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Department of Law Spring Term 2020
Master Programme in Investment Treaty Arbitration Master’s Thesis 15 ECTS
ISDS vs. Diplomatic protection
What venue, for future investment disputes, would be the best of choices in accordance to have justified investment protection?
Author: David Carlsson
Supervisor: Ylli Dautaj
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Abstract
From the end of 18th century, investors from the Western hemisphere were in need of a protection for their investors. Whenever, inter alia, host-States of Latin America could not – or did not – assist the foreign investors through sufficient local remedies, investors instead sought remedies through their own government. This process is known as diplomatic protection, which in the early stage of 19th century was a viable and good-intended dispute resolution venue.
Thus, from the mid-19th century, seeking procedural redress through the foreign investor´s home government became the common method for solving investment disputes. However, at times the diplomatic stand-off was assisted with pressure from armed forces. Thus, diplomatic protection had eventually turned into a corrupt system, sometimes used to seek vengeance for way more than the initial damage.
Towards the end of the 19th century and beginning of the 20th century, diplomatic protection was rejected and investor-state dispute settlement (ISDS) came to the surface. ISDS intended to be way less influenced by, among other things, economic pressure, military power and political influences. Instead of two States negotiating on behalf of the aggrieved investor, a tribunal of independent arbitrators were tasked with adjudicatory powers. However, dissatisfactions, criticism, and calls for illegitimacy eventually were levelled against the ISDS regime, initially during the late 20th century but more outspread now in the 21st century.
This thesis presents a historical development of diplomatic protection and ISDS;
comparing pros and cons, respectively, and culminating in an informed opinion regarding which venue is preferable for future investment disputes. The author concludes that each investor-State relation must be analysed individually before being able to determine what protection is more suitable. It is argued that each State possess a certain amount of power; hence, the investor should merely be provided a ‘fair amount of protection’.1 Hence, investors should claim their rights through conventional and common international law, without governmental support, merely seeking vengeance through host-State’s local remedies. However, since the international fora of conventional and common
1 See chapter 3.5 for further explanation.
3 international law is not yet developed to the extent, that it is completely reliable and invocable. States and investors will have to rely on the balance between ISDS and diplomatic protection, with a thorough demarcation between those, depending on the involved State´s need of a ‘fair amount of protection’.
Keywords: ‘fair amount of protection’, diplomatic protection, ISDS, local remedies, power.
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Table of Content
1. Background ... 6
1.1 Problem formulation and purpose ... 7
1.2 Delimitation ... 7
1.3 Method and sources ... 8
1.4 Demarcations ... 8
2. An Historical Account on the Roots of Diplomatic Protection and its Rejection ... 9
2.1 Background ... 9
2.2 The rise and development of diplomatic protection... 9
2.3 The rise and development of ISDS ...14
3. The Unification of States and the cause of power ...16
3.1 Background ...16
3.2 Transcending borders ...17
3.3 The effect of investment and treaty development ...20
3.4 The development of international political order and float of economic and political power...22
3.5 The parties need of a ‘fair amount of protection’ ...26
4. Arrangements to stabilize investment concerns ...27
4.1 Background ...27
4.2 Three particular arrangements ...27
4.2.1 Calvo Clause ...27
4.2.2 Gunboat Diplomacy ...30
4.2.3 Washington Consensus ...32
4.3 Future aspects of ISDS and diplomatic protection ...34
4.3.1 ISDS ...34
4.3.2 Diplomatic protection ...37
5. Conclusion ...39
6. Bibliography ...41
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List of abbreviation
BIT Bilateral investment treaty
CCIAG Corporate Counsel International Arbitration Group ELR Exhaustion of local remedies
EU European Union
FDI Foreign direct investment
GDP Gross domestic product
ICC International Chamber of Commerce
ICSID International Centre for Settlement of Investment Disputes
IIA International Investment Agreement
IISD International Institute for Sustainable Development
IMF International Monetary Fond
ISDS Investor-state dispute settlement
NAFTA North American Free Trade Agreement
UNCITRAL United Nation Commission on International Trade Law
US United States
WTO World Trade Organisation
WWI World War I
WWII World War II
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1. Background
This research concerns pros and cons of the following two dispute settlement systems: ISDS and diplomatic protection. The latter has its roots as long back as the 18th century, it was a form of negotiation-system between two parties, normally two States. This particular method included inter alia consular action;
negotiations with the other state; political and economic pressure; judicial or arbitral proceedings or other forms of peaceful dispute settlement.2 Diplomatic protection is a way for a State to protect its own citizens; for example, an injury to an alien is considered to be an indirect injury to his home country and in taking up his case the state is seen as asserting its own rights.3 This way of negotiation has been recognized as customary international law by international courts and tribunals as well as scholars, and after the second World War (WWII), this method developed more into judicial proceedings or as an economic pressure.4 In the nineteenth and early twentieth centuries diplomatic protection was seen as a weapon wielded by wealthy nations against the poorer or less developed nations.5 As colonized nations gained independence in the early part of the second half of the 20th century, diplomatic protection came to be associated more generally with a tussle between developed and less developed States connected particularly with foreign investment by nationals of developed States.6
After the WWII, some institutions in the world, such as the World Bank, wanted a new form of settlement proceedings, something more autonomous and multilateral specialized to encourage international flow of investments, and this was the dawn of the ISDS.7 Instead of two States negotiating on behalf of the aggrieved investor, a tribunal of independent arbitrators were tasked with adjudicatory powers. The idea of ISDS was partly to decrease the influences of, among other things, economic pressure, military power and political influences.8
2 Dolzer, Rudolf, and Christoph Schreuer. , 'Principles of International Investment Law', Anonymous Translator(2nd;2; edn, Oxford, Oxford University Press, 2012), 232-233.
3 Ibid.
4 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford; Oxford University Press, 2008;2009), 10.
5 Ibid, 19.
6 Ibid.
7 Billiet, J., Benini, Maria Elenora, Le, Cari-Dee, Noilhac, Amélie & Oosterveen, Cecile, International investment arbitration: a practical handbook, (Maklu, Antwerpen, 2016), 38.
8 Chaisse, J. ‘Sixty Years of European Integration and Global Power Shifts: Perceptions, Interactions and Lessons’, (London: Bloomsbury Publishing, 2020), 314.
7 In this light, we must nevertheless ask; is ISDS really a neutral resolution system? Will influences of economic pressure, military power and politics completely vanish thanks to ISDS? Will arbitrators actually seek what is fair and just in terms of public policy and the public interest? Or will they be pushed to
‘biased justice’ for personal gain and interest?
1.1 Problem formulation and purpose
The object of this thesis is to identify the reason(s) why diplomatic protection came about to begin with and, corollary, for what reason(s) the sovereign States at a later point choose to reject diplomatic protection and replace it with the ISDS system. This culminates in whether ISDS is preferable to diplomatic protection outright, sometimes, or not at all. In comparison, pros and cons of each regime will be presented. The ultimate purpose is to analyze trends in order to propose the best venue for future investment disputes.
The result of the analyze in this thesis will contribute with a divergent viewpoint on how investment protection has developed and how investment protection possibly could be improved, in order to gain a more balanced and justified protection for both sides, i.e. investors and States alike.
1.2 Delimitation
Chapter 2 will present a thorough history background of both resolution systems – ISDS and diplomatic protection – covering the reasons of why they appeared, when it happened and for what reason diplomatic protection more or less got rejected and replaced by ISDS. Chapter 3 continues with the development of uprising Unions, covering how State borders and domestic legislation diminish, and International political order grows stronger. The outcome of chapter 3 shows how power – economic and political – transcends from States to Unions and how it affect investments. Chapter 4 describes in detail three arrangements – provisions, clauses and policies – that were produced during the development of both resolution systems, to regain order, balance and justice. A thorough analyse of what purpose these three arrangements served will be presented, and in the end of the fourth chapter, pros and cons of both resolution systems will be presented and a brief assumption of their forthcoming future. Chapter 5 will end
8 the thesis with the authors own thoughts and opinions related to the research question and purpose of the thesis.
1.3 Method and sources
The sources used in this thesis are mainly doctrines and research-papers, and to a minor extent even webpages, news and articles. The foundation of the thesis is built on a diverse selection of scholars research; explaining the history of both resolution systems, and the diverse selection of scholars contributes possible different perspectives. The webpages, news and articles are mainly highlighting certain aspects of each system, focusing on issues and solutions.
The thesis is based on a legal history method; presenting a timeline of the two resolution systems, starting with the late 18th century and continuing to 21st century. In the end of the fourth chapter, there will be future aspects of diplomatic protection and ISDS presented as well. Along with the legal history method, a comparative method is applied; extending the inequalities between the two resolution systems, illuminating pros and cons of them both.
1.4 Demarcations
The thesis will briefly contain the whole world economy and political balance between East and West – North and South, but will not cover any specific States.
There will be a great focus on the investment-development and the correlation between Europe/America and Latin America.
The thesis will have an historical point of view, covering the late 1700s, 1800s and 1900s, the two first decades of the 2000s, and some future assumptions.
Considering the analyse of more than 200 years of timespan, and the development of States through investments, this thesis will only cover major historical turnouts, with respect to the evolution of investment law and ISDS, such as Gunboat Diplomacy, Calvo Clause and the Washington Consensus.
Although more valuable points are worth mentioning, time and space are not sufficient enough for this thesis.
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2. An Historical Account on the Roots of Diplomatic Protection and its Rejection
2.1 Background
Through time, States and Unions have developed their own protection based on their different ideologies.9 Each State with its own regime, serves to protect its citizens with its domestic legislation.10 By time, States develops by interaction with other States; commerce, trade and investments were the type of interaction that boosted each State´s economy and welfare.11 Nation-wide commerce developed into international-wide investments, and soon after, investors demanded agreements and agreements demanded protection. Domestic legislation covers and protects its citizens in the region of the State – jus civile – and the development of investment now demanded a protection of the people in the region of an international plane – jus gentium.12 The second chapter will now present the introduction of the first version of investment protection – diplomatic protection – on an international plane, and its rejection.
2.2 The rise and development of diplomatic protection.
In the late 18th century, there was a growth of a variety of means of communication, and the introduction of industrialization resulted in individuals traveling to all parts of the world. The interest of extensive foreign investment increased within the jurisdiction of all States, and soon after the Renaissance and the age of discovery, nation States were entailing more complex relationships.13 This gave rise to numerous conflicts of interest and disputes, and a legislation was needed, that covers and trumps the domestic jurisdiction, a method solving uprising international disputes between parties.
The development of the western hemisphere introduced the international investment for the world, which was of great importance for sustainability and
9 https://plato.stanford.edu/entries/law-ideology/
10 Ibid.
11 National Law University, Jodhpur. 'Trade, Law and Development', Trade, Law and Development, 2009, 1-3.
12 Austin, John & Campbell, Robert, Lectures on jurisprudence or the philosophy of positive law. Vol. 1, 5. ed., the Lawbook Exchange, Clark, N.J., 2005[1885], 37-38.
13 Amerasinghe, Chittharanjan Felix, Diplomatic protection in international law, (Oxford University Press, Oxford, 2008), 9.
10 development of the States.14 The European States were well developed in comparison to the rest of the world at that time, therefore the concept of justice found in the accepted legal norms of the European States spilled over into the other hemisphere.15 In Europe, the economy was mainly built and constructed as capitalism and was tinged by individualism.16 The private property rights and sanctity of contracts were sacred matters in their legal system. In the course of the 19th century the society of States expanded beyond the European continent westward.17 The new States in the western hemisphere adapted to the procedures of investment and by time they even incorporated the tinged individualism of Europe into their legislation.18 Though, in the far East and mid-East, that was not the case, they did not adapt to the western capitalism and individualism.19 As for conditions of order and stability which were required to make the European system work satisfactorily, these had not yet been established in many States of the new society of States. Thus, there were continual clashes of interest and frequent accusations of unjust treatment of foreigners.20
A certain protection was now demanded by the investors, and in the mid-19th century, governments had begun to deal with questions concerning nationals protection abroad as legal questions which justified interposition by appeal of principle of international law, from whatever source they may have been derived.21 The settlement of disputes of this nature was gradually becoming subject to legal methods and the institution of diplomatic protection for all practical purposes took root.22
Historically the idea of diplomatic protection was already founded in the 18th century by a man named Vattel, emphasising that an injury of a citizen is an injury of a State and that the State is responsible for protecting its citizen.23 The State is bound to seek vengeance and, if possible, force the aggressor to
14 Amerasinghe, Chittharanjan Felix, Diplomatic protection in international law, (Oxford University Press, Oxford, 2008), 13.
15 Ibid, 14.
16 Ibid.
17 Ibid.
18 Ibid.
19 Ibid.
20 Ibid, 13-14.
21 Ibid, 14.
22 Ibid.
23 Vattel, Emer de, The law of nations: or, principles of the law of nature, applied to the conduct and affairs of nations and sovereigns, with three early essays on the origin and nature of natural law and on luxury, (Liberty Fund, Indianapolis, Ind., 2008), 136.
11 compensate the caused injury or punish him, since otherwise the citizen will not obtain the chief end of civil society, which is protection.24
However, a disagreement as to the justifiable scope of the upcoming protection started to evolve after some time. The usage of diplomatic protection were clearly seen between greater European States and weaker States in either Latin America or States in the far East. As the Europeans wanted to invest in the underdeveloped States in Latin America or in the far East, European investors were seeking protection in case of a dispute. It has been observed that:
The continued state of political disorder in many South American countries gave rise to a steady stream of complaints of injuries to foreigners, and to occasional resort to armed intervention to enforce demands for redress. The repeated failure of local governmental institutions to function in the expected manner led to a general loss of confidence in those institutions among foreigners, and to an increasing readiness to resort to diplomatic protection. In any event, the demands and claims fi led by other countries against the Latin-American states far exceeded the claims which these countries had against other countries.
The impression soon spread in Latin America that diplomatic protection was a practice which strong countries only resorted to against weaker countries, and never against each other. This seems to infer an inferior position for the states against which demands were regularly made.
Furthermore, the nineteenth century was an era of expansionism among the great powers, and there was a constant fear among the smaller powers that complaints regarding the lack of protection of foreign interests would be used as excuses for terrestrial conquest. These things led to the growth of a school of thought in Latin America which was vigorously opposed to the extension of the practice of diplomatic protection and which sought to confine it to the narrowest possible limits.25
If an individual´s human rights were violated abroad by another State, the individual´s State could intervene and protect its citizen and claim
24 Ibid.
25 Dunn, Frederick Sherwood, The protection of nationals: a study in the application of international law, (John Hopkins P., Baltimore, 1932), 55-56.
12 reparation/compensation for its suffered injuries.26 In practice this was mainly enjoyed by the strong European States, as it was those States that intervened wanting to protect their nationals against the policy set by the States themselves.
Inevitably, diplomatic protection of this kind came to be seen by developing nations, particularly in Latin America, as a discriminatory exercise of power rather than as a method of protecting the human rights of foreigners.27
In 1868, an Argentinean jurist named Carlos Calvo, expressed his opinion about the developed institution of diplomatic protection on behalf of the citizens of Latin America.28 From the independence and equality of States he concluded that aliens were entitled to the same kind of treatment as natives and no better, and as long as local institutions of justice were open for aliens on the same basis as the natives, there were no reason to complain for international justice.29 Calvo wanted to demonstrate that European States were in an alliance and that European States and Latin American States were not. The European States were abusing the jurisdiction between weaker and stronger States to gain advantage.
Calvo’s announcement later became known as the Calvo doctrine or Calvo Clause, and to a large extent the Latin American States implemented the doctrine into their foreign policy.30
The diplomatic protection came to be the major settlement-system from late 19th century to early 20th century. Pecuniary claims due to injuries started to accumulate against Latin American States, and the purpose was mainly to maintain pressure on the already indebted States.31 Even in some cases European States used armed intervention to withhold the power they already possessed.32 However, the legal institution of diplomatic protection could in the last resort lead to a peaceful settlement of disputes by arbitration, if not by negotiation.33 Though unquestionably, diplomatic protection was a substitute for territorial conquest, while bringing the Latin American States within the pale of
26https://documents-dds-
ny.un.org/doc/UNDOC/GEN/N00/330/76/PDF/N0033076.pdf?OpenElement
27 Ibid.
28 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford; Oxford University Press, 2008;2009), 15.
29 Ibid.
30 Ibid.
31 Ibid, 16.
32 Ibid, 15.
33 Ibid.
13 international trade and intercourse. Even if the result wasn’t really what the Latin American States would have desired, the probable outcome of alternatives would have been far less desirable.34
By time, many institutions tried to codify the diplomatic protection and during the 20th century, especially after the WWII, it got to be accepted as a rule of customary international law.35 Although implemented in the rule of law, a debate still occurred and was increasing by time. The antagonist of diplomatic protection claimed that it was an abuse by imperialist Powers, that it was a European invention and that aliens should not enjoy more extensive protection than a State’s own nationals.36 Despite such criticism, State responsibility for injuries are widely accepted today.37 It is also accepted that responsibility of this kind is accompanied by a duty to make reparation. As Special Rapporteur Mr.
Garcia Amador proposed:
For the purposes of this draft, the “international responsibility of the State for injuries caused in its territory to the person or property of aliens”
involves the duty to make reparation for such injuries.38
The right of the State of nationality to exercise protection in this way has been confirmed by judicial decisions39 and the writings of scholars.40 Furthermore, it has been codified in article 3 of the Vienna Convention on Diplomatic Relations and in article 5 of the Vienna Convention on Consular Relations, which lists as a function of diplomatic and consular missions.41
34 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford; Oxford University Press, 2008;2009), 15.
35 Ibid, 23.
36 S. N. Guha Roy. 'Is the Law of Responsibility of States for Injuries to Aliens a Part of Universal International Law?', The American Journal of International Law, vol. 55/no. 4, (1961), 863-891.
37 Garcia-Amador, F. V., 'The Changing Law of International Claims: Vol. 2', Anonymous Translator (New York, Oceana, 1984), 74-76.
38 https://legal.un.org/ilc/publications/yearbooks/english/ilc_1961_v2.pdf, 46.
39 Mavrommatis Palestine Concessions, Judgment No. 2, 1924, P.C.I.J., Series A, No. 2, 15-16.
40 Joseph, C., Diplomatic Protection and Nationality: The Commonwealth of Nations. Gateshead, Northumberland Press, 1968. (Thesis, University of Geneva), 1.
41 Art. 3, para. 1 (b), of the Vienna Convention on Diplomatic Relations. The Vienna Convention on Consular Relations, in turn, contains a very similar, but somewhat more specific provision in article 5:
“Consular functions consist in:
“(a) protecting in the receiving State the interests of the sending State and of its nationals, both individuals and bodies corporate, within the limits permitted by international law; “... “
14 The general consensus on the right of the State to exercise diplomatic protection have been presented in many different ways. In 1915, Borchard wrote that:
Diplomatic protection is in its nature an international proceeding, constituting “an appeal by nation to nation for the performance of the obligations of the one to the other, growing out of their mutual rights and duties.42
In 1968, Joseph expressed his opinion and emphasised more about the injuries of the individuals and the responsibility of the State:
[D]iplomatic 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.43
2.3 The rise and development of ISDS
As the diplomatic protection becomes accepted as a customary international law, there are still doubt and disagreements among States whether this method would be the most convenient way of settling investment disputes. After WWII, conflicts among States arose from nationalisation of foreign property, particularly in eastern Europe, which generated a great usage of diplomatic protection for mostly western States.44 The dissatisfaction relies among other on the rules governing diplomatic protection, the rule of exhaustion of local remedies (ELR), which aims at safeguarding state sovereignty by requiring individuals to seek redress for any harm allegedly caused by a state within its domestic legal system before pursuing international proceedings against that state.45
In 1966, the Convention of International Centre for Settlement of Investment Disputes – ICSID Convention – went into force, ratified by 20 States at that time.
(e) helping and assisting nationals, both individuals and bodies corporate, of the sending State.”
42 Borchard, E., 'The Diplomatic Protection of Citizens Abroad, Or, the Law of International Claims', Anonymous Translator (New York, The Banks Law Publishing Co, 1916), 354.
43 Joseph, C., Diplomatic Protection and Nationality: The Commonwealth of Nations. Gateshead, Northumberland Press, 1968. (Thesis, University of Geneva), 1.
44 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford;, Oxford University Press, 2008;2009), 17.
45 Ibid.
15 Under the Convention, national States agree not to exercise diplomatic protection in investment disputes while the aliens and the host States enter into arbitration under the protection of ICSID as a means of settling such disputes.
Henceforth, the ICSID Convention contribute that States, that have ratified the Convention, agrees to commence for arbitration when a dispute needs to be settled, which per se would replace the institution of diplomatic protection.46 States may also agree under bilateral investment treaties (BITs) to commence for arbitration as a dispute settlement and also replace the exercise of diplomatic protection.47
Using the Convention, or agreeing upon arbitration under a BIT, will reject the resort of local remedies and also intervention by other national States. This type of procedure, Investor State Dispute Settlement – ISDS – is generally governed by private international law and local remedies will be replaced by applicable rules of public international law.48 This will induce the foreigner not to seek diplomatic protection and inure the benefit of the foreigner.
Although alternative ways for settling disputes such as ICSID Convention and BITs now contributes, the availability of the institution of diplomatic protection is not diluted. Considering the alternative dispute settlement resolutions, a debate hinges on a fundamental empirical question that has puzzled international law scholars for some years: is ISDS a pro-claimant or pro-respondent litigation setting? In comparison to diplomatic protection, history tells us at least for sure that the institution is pro claimant (in favour for stronger States).
46 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford; Oxford University Press, 2008;2009), 18.
47 Ibid.
48 See, for example, the LIAMCO (Liamco v Libya) Arbitration (1977), 62 ILR 140; the TEXACO (Texaco v Libya) Arbitration (1977), 53 ILR 389; and the Sapphire-NIOC Arbitration (1963), 35 ILR 136.
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3. The Unification of States and the cause of power
3.1 Background
Investments have until now, the 21st century, been a fundamental part of State- development. At the very beginning, in the 18th and 19th century, investments were not on a large global scale, but were at least constantly increasing. Entering the 20th century, trades and investments were increasing with outrageous speed, especially after both world wars due to the recovery of the States.49
Investments are steadily under different settings than what it was from the beginning of world-wide trading. States are still in the same need of investments to sustain their power and economic wealth. Though, as States are trading with each other, both goods and services, the influences of these are affecting the world-wide market, and the increase of such widespread trades and investments tends to dilute the borders of States, and an explanation of why will be presented in this chapter.
In the 21st century, people are moving around more than ever before, which affects ideology, technology, religion and in the long run the economic wealth and political power for each and every State. Transcending borders have by time developed Unions, and what once before were independent States have now through alliances and trading-partners created a collective. The citizens of a State are protected by its domestic legislation, and for some States even the legislation by the Union. In matters of investments, the protection for both sides, the host State and the investor, are of crucial matters and must or at least should be balanced with ‘a fair amount of protection’50.
Now indicating on this ‘fair amount of protection’, we already know the history behind the resolutions of diplomatic protection and ISDS. Both resolutions have, as previously mentioned, a two-sided coin, either in favour of claimant or in favour of respondent. The main purpose of these two systems are obviously to
49 Jones, Jonathan. & Wren, Colin, Foreign direct investment and the regional economy, (Ashgate, Aldershot, Hants, England, 2006), 64.
50 A ‘fair amount of protection’ intends to express that every State already possess a certain amount of protection through its domestic legislation, its economic, political and military power, and whether the State is a Union-member or not, protected under unified legislation. The combined protection out of these three parameters, will in comparison to the opposite State´s (host-State or investor-State) possessed protection, be in need of strong or less strong – ‘fair’ – protection, to stand on just terms with the opposing State. For a more detailed definition, see chapter 3.5.
17 render fair trials and convict justice in case of a breach of an agreement. ‘A fair amount of protection’ is greatly connected to what economic wealth, armed forces and political power each State possess in comparison to the other State, and a general rule is that weaker positions should be provided greater protection.
The following chapter will analyse and illustrate the development of transcending borders, the effect of investments between States and the sort of influences economic wealth and political power have on investments. The outcome of this analyse will at the very end of this chapter come to a conclusion about what ‘a fair amount of protection’ contain and really mean.
3.2 Transcending borders
As the American arbitrator Brower explains:
Imagine a world in which ideology was ruled by rationality without any biases. In such a world there would be little room for political debate among intelligent people. If we were all exposed to the same facts, we would end up reaching the same conclusions. We would still need parties and elections since our interests are not identical. But we would never remain split over questions such as which economic policy would benefit the most British people, or which policy would be most effective for tackling terrorism.51
Accordingly, the growth of law is everywhere dependent on, or at least influenced by, a conscious or unconscious creation of law. Custom, usage, habit, religion, morality, the nature of the thing, tradition, reason, the examples of single individuals, and many other factors, contribute the material out of which the requisite rules of law are built up.52
In the early 1900s, the world experienced WWI and about 20 years later a WWII.
Even though the world had experienced wars before, like the expand of Roman Empire or the advancement of France lead by Napoleon Bonaparte, the need of protection, the need of human rights, was now suddenly at the 1900s a new topic,
51 Brower, Charles H., II. 'Politics, Reason, and the Trajectory of Investor-State Dispute Settlement', Loyola University of Chicago Law Journal, vol. 49/no. 2, (2017), 279.
52 Oppenheim., 'Future of International Law', Anonymous Translator (S.l., Oxford: Clarendon Press, 1921), 3.
18 and for the very first time, international political order was in great need.53 States were becoming aware of the foreign threat, and the likelihood of being harmed by another State was high. States were at this point more opened up than ever before, States borders are diluting in a way and the idea of seeking international protection was now a fact.54 The whole world demanded an international political order and during the 1900s, dozens of institutions, organizations and unions are now constructed – United Nations at 1945, European Union at 1950, Permanent Court of International Justice at 1922 and transformed into International Court of Justice 1945 and International Centre for Settlement of Investment Disputes at 1966, among others.
The transformation of the 1900s market-regulation were formed and mankind entered into a new era of global order. The international economic climate were now transformed into something different and the debate concerning Foreign Direct Investments (FDI) were not any longer about whether investments should be protected but instead how it should be protected.55
Now as the international political order is expanding, States were now more bound to each other through legislation and through conduct. The sovereignty of each State was somehow changing, not completely disappearing, but was now forced into the shadows of the public order. Lassa Oppenheim, seen as the father of the modern International Public Law, shares his view on the organization of international society and the idea of State sovereignty:
The assertion that, because of the unlimited sovereignty of its members, the family of nations must remain for all time an unorganized society, either has in view the organization of international society on the model of a state, or is founded on an untenable conception of the idea of sovereignty. If the compression of the whole world into the form of a single state were attained, the states of the day would certainly lose their sovereignty and be degraded into provinces. On the other hand, however, the sovereignty of the members of the international society just as little
53 Haigh, Stephen, Future states: from international to global political order, Ashgate, Farnham, Surrey, 2013, 1.
54 Ibid, 1-3.
55 The Organisation for Economic Co-Operation and Development (OECD) had started work on a multilateral treaty protecting foreign investment. This was followed by the Abs-Shawcross Convention but again did not get enough traction. The World Bank was finally more successful when they initiated the ground-work that came to be the ICSID Convention.
19 excludes its organization as the fact of the existence of this society excludes the sovereignty of its members. Sovereignty as the highest earthly authority, which owes allegiance to no other power, does not exclude the possibility that the sovereign should subject himself to a self-imposed order, so long as this order does not place him under any higher earthly power. All members of the international society thus subject themselves in point of fact to the law of nations without suffering the least diminution of their sovereignty. But of course, for him to whom sovereignty is equivalent to unrestrained power and unlimited arbitrariness of conduct, there cannot be any international law at all, any more than any constitutional law, seeing that international and constitutional law are opposed to absolute arbitrariness, even though they recognize that a sovereign state is the highest earthly authority.56
As Oppenheimer mentions, if the States were to unite into one big State, the result would be that the involved States turns into provinces and thus loses their sovereignty. The development of the international political order is not the same as Oppenheim´s idea of Sates uniting into one big State, but the concept have similarities, the concept of unifying.
Sovereignty could be divided into two shapes, either national or international, and there is a difference between them in matters of power. Either it’s the Union that’s not answerable to a higher power – ‘international sovereignty’ – or it’s the State – ‘internal sovereignty’.57 This matters when States are either in a dispute within the Union or when a State is in a dispute with a non-union State. In theoretical terms, sovereignty on the international plane means not simply the power of an independent State, but the unlimited power of the State. Viewed thus, national sovereignty is equated with the existence of the State and involves an assertion of the right of the State to do whatever it wants without restriction.58 To mention some examples of sovereignty and the development of the international political order, individual members of the European Union (EU) are not sovereign with respect to matters governed by EU law and, beyond
56 Oppenheim., 'Future of International Law', Anonymous Translator (S.l., Oxford: Clarendon Press, 1921), 11.
57 Lauterpacht, Eli. 'Sovereignty-Myth Or Reality?', International Affairs (Royal Institute of International Affairs 1944-), vol. 73/no. 1, (1997), 138.
58 Ibid, 140.
20 Europe, modern sovereignty, as Abram and Antonia Chayes have noted, has been reduced to issues of status or membership in distinct international organizations—to which states have delegated away distinct (and growing) powers.59 These international organizations have become ‘autonomous’ agents capable of exercising implied and un-enumerated powers as pedestrian as the capacity to exercise forms of diplomatic protection.60 Due to the development of these organizations/Unions and their institutional practice, there has been a steady diminution of conception of domestic jurisdiction.61
3.3 The effect of investment and treaty development
As mentioned in the second chapter, investments increased remarkably from the end of 18th century and onwards. States could provide other States with technology, goods and services, which in the end provided for the development of both States. By time, States around the world demanded a system for dispute settlement, a system under which institutions could control and protect international investments. Accordingly, institutions such as inter alia ICSID arose, and along with that a phenomenon peculiar to the aftermath of the WWII arose, the BIT.62
The records show that the first post-WWII so-called BIT was signed in 1959 and was between the Federal Republic of Germany and Pakistan. Between 1959 and 2001, there were 837 BITs signed.63 All these treaties with the exception of one (between Germany and Greece in 1961) have been between developed countries, on the one hand, and less developed countries, on the other.64
Thus, after the first BIT was drafted, thousands of BITs followed. A trend among BITs is to include different rules of arbitration for the settlement of investor-
59 A. Chayes and A. Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Cambridge MA, London: Harvard University Press, 1995), 27.
60 Cassese, Antonio., 'Realizing Utopia: The Future of International Law', Anonymous Translator (Oxford, Oxford University Press, 2012), 30.
61 For evidence drawn from the practice of the UN General Assembly and Security Council concerning the shrinking domain of Art. 2(7) of the UN Charter, see, e.g., J.E.
Alvarez, International Organizations as Law-Makers (Oxford: Oxford University Press, 2005), 146–183
62 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford; Oxford University Press, 2008; 2009), 334.
63 Ibid.
64 Ibid.
21 State disputes. They also provide that in the absence of agreement between the parties on this matter, the dispute shall be settled by arbitration according to a particular one of the mentioned forms.65 Other treaties, for example those concluded by the United States (US), give the host State’s advance consent to each of the mentioned forms of arbitration, thus in effect giving the investor the choice.66 References are common to ICSID, or to arbitrate under the rules of United Nations Commission on International Trade Law (UNCITRAL-rules), and, to a lesser extent, the rules of International Chamber of Commerce (ICC- rules).67 There is comparatively little uniformity in this particular area of treaty practice. While the inclusion of an investor-State arbitration clause has become a common feature of BITs, there is variety in the choice of arbitration methods.68 The BITs or for that matter the international investment dispute settlement treaties, could all include a waiver of the local remedies rule, and by that exclude the possibility of solving the dispute within a domestic legal system. The BIT could expressly mention for example ICSID arbitration as the only dispute settlement procedure, and by that virtue waive the rule of local remedies.69 Likewise, a provision in the BIT could state that local remedies were to be used as an option, even where ICSID arbitration were the chosen procedure. But since a waiver could either be expressly or implied in the BIT, it’s all up for interpretation whether local remedies are to be waived or not.70
In some circumstances, the question occurs whether the local remedies have impliedly been waived, and becomes one major thing when constructing a BIT.
It is arguable that, because the host State has agreed to arbitration which is international, being under a treaty, the procedure provided for is in effect the exercise of diplomatic protection by the investor’s national State; even if an investor wants to commence for arbitration, the rule of local remedies would
65 Article 8 of the UK BIT with Czechoslovakia (1990), and Article 10 of the UK BIT with Ghana (1989).
66 Article VI (4) of the US BIT with Armenia (1992), and Article VII (4) of the US BIT with Argentina (1991).
67 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford; Oxford University Press, 2008; 2009), 335.
68 Ibid.
69 Ibid, 335-336.
70 Ibid.
22 most likely be applied if no waiver is expressly mentioned in the BIT. However, there are no crystal-clear answers to this issue.71
The concept of a BIT is to protect both parties for infringements and commence for arbitration whenever a breach of the treaty occurs, though two questions do arise regarding the provisions of ultimately settling the disputes by arbitration.
The first is whether the investor’s national State could use these provisions to have disputes settled in the direct exercise of diplomatic protection.72 The second is whether the inter-State arbitration provided for, if permissible in the exercise of diplomatic protection, is subject to the exhaustion of local remedies by the investor.73 The answers to those questions would naturally depend on how one interprets the BIT.
The world today is a world where States are constantly developing their relationships with each other by means of treaties.74 In the period from 1945 to 1996 the United Nations, to which all treaties should be notified, had registered no less than 32,516 treaties.75 Every such instrument affect, to a greater or lesser extent, the freedom of the parties to the treaty.76 There are few, if any, cases now of burdens assumed without corresponding benefits; and none in which the sovereignty of the State, in the strict sense of that word, is affected.77
3.4 The development of international political order and float of economic and political power
A quote by Lassa Oppenheim: “He who would portray the future of international law must first of all be exact in his attitude towards its past and present”.78 Dante Alighieri made an important statement for more than 700 years ago, that unity seems to be the root for what it is to be good. Dante quoted this in his book De Monarchia: “Mankind is most a unity when it is drawn together to form a single
71 Amerasinghe, Chittharanjan Felix., 'Diplomatic Protection', Anonymous Translator (New York; Oxford; Oxford University Press, 2008; 2009), 336.
72 Ibid, 340.
73 Ibid.
74 Lauterpacht, Eli. 'Sovereignty-Myth Or Reality?', International Affairs (Royal Institute of International Affairs 1944-), vol. 73/no. 1, (1997), 142.
75 Ibid.
76 Ibid.
77 Ibid.
78 Oppenheim, Lassa, The future of international law., Washington, 1921, 1.
23 entity, and that can only came about when it is ruled as one whole by one ruler.”79
In other words what Dante meant, and as international lawyers have written ever since, ‘there must be a third party of wider jurisdiction who rules over both of these’.80 The world needs to unite in order to be good, and by delegating control to the ‘one ruler’, those involved in the delegation, will be drawn together. A further explanation of Dante´s ideology:
The whole of mankind in its ideal state depends on the unity which is men's wills. But this cannot be unless there is one will which controls and directs all the others towards one goal, since the wills of mortals require guidance on the account of the seductive pleaser of youth, as Aristotle teaches at the end of the Ethics. Nor can such a single will exist, unless there is one ruler who rules over everybody, whose will can control and guide all the other wills.81
The idea of Dante was to unite the world into one community, a world government.82 But it required a unity imposed on ‘men's wills’ from above.
Attempts were even made, trying to rule the whole world under one legislation, a natural law – jus gentium – under which state sovereignty and private property arose.83 Hugo Grotius, a famous lawyer in the 16th century, agreed that the golden age had been one of freedom and common ownership and that this had been historically transformed into sovereignty and private property.84
Grotius further developed Dante´s ideology into laws, and emerged from the encounter by Europeans of peoples and cultures who, until then, had had little or no presence in the European imagination. After the regularization of those relations by colonization, the law of nations limited itself again to a ‘public law of Europe’.85 The ideology and laws were intended to freeze the territorial status
79 Dante Alighieri, Opere minori di Dante Alighieri. Vol. 2, La vita nuova ; De vulgari eloquio
; De monarchia ; De aqua et terra, 3. ed., Barbèra, Firenze, 1873, 13.
80 Ibid, 21.
81 Ibid, 27.
82 Cassese, Antonio. , 'Realizing Utopia: The Future of International Law', Anonymous Translator(, Oxford, Oxford University Press, 2012), 4.
83 Ibid, 5.
84 H. Grotius, ‘Commentary on the Right of Prize and Booty’ (edited and with an introduction by M. van Ittersum, Indianapolis: Liberty Fund, 2006), 315–18.
85 Cassese, Antonio., 'Realizing Utopia: The Future of International Law', Anonymous Translator (Oxford, Oxford University Press, 2012), 6.
24 quo and to set up a system of arbitration and free trade in Europe.86 However, looking at the world today, even though the law of nations and its power is delegated away through treaties – to the international political order – State sovereignty still remains, to some extent.87
Along with the development of international political order and during the 20th century, an institution named International Institute for Sustainable Development (IISD) was founded 1990. Sates were demanding sustainability for their economic development, and accordingly IISD were the institution promoting human development and environmental sustainability. As for the development of the States, sustainable development is an investment issue.
Capital is needed to alleviate poverty, create jobs, accelerate the clean energy transition and allow for the development of much-needed infrastructure to provide goods and services for all, and FDI is an important source of that capital.
IISD works closely with governments and civil society to improve the linkage between investment and sustainable development. As the governments starts to unify on a larger scale, both economic wealth and political influence transcends to the unified organization and in that sense, more or less evens out the total amount of economic wealth and political power in that particular Union. For some States, this would mean a great benefit, gaining more wealth and power, and for others it might even decrease their previous status. But to be clear, this would not per se mean either a benefit or a loss for a State, it’s mainly a balance differentiation of their status. Though worth mentioning, Oppenheimer concludes the following:
Were the earth's surface permanently divided between equally great and equally powerful states, the political equilibrium would be stable, but it is rooted in the nature of things that this equilibrium can only be unstable.
The reason is that individual states are subject to a perpetual process of evolution, and thereby to perpetual change. This evolution is for one state upwards, for another downwards. No state is permanently assured against break-up, and it is the break-up of existing states and the rise of new states
86 Cassese, Antonio., 'Realizing Utopia: The Future of International Law', Anonymous Translator (Oxford, Oxford University Press, 2012), 6.
87 Ibid, 26.
25 that threaten the permanent organization of the international community of states with danger.88
Now, the Unions founded until today, have never embodied the whole world, which means that only some States will enjoy the benefit of the common status within the Union. Consequently, Union States dealing with non-Union States will most likely end up in unbalanced positions. But not to be mistaken, even Union members dealing within the Union could accordingly end up in unbalanced positions, but luckily would at least stand under unified jurisdiction.
Unified or not, is one part of the economic growth and potential protection.
Another major part is the effect of politics have on FDI, depending on a country’s regime, arguably, whether FDI comes from authoritative or democratic regimes.89 Here is a standing point of the research Jing-Lin Duanmu did on FDI and how influences of politics and economics affect:
Although colonialism historically promoted a more “integrated” global market because of the political power imposed by, for example, the British Empire, on its colonies contributed to reduced institutional risk for British and other European investors,90 it does not change the fact that colonialism was an affront to freedom and dignity. More important to the purpose of our research, the current lack of global governance affirms that a unilateral political power is no substitute to equitable and enduring global governance. The irony, in fact, is that it is precisely the weak global governance that provided and will continue to provide a fertile ground for powerful nations to exert their influence in international business. Since the exercise of political power naturally brings about a commitment problem, whoever holds the power, it may be to predatory governments’
interest to improve their property rights standard so that they will not fall victim to more powerful foreign governments. Our findings of the effectiveness of using political and economic power to curb the risk of poor
88 Oppenheim., 'Future of International Law', Anonymous Translator (S.l., Oxford: Clarendon Press, 1921), 68.
89 Duanmu, Jing-Lin. 'State-Owned MNCs and Host Country Expropriation Risk: The Role of Home State Soft Power and Economic Gunboat Diplomacy', Journal of International Business Studies, vol. 45/no. 8, (2014), 1058.
90 Schularick, M., & Steger, T. The Lucas Paradox and the quality of institutions: Then and now.
Working Paper. 2008/3, The Open Access Publication of the ZBW – Leibniz Information Centre for Economics, Free University of Berlin, Berlin, Germany.
26 governance only highlight the vital importance of establishing global governance structure for FDI so that all nation states will abide by a same set of rules governing FDI, eliminating privileges as well as opportunism.91
3.5 The parties need of a ‘fair amount of protection’
The previous three sub-chapters have now guided the reader over wide areas, and have put before him aims which was necessary to understand before presenting a more detailed explanation of a ‘fair amount of protection’.
Accordingly, States have for a long period of time had their domestic legislation, and by the time States started to trade and invest with other States, the domestic legislation were slowly diminishing with accurate pace as the international political order was increasing – transcending border and unification. The State- economy was of course also affected by the trading and investing, causing balance-differentiations between wealthy and poor States, nor in a good or bad way. The greater economy, the greater economic power.
All FDI have a great impact on the politics and politics have great impact on FDI. The more investments a State could manage, the more political influence that State gained. Accordingly, the higher the influence of politics gets, the more, less influential States are ought to follow.
Now, with great political influences and great economic power, a State is much likely to possess or develop a strong army, in purpose of protecting its influences and wealth. The outcome of the possessed political, economic and military power, are causing States in unbalanced positions with unequal amount of power. However, depending on each States transcending borders, some are Union-members, and some are not. The unification of States creates a community of ‘State-potential’, relating to the combined economic, political and military power they possess as per State due to that community.
Depending on each State´s economic power, political power, military power and unification, the balance in comparison to the opposed State (investor), will
91 Duanmu, Jing-Lin. 'State-Owned MNCs and Host Country Expropriation Risk: The Role of Home State Soft Power and Economic Gunboat Diplomacy', Journal of International Business Studies, vol. 45/no. 8, (2014), 1057.
27 determine whether that investor are in need of strong or less strong protection – a ‘fair amount of protection’.
4. Arrangements to stabilize investment concerns
4.1 Background
The previous chapter have now presented the historic background of State- unification and prosperous development of treaties. The outcome of this development have caused unbalanced acts, and accordingly clauses, principles, and policies have been produced to maintain a more balanced order. The following chapter will hence explain in detail for what reason these clauses, principles and policies came to surface and what their purpose serves. At the end of the fourth chapter, a thoroughgoingly analyse of the two resolution systems will be presented. Both systems will be criticized for their pros and cons in dealing with disputes and how forthcoming they are in the nearest future.
4.2 Three particular arrangements 4.2.1 Calvo Clause
As mentioned previously in the second chapter, the Calvo Clause, came to surface when a national from a wealthy State were investing in an underdeveloped State. The result came to be that wealthy States from especially Europe started investing in underdeveloped States in Latin America, and whenever a breach of the agreement occurred, the wealthy State would vouch for their national investors, whereby the investors would not suffer by being subjected to inferior standards of law and justice.92 The citizen could appeal to their home government for protection, instead of obtaining foreign remedial processes.93 This procedure of protecting aliens in foreign States came to be known as the institution of diplomatic protection.
92 Shea, Donald Richard., 'The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy', Anonymous Translator (N - New ed., Minneapolis, University of Minnesota Press, 1955), 5.
93 Ibid.
28 As these procedures prolonged with the usage of diplomatic protection, Latin American States wanted to prevent this abuse, because it was more or less used as a tool of economic or political imperialism.94 Many unsuccessful attempts were made trying to prevent this abusage, but the one that really made tangible impact were the so-called Calvo Clause, by which the alien agrees to waive the right of diplomatic protection and merely redress eventual grievances to the local judicial remedies.95
Quoting Donald R. Shea and to brush-up what was focused on in detail about a world under constant change in the third chapter:
Since international law is not static, but evolves with the changing environmental conditions of the world community, care will be taken here to analyze the development of the Calvo Clause against this changing background.96
The Calvo Clause has been a legal and a diplomatic problem for more than 150 years as of now, and is a result of the exploitation of the natural resources in the underdeveloped States of the world that occurred in the 19th and early 20th century.97 But not to be mistaken, the investments and migrations were both necessary and mutually profitable. However, by time, the tension of this exchange were greatly enhanced by the chronic social, political and economic instability that characterised many of these underdeveloped regions.98
In the early age of the Latin American regimes, they were superficially patterned by the liberal-democratic ideal and embraced the Western democracy and justice.99 But somehow the democratic process was lacking, and the forming of democratic republics of these regimes never completely worked out.100
94 Shea, Donald Richard., 'The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy', Anonymous Translator (N - New ed., Minneapolis, University of Minnesota Press, 1955), 5.
95 Ibid, 6.
96 Ibid.
97 Ibid, 9.
98 Ibid.
99 Shea, Donald Richard., 'The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy', Anonymous Translator (N - New edn, Minneapolis, University of Minnesota Press, 1955), 9-10.
100 Dunn, Frederick Sherwood., 'The Protection of Nationals: A Study in the Application of International Law', Anonymous Translator (Baltimore, John Hopkins P, 1932), 54.
