi,69 and the right to be heard.70

(f) Unilateral statements

The legal effect of unilateral statements and the conditions under which these may be considered
binding have played a prominent role in some cases, especially in the context of the guarantee of
fair and equitable treatment (FET). Here, the principle of good faith is closely tied to the
operation of the principle of estoppel. The International Court of Justice and its predecessor have
recognized that unilateral declarations will be binding if the circumstances and the wording of
the statement are such that the addressees are entitled to rely on them.71 The International Law
Commission has adopted Guiding Principles applicable to unilateral declarations of states
capable of creating legal obligations.72

This situation may also arise in the relationship between the host state and the foreign investor. 73
Arbitral tribunals have so held on the basis of the principle of good faith.74 In Waste
Management v Mexico, the Tribunal found that in applying the FET standard, ‘it is relevant that
the treatment is in breach of representations made by the host State which were reasonably relied
on by the claimant’.75
In Total v Argentina76 the Tribunal said:

References(p. 19) Under international law, unilateral acts, statements and conduct by States may
be the source of legal obligations which the intended beneficiaries or addressees, or possibly any
member of the international community, can invoke. The legal basis of that binding character
appears to be only in part related to the concept of legitimate expectations—being rather akin to
the principle of ‘estoppel’. Both concepts may lead to the same result, namely, that of rendering
the content of a unilateral declaration binding on the State that is issuing it.77

(g) Judicial Decisions

Article 38(1)(d) of the ICJ Statute provides that judicial decisions (along with scholarly writings)
constitute ‘subsidiary means for the determination of rules of law’. Though this provision indicates that
judicial decisions play only a secondary role, international courts (and remarkably the ICJ) take part in the
law-making process and significantly influence the development of international investment law.

Decisions of international tribunals also play a significant role in the reality of international investment
jurisprudence. Accordingly, almost all investment awards in the past two decades include numerous
references to prior decisions of investment tribunals. As discussed above, investment tribunals often cite
decisions of the ICJ as authoritative statements of existing international legal rules, most prominently ICJ
decisions regarding reparations,106 state responsibility and the law of treaties.

(h) Scholarly Writings

‘Teachings of the most highly qualified publicists of the various nations’ constitute the last source of
international law mentioned in Article 38(1)(d) of the ICJ Statute, and they are referred to as a subsidiary
means for the determination of international legal rules. The ICJ rarely refers to the opinions of writers in
its decisions (although more references appear in the opinions of individual judges). Nevertheless,
scholarly writings are an important source for organizing and analyzing the structure and content of
international law; and for elucidating the nature, history and practice of the rules of law, and they
certainly influence tribunals’ decisions.

In contrast to the practice of the ICJ, the WTO Appellate Body and the European Court of Human Rights
(which rarely refer to writers’ opinions), investment arbitrators refer to scholarly writings in almost all
instances. Writers’ publications are extensively used with regard to specific treaty interpretation and
questions concerning rules of international customary law. Scholarly writings are often used to establish a
point of departure for further legal analysis and tribunals frequently employ experts’ writings to define
‘tests’ to be later utilized as conditions for applying rules.

Scholarly writings include numerous references to soft law instruments, and preparatory works leading to
non-binding instruments (such as the ILC rules on state responsibility) extensively cite a wide range of
scholarly works.
RELATIONSHIPS BETWEEN SOURCES OF INVESTMENT LAW

Different rules deriving from various sources of investment law may contradict each other, and the
proliferation of BITs as well as the increasing number of investment tribunals’ awards are likely to
engender more inconsistent rules.

International norms that are considered as jus cogens (peremptory norms) prevail over all other
inconsistent rules of international law.

Article 53 of the 1969 Vienna Convention on the Law of Treaties further establishes that such a
conflicting treaty is void. The superior normative status of jus cogens rules has also been confirmed in
several investment awards.

Unless peremptory rules of international law are involved, Article 103 of the United Nations Charter
provides that the Charter’s provisions prevail over other incompatible treaties.139 The special status of
the UN Charter’s provisions was affirmed by the ICJ’s decision in the Lockerbie case regarding the
relationship between Article 25 of the Charter and the 1971 Montreal Convention for the Suppression of
Unlawful Acts against the Safety of Civil Aviation.

International investment tribunals have extensively cited various provisions of the Vienna Convention but
they have yet to effectively resort to Article 53 regarding the primacy of the rules of jus cogens or UN
Charter provisions over investment treaties. Still, these well-known principles of public international law
may be applied by future investment tribunals. This is particularly true with regard to arguments
regarding inconsistencies between human right treaties and investment treaties’ obligations

 Where different international rules derived from customary and treaty law, such a contradiction may
arise, for instance, where a rule included in an investment treaty is inconsistent with a customary rule
regarding environmental protection.

Under international law, treaty and custom generally have equal weight, and inconsistencies are regulated
by three interrelated principles:

(i) lex specialis derogat legi generali – i.e. a specific rule prevails over a general one;

(ii) lex posterior derogat legi priori – a later rule prevails over a prior one; and

(iii) respecting the parties’ intentions – where the parties intended to replace a rule deriving from one
source of international law with another rule included in another source of law (e.g. replacing a customary
rule with a treaty rule), the rule preferred by the parties will prevail.

The above principle regarding the priority of a specific rule over a general one was confirmed by the
Enron case in which the tribunal addressed the relationship between a rule included in the Argentina-US
BIT (regarding emergency cases) and rule of customary international law (article 25 of the ILC on state
responsibility).