India’s 2016 Model Bilateral Investment Treaty –

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India’s 2016 Model Bilateral Investment

Treaty

–

A backlash to the Calvo doctrine and legal nationalism?

Martin Söderman

Juridiska institutionen Examensarbete 30 hp.

Ämnesinriktning: Folkrätt, internationell investeringsrätt Vårterminen 2020

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Abstract

In the late 19th_{and early 20}th_{centuries two opposing international law doctrines intensely}

debated the standard of treatment owed to aliens (non-nationals) in customary international law. Proponents of the Calvo doctrine, mainly developing countries, held that aliens were entitled the same treatment as nationals of the host State, no more and no less. Developed, capital-exporting countries on the other hand advocated that an international minimum standard had been established in customary international law. Today various international instruments have defined fundamental human rights, and the contentious debate on the international minimum standard has more or less abated. However, there is one area in international law where the debate has endured; the protection of foreign investment. The protection of foreign investment is delicately located in the nexus between public and private interests, and with varying political systems in different regions of the world it has been proven difficult to reach consensus on what constitutes customary international law.

Due to the lack of international agreement and political uncertainty, capital-exporting countries deemed it necessary to shift focus to treaty law and introduced the bilateral investment treaty (BIT) and international investor-state arbitration for the settlement of disputes (ISDS). Today, the international minimum standard has been incorporated in near 3,000 BITs that exist globally. The widespread “treatification”1_{of investment protection has led to the development of a new}

branch in international law, i.e. international investment law (IIL). Despite its widespread use it has been claimed that BITs and the ISDS mechanism in particular incentivizes foreign investors to challenge any regulatory measure that harms their investments for sizeable damages - even legitimate regulatory measures of host states - thus imposing significant costs on the sustainable development objectives of states. Subsequently numerous international organizations, such as UNCTAD, argue that IIL needs reform in order to better balance investment protection with State sovereignty. In recent years revised State practice has been indicating that a backlash is taking place against the investment protection system created under IIL.

The main purpose of this thesis is to analyze the latest State practice in India. Since 2011 India has experienced a flood of BIT-claims which prompted the Indian government to review its vast BIT program. The review led to the termination of a majority of its BITs and the introduction of a new template/model for future BIT negotiations, i.e. the 2016 Model-BIT. Interestingly the 2016 Indian Model-BIT does not include the most common BIT provision related to the international minimum standard and severely restricts access to international arbitration, thus indicating a re-awakening of the Calvo doctrine and legal nationalism.

1_{Increasing use of treaties to supersede customary international law. Oxford Reference.}

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Abbreviations

BIT Bilateral Investment Treaty

CERDS Charter of Economic Rights and Duties of States

FDI Foreign direct investment

FET Fair and Equitable Treatment

ICJ International Court of Justice

ICSID International Centre for Settlement of Investment Disputes

IIA International Investment Agreement

IIL International Investment Law

ILC International Law Commission

ISDS Investor State Dispute Settlement

MFN Most Favoured Nation

NAM Non-aligned Movement

NAFTA North American Free Trade Agreement

NGO Non-Governmental Organization

NIEO New International Economic Order

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Foreword

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1 Introduction

1.1 Background

The protection of foreign investment has undergone rapid development in recent decades due to an expanding global network of bilateral investment treaties (BITs) and the investor-state dispute settlement mechanism (ISDS).2_{These developments have in turn generated a new}

branch in international law, i.e. international investment law (IIL). The origins of BITs and IIL followed the failure of developed and developing states to agree on the standard of treatment owed to foreign investors/investments in customary international law.3_{In the ‘pre-BIT’-era,}

developed, capital-exporting, countries argued that an international minimum standard had been established as custom while developing, capital-importing countries maintained that foreign investors were not entitled to any favorable protection beyond the domestic laws and jurisdiction of the host State, i.e. the national treatment principle as put forward by the Calvo doctrine.4

The uncertainty and lack of clarification in customary international law eventually prompted capital-exporting States to abandon any wide-sweeping multilateral efforts and shift focus to bilateral treaties for the promotion and protection of investments.5_{Hence, a BIT stipulates the}

minimum standard of treatment owed to foreign investors from the two signatory countries.6

Custom and general principles of international law can still be applied but mainly for the purpose of clarifying potentially vague BIT provisions.7_{The first ever BIT was signed in 1959}

between Germany and Pakistan and as of 2018 there is a global network of 3317 international investment agreements (IIAs), out of which 2,932 are BITs.8_{Other examples of IIAs are free}

trade agreements (FTAs), regional investment agreements (RIAs) and multilateral agreements

2_{Brown, Commentaries on Selected Model Investment Treaties, foreword.} 3_{Salacuse, The Law of Investment Treaties, p. 110.}

4_{Kjos, Applicable Law in Investor-State Arbitration p. 163.}

5_{Dumberry, Are BITs Representing the “New” Customary International Law? p. 676.} 6_{Salacuse, The Law of Investment Treaties, p. 1.}

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with investment chapters.9_{The United Nations Conference on Trade and Development}

(UNCTAD) has defined BITs as “agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other’s territories by companies based in either country.” Despite the reciprocal definition, the primary rationale of a BIT is to provide adequate legal protection to investors from a developed, capital-exporting country who invests in a developing, capital-importing country. In the ‘developed-underdeveloped’ context, the existence of a BIT thus guarantees a higher standard of legal protection compared to the often-lacking national laws and corrupt local courts of a developing host country, and as such BITs inherently reflect an ‘anti-Calvo’ stance.10_{The main incentive}

for developing, capital-importing, countries to conclude BITs has been to signal a favorable investment climate, in the hopes of stimulating economic growth and development.11

The fundamental problem or risk that a BIT seeks to minimize is that once a foreign investor has sunk in resources in a foreign country they become vulnerable to potentially unjust acts and/or arbitrary regulations of the host State.12_{The host State might e.g. decide to expropriate}

foreign held assets or introduce regulatory measures that discriminates or otherwise infringes upon foreign investment interests. Despite the potential existence of a BIT, foreign investors are also subject to the national laws of the host State and it is important that the host State’s sovereign right to regulate remains unconstrained in areas where legitimate interests of the local population might collide with foreign investment interests. It is thus the challenging task of BIT negotiators to strike an appropriate balance between State sovereignty and investment protection.13

1.2 Settlement of disputes – ISDS

A major contributing factor to the development of IIL is the dispute settlement mechanism Investor-State Dispute Settlement (ISDS). In short, the ISDS mechanism enables an injured foreign investor to circumvent local courts of the host state and directly sue the host state for damages liable under the relevant BIT via international arbitration.14_{Today ISDS has become}

9_{OECD, Evolution of International Investment Agreements (IIAS) in the Mena Region, p. 2.} 10_{Juillard, Calvo Doctrine, p. 21.}

11_{UNCTAD, Bilateral Investment Treaties from 1959-1999, p. 1.} 12_{Schreuer, Investments, International protection, p. 1.}

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a standard procedural provision in most BITs and been described as “one of the most important progressive developments in the procedure of international law of the 20th_century”.15_{It has}

been said that ISDS transferred the protection of private investment from the political realm of diplomacy and national courts and reassigned it to the legal realm of independent “apolitical” tribunals composed of private individuals.16_{This has created two controversial developments}

in IIL; i) multinational corporations acquiring international legal standing in parity with sovereign states and ii) private arbitration tribunals interpreting and enforcing often vague BIT provision.17_{Despite the fact that a BIT only regulates investment protection between the two}

signatory states, ISDS tribunals frequently use arbitral precedent to interpret often vague BIT provisions.18_{This has led to the somewhat unforeseen and controversial outcome where}

arbitrators have become de facto law makers and generated a coherent system of investment protection under IIL.19_{While supporters of the ISDS mechanism emphasize that it is a}

depoliticized, neutral and effective mechanism, critics claim that it is investment-biased, expensive and often infringes upon legitimate regulatory rights of sovereign states and sustainable development objectives.20

1.3 Backlash

In recent years there has been a rising trend among foreign investors to challenge all kinds of regulatory policies of host States as potential BIT-violations.21_{This has stunned the most}

frequent respondents in arbitration proceedings, i.e. developing countries, since the original intent of BITs was to primarily protect foreign investors against unlawful expropriations.22

Many countries regard the need to defend themselves time and again as a serious burden.23

Some scholarly writers even speculate of a “regulatory chill” due to the potential risks of having to pay multimillion-dollar damages to foreign investors.24_{Others go further and claim that}

ISDS tribunals and the IIL-system as a whole suffers from an inherent, systematic pro-investor

15_{Dumberry, Are BITs Representing the “New” Customary International Law? p. 679.} 16_{Kaushal, Revisiting History, p. 498.}

17_{Ranjan & Anand, The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction, p. 3-4.} 18_{Schill, Sources of International Investment Law, p. 1105.}

19_Ibid.

20_{Johnson, Skartvedt, and Coleman, Investor-State Dispute Settlement: What Are We Trying to Achieve?} 21_{Salacuse, The Law of Investment Treaties, p. 4.}

22_{Skovgaard Poulsen and Aisbett, When the claim hits - Bilateral Investment Treaties and Bounded Rational Learning, p. 2.} 23_{Dolzer and Schreuer, Principles of International Investment Law, p. 11.}

24_{Tianhaara, Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute}

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bias.25_{Whether deserved or not, IIL has received much criticism from governments, scholars,}

civil society, even from prominent arbitrators on the “inside” and a backlash against the IIL-system is thought to have begun in the early 2000’s.26_{Supporters of IIL on the other hand}

dismiss the criticism as a “post-colonial meme”.27_{Nonetheless, it is undisputed that a wide}

range of regulatory measures in areas such as environmental policy, the supply of drinking water, monetary policy, taxation and regulations related to health have been challenged by foreign investors as BIT-violations.28_{This has created widespread unease with BITs and the}

ISDS mechanism in particular and led to varying critical responses, with some countries withdrawing from the investment protection system under IIL altogether and others trying to reform the system from within through revised State practice.29_{Some scholarly writers have}

interpreted revised State practice as signaling a revival of the highly disputed Calvo doctrine and national treatment.30

Arguably the most important instrument of State practice in the area of BITs is a country’s Model-BIT. A Model-BIT is the blueprint upon which future BIT negotiations occur and a representation of a State’s negotiating position when it comes to BITs and the protection of foreign investment.31_{The object of analysis in this thesis are the recent developments in India’s}

BIT program and specifically India’s Model-BIT from 2016.

1.4 Why study India?

In India there has been a growing skepticism towards BITs and between 2011–2015 the Indian government did a drastic restructuring of its BIT program which was finalized with the adoption of a new Model-BIT and the termination of 57 BITs.32_{Before India decided to scrap most if its}

25_{Sornarajah, On fighting for global justice: the role of a Third World international lawyer.}

26_{Perrone, The International Investment Regime at a Crossroad: Should We be Rethinking Foreign Investment Governance?}

Langford, Behn and Faucald, Backlash and State Strategies in International Investment Law, Schill, Reforming Investor-State Dispute Settlement (ISDS): Conceptual Framework and Options for the Way Forward, Waibel, Kaushal, Chung and Balchin, The Backlash against Investment Arbitration: Perceptions and Reality.

27_{Brower, What’s in a Meme? The Truth about Investor-State Arbitration: Why It Need Not, and Must Not, Be Repossessed}

by States.

28_{Ranjan & Anand, The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction, p. 3.}

29_{Sabanogullari, The Merits and Limitations of General Exception Clauses in Contemporary Investment Treaty Practice.} 30_{García-Bolívar, Sovereignty vs. Investment Protection: Back to Calvo? Subedi, International Investment Law: Reconciling}

Policy and Principle, p. 1, Vicente, Towards a Universal Justice? Putting International Courts and Jurisdictions into Perspective p. 255, Schreuer, Calvo's Grandchildren: The Return of Local Remedies in Investment Arbitration, Shan, From North-South Divide to Private-Public Debate: Revival of the Calvo Doctrine and the Changing Landscape in International Investment Law.

31_{Brown, Commentaries on Selected Model Investment Treaties, p. 2.}

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BITs, the Indian BIT program was one of the biggest among developing countries.33_{In the early}

1990’s India liberalized its economy and opened up its borders to international trade and foreign direct investments (FDI) which resulted in India becoming a major player in the global arena. When India signed its first BIT with the United Kingdom in 1994, FDI inflows to India was at a meagre US$ 393 million compared to US$ 42 billion in 2017–18.34_{Despite a fast developing}

economy, India is still considered a net capital-importer with foreign investment policies that have remained mostly liberal and investment-friendly.35_{However, India and many Asian}

countries still lags far behind most Western countries in terms of offering effective institutions and a stable business environment.36_{A negative consequence of increased participation in the}

globalized economy with comparatively lacking institutions is increased exposure to BIT- claims and recently India has experienced a surge of claims which caught the Indian government off-guard.37_{With the sudden termination of BITs and a new Model-BIT, India is}

demonstrating a drastic policy change towards BITs and the current system of investment protection under IIL. The Model-BIT still includes the ISDS mechanism which signals that India wants to remain in the IIL-system.38_{However, the ISDS provision has been severely}

limited in its scope and application, e.g. it requires the exhaustion of local remedies for a certain period of time – very much a nod to the Calvo doctrine. A further sign of a Calvo revival is the exclusion of the ‘fair and equitable treatment’ (FET) standard, often considered the treaty version of the controversial international minimum standard.39

The events in India illustrate well the tension between State sovereignty and investment protection and India offers an interesting case study of how a large democratic, capital-importing State in the era of globalization approaches private versus public interests. While there is an abundant amount of literature on India’s approach in multilateral trade negotiations, where India has been advocating for equitable and development-friendly legal order, there is comparatively little to read on India’s approach to bilateral investment negotiation.40

33_{Ranjan, India and Bilateral Investment Treaties—A Changing Landscape, p. 3.} 34_{UNCTAD, World Investment Report 2019, p. 4.}

35_{Nedumpara, India and International Law, p. 215. See also the ‘Make in India’ initiative, <https://www.makeinindia.com>}

(accessed on March 2nd_{, 2020).}

36_{He, ‘One Belt, One Road’: China’s New Strategy and Its Impact on FDI, p. 167.} 37_{Ranjan, India and Bilateral Investment Treaties—A Changing Landscape, p. 3-5.} 38_{Ranjan, India’s Model Bilateral Investment Treaty – Is india too risk averse? p. 9.} 39_{UNCTAD, Fair and equitable treatment (2012), p. 7.}

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1.5 Purpose

The purpose of this thesis is to analyze if the 2016 Indian Model-BIT represents a backlash to the Calvo doctrine. Since the Calvo doctrine stipulates national treatment both in regard to substantive and procedural rights, the Indian Model-BIT’s key substantive and procedural provisions will be analyzed. This is a relevant topic to analyze since the motives behind the Indian model-BIT are largely unknown, not even the European Commission has been able to establish a channel of communication with the Indian government regarding the sudden termination of BITs and its decision not to re-negotiate existing BITs.41

1.6 Method and Material

BITs are interpreted against the backdrop of customary international law.42_{It is generally held}

that customary international law arises out of the general practice of States (characterized by widespread and consistent application over a long time) followed by them out of a sense of legal obligation (opinio juris).43_{Weiler, an IIL scholar, has stated that there is a dynamic}

relationship between historical analysis and the development of both customary and treaty norms and that “anyone who attempts to interpret the provisions of an investment treaty, without first establishing a proper historical grounding, risks embarking upon a rudderless excursion into subjective analysis.”44 _{The method of the thesis aims to follow this}

recommendation and begins with a historical analysis of the general factors that has shaped the international rules governing foreign investment protection.

The general factors analyzed are the following:

i.) the international minimum standard vis-à-vis the Calvo doctrine in customary international law

ii.) the international minimum standard in IIL, i.e. the key substantive treaty provision of FET and the key procedural provision of ISDS

41_{Interview with Mr. Jonas Hallberg at the Swedish Council of Trade (Kommerskollegium).} 42_{Salacuse, The Law of Investment Treaties, p. 46.}

43_{ILC, Identification of customary international law - Comments and observations received from Governments (2018).} 44_{Weiler, The Interpretation of International Investment Law: Equality, Discrimination and Minimum Standards of}

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The historical background will provide a conceptual framework for the subsequent interpretation and discussion of the specific rules contained in the Indian Model-BIT. The interpretation of a treaty text begins with Article 31 (1) of the Vienna Convention on the Law of Treaties (VCLT), which reads “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its

object and purpose” (emphasis added).45_{Salacuse confirms that the preceding history of the}

development of BITs is an important element when interpreting the objective and purpose of international law-making and he adds that the history of the development of investment treaties has “largely been driven by capital-exporting countries and their nationals and companies.”46

The core purpose of the thesis is analyze whether India’s new Model-BIT deviates from this objective and instead embraces the rivaling objective of the Calvo doctrine, elevating the primacy of State sovereignty and national treatment over international investment protection.

IIL is based on the conventional sources of international law stated in Article 38 of the Statute of the International Court of Justice, i.e. treaties, custom and general principles together with judicial decisions and scholarly opinion. Within IIL, BITs represent the dominant source of law.47_{It is important to note that while treaties can be the expression of a State’s understanding}

of the law (opinio juris) it does not have to be since treaties are often the result of compromise and bargaining.48_{Nonetheless, a country’s Model-BIT is a non-binding, soft law instrument in}

State practice with the objective to influence, fill gaps and/or assist in the interpretation of investment treaty law (hard law).49_{For this reason it is widely held that a Model-BIT is a}

declaration of a State’s ideal policies (de lege ferenda) providing little room for State negotiators to deviate from the model.50_{When examining the historical background, mainly}

secondary sources have been used, e.g. treatises, law journals, restatements and legal encyclopedias. Article 38 (1) of the ICJ Statute stipulates that judicial decisions and scholarly opinion are subsidiary means for the determination of rules of law.51_{A distinguishing trait of}

BITs is that they contain vague and imprecise treaty provisions, thus judicial decisions (arbitral precedent) and scholarly opinion have become important sources for arbitration tribunals when interpreting treaty terms.52_{Professor Sornarajah, a scholar and noted critic of the current}

45_{UN, Vienna Convention on the Law of Treaties, 23 May 1969.} 46_{Salacuse, The Law of Investment Treaties, p. 108.}

47_{Ibid, p. 140.}

48_{Bring, Det folkrättsliga investeringsskyddet: En studie i u-ländernas inflytande på den internationella sedvanerätten, p. 237.} 49_{Bjorklund, Assessing the effectiveness of soft law instruments in international investment law, p. 65.}

50_{Ibid, p. 68.}

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system, has described these sources as “low-order sources of international law” and that decisions of tribunals and scholarly writings “are no more than hired guns, thus not leaving states to address issues involving economic development, poverty, welfare needs [and] the environment.”53_{This is important to keep in mind, especially since IIL doctrine is vast and}

produced by both scholars and practitioners, reflecting different interests and political backgrounds. To achieve an unbiased analysis, literature and articles with diverse point of views have been referred to.

1.7 Delineation

The historical background of the international minimum standard and the dynamic interplay between customary and treaty rules, which has shaped its current mode of existence in BITs is the starting point of the thesis. The ‘pre-BIT’ history of the international minimum standard is many centuries long and in order to keep the length and scope of the thesis within its recommended boundaries, the thesis does not include any lengthy investigation into primary sources but is limited to the use of secondary sources. The international minimum standard revolves around the central legal conflict between investment protection and State sovereignty and the Indian Model-BIT is a review (de lege ferenda) by the Indian government, reflective of the recent recommendations and comments by intergovernmental organizations, such as UNCTAD, on the need for reform and the re-assertion of State sovereignty within IIL. While, the political objectives that surround the international minimum standard is helpful for context it is not relevant for achieving the purpose of the thesis, hence any discussion of India’s legal policy and its new Model-BIT from a de lege ferenda approach has been left out.

1.8 Outline and disposition

The thesis contains six chapters. The first chapter introduces the subject, i.e. IIL and the principal conflict between investment protection and State sovereignty or in other words private versus public interests in relation to new State practice in India.

53_{Sornarajah, Evolution or Revolution in International Investment Arbitration? The Descent into Normlessness, p. 631, 654–}

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Chapter two is the longest chapter of the thesis and describes the history of IIL. The chapter is divided into the most significant historical ‘eras’ that has shaped the international rules on investment protection. The tension between investment protection and State sovereignty is most apparent in the colonial and post-colonial eras. The colonial era is studied more in-depth since that’s when the international minimum standard and the opposing Calvo doctrine emerged. The chapter finishes with the global era and the origin of BITs, an era when State sovereignty took a backseat to investment protection.

Chapter three delves deeper into the ‘global era’ and describes how the international minimum standard has been incorporated in BITs, through the ‘fair and equitable treatment’ (FET) standard and investor-State Dispute Settlement (ISDS). The chapter describes the controversial dual role of arbitration tribunals as both interpreter and law maker and how arbitration case law has generated a coherent ‘system’ of investment protection under IIL. The chapter ends with how a possible re-awakening of the Calvo doctrine might look like in a treaty context.

Chapter four introduces India and provides a basic overview of India’s historical approach to foreign investment protection vis-à-vis State sovereignty and then goes deeper into its BIT program and recent experiences with ISDS arbitration.

Chapter five analyzes India’s Model-BIT from 2016, focusing on key provisions regarding substantive and procedural treatment. Each key provision is commented upon using the historical theoretical framework laid out in the previous chapters.

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2 The history of international investment law

Scholars have identified three significant periods in the history of international law that has shaped modern foreign investor protection; the colonial era, the post-colonial era and the global era.54_{For the purpose of the thesis, the colonial era is examined more in-depth given that the}

international minimum standard and the Calvo doctrine emerged during this period.

2.1 The Colonial Era and the international minimum standard

By the end of the Middle Ages, as the European continent witnessed the birth of nation-states and the expansion of trade relations, sovereign leaders began negotiating treaties, regulating trans-border economic activity for the purpose of safeguarding the interests of their nationals in other countries.55_{For many centuries European nations habitually concluded commercial}

treaties for mutual economic benefit and out of this historical practice certain principles of protection for aliens and their property developed as custom, at least among European nations.56

These principles, e.g. national treatment (prohibiting discrimination in favour of nationals), most-favoured-treatment (prohibiting discrimination in favour of other foreigners) and the doctrine of denial of justice, would eventually lay the foundation of modern investment treaties.57_{With regards to the colonial context, the European imperial powers simply imposed}

their political and military influence and saw no need to conclude commercial treaties with their colonial subjects.58_{But with rapid technological progress in the 19}th_{Century commercial}

trans-border activity spread beyond the European and colonial context and with more investments taking place outside of the western sphere of influence, Western jurists saw a practical need to publicize and affirm the principles of protection that had developed as customary among the

54_{Vandevelde, A brief history of international investment agreements p. 158.} 55_{Salacuse, The Law of Investment Treaties, p. 81.}

56_{Weiler, The Interpretation of International Investment Law: Equality, Discrimination and Minimum Standards of}

Treatment in Historical Context, p. 95.

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European nations.59_{Thus, as a direct result of the expansive interests of western economic}

powers and American influence in Latin America and Asia, the principle of an international minimum standard started to develop within Western legal theory.60_{The standard was}

polemically dubbed the “standard of civilization”.61_{However, the legal groundings of such a}

standard in customary international law was highly disputed and the standard was rigorously refuted, especially by Latin American jurists, and in particular by the Argentine jurist Carlos Calvo (1824-1906) who penned the Calvo doctrine in reply to Western jurists and their “standard of civilization”.62_{The Calvo doctrine is based on the axiomatic principle of sovereign}

equality between states and the related national treatment principle. The Calvo doctrine decrees that the standard of treatment owed to aliens is derived from the national treatment principle, i.e. that the national laws and jurisdiction of the host state is the principal and primary source from which the legal protection owed to foreign investors flows.63_{The Calvo doctrine became}

very popular in its native Latin America. The Mexican Foreign Minister Eduardo Hay explained his country’s position to his American counterpart in 1938:

“The foreigner who voluntarily moves to a country which is not his own, in search of a personal benefit, accepts in advance, together with the advantages he is going to enjoy, the risks to which he may find himself exposed. It would be unjust that he should aspire to a privileged position.”

Supporters of the international minimum standard did not dispute the sovereignty of states but justified the “privileged position” of foreigners and their property under international law as a necessary assurance. If the law of the host state undermines international legal norms foreigners should be protected under international law, the right to be treated “equally bad” was not a justifiable argument according to adherents of the international minimum standard.64_The

tension between the international minimum standard and the equality doctrine in international customary law could perhaps be linked to different conceptual views on justice but more likely it was the result of differing economic interests.65_{Naturally countries with expanding economic}

interests were inclined to pursue an international minimum standard of protection while

60_{Salacuse, The Law of Investment Treaties, p. 48.}

62_{Vandevelde, A brief history of international investment agreements, p. 159.} 63_{Salacuse, The Law of Investment Treaties, p. 47.}

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countries with little or no foreign interests would seek to protect themselves from external influence and uphold full sovereignty over foreign economic interests.66_{In support the}

international minimum standard, Oppenheim, by many regarded as one of the fathers of modern international law, stated:

“It is a well-established principle that a State cannot invoke its municipal legislation as a

reason for avoiding its international obligation. For essentially the same reason a State, when charged with a breach of its international obligations with regard to the treatment of aliens, cannot validly plead that according to its Municipal Law and practice the act complained of does not involve discrimination against aliens as compared with nationals. This applies in particular to the question of treatment of the persons of aliens. It has been repeatedly laid down that there exists in this matter a minimum standard of civilization and that a State which fails to measure up to that standard incurs international liability.”67

From this quote it becomes apparent that the original international minimum standard obligated the protection of “the persons of aliens”, i.e. injuries to the body (today largely overtaken by human rights law). The novel “standard of civilization” went further and included injuries to the property of aliens. The following sections will explain how Western jurists succeeded with this accomplishment.

2.1.1 The Doctrine of Denial of justice and the “standard of civilization”

The origins of the international minimum standard can be traced back to the doctrine of denial of justice.68_{Grotius considered when a denial of justice had occurred: “in case a judgment}

cannot be obtained against a criminal or a debtor within a reasonable time” and “if in a very clear case…judgment has been rendered in a way manifestly contrary to law”. Moreover, Vattel emphasized that a denial of justice was the only condition that justified reprisals from the home State of the injured alien.69_{From the works of Grotius and Vattel it has been deduced that a}

‘denial of justice’ was limited to judicial (procedural) failures of host States and included;

66_{Salacuse, The Law of Investment Treaties, p. 48.} 67_Ibid.

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i) denial of access to courts, ii) inadequate procedures and iii) unjust decisions.70_{At the time}

when Grotius and Vattel contemplated the denial of justice doctrine, the law of nations was considered to be derived from natural law. Despite the fact that a more modern positivist approach to the law of nations was adopted in the 19th_{Century, i.e. that international law is}

derived from the implicit consent of nations through customary practice, the natural law-based denial of justice doctrine continued to evolve, inspiring the “standard of civilization” and the doctrine of diplomatic protection. Being premised on outdated natural law foundations, the legitimacy of such ‘enhancements’ of the original denial of justice doctrine in customary international law was highly disputed by the Calvo doctrine.71_{However, the essential}

underlying conflict was not about different schools of legal theory but rather around diverging interpretations of the national treatment principle.

2.1.2 The relative national treatment principle

A paradoxical feature of the national treatment standard is its relativity, since its normative content varies and depends on the treatment offered by the individual host state and its domestic law and not on some ‘a priori’ absolute principle of equal treatment.72_{In general, when it comes}

to the question of what actually amounts to a breach of international law by a State it varies from one State to the next and depends on the substantive content of the specific State’s international obligations, located in lex specialis, e.g. human rights conventions and treaties. Not even customary international law can be said to be generally applicable for all States since States are differently situated and have different interests, e.g. coastal and landlocked States, capital-exporters and capital-importers etc.73_{Due to the individual nature of states there is no}

such thing as a uniform code of international law reflecting the obligations of all States.74

However, when it came to the international minimum standard and the “standard of civilization”, Western legal theory argued that national treatment was contingent upon who invoked it. Weiler explains; “Western legal theory was based on the political and international theories of John Stuart Mill… and for Mill, liberalism, equality and non-intervention were

70_{Wallace Jr., Fair and Equitable Treatment and Denial of Justice: From Chattin v. Mexico to Loewen v. USA, p. 672.} 71_{Ibid., p. 673-674.}

72_{UNCTAD, National Treatment, p. 6.}

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principles that only applied to the conduct of “civilized” States.”75_{Thus, according to Western}

jurists, “uncivilized” nations were precluded from invoking national treatment under the equality doctrine when it came to the treatment of aliens. The Calvo doctrine rejected this conclusion and sought to reaffirm that the axiomatic principle of sovereign equality and national treatment applied to all sovereign nations irrespective of socio-economic status. Thus, the national treatment principle was subjected to a normative tug of war in customary international law between proponents of the international minimum standard and supporters of the Calvo doctrine.76

2.1.3 National treatment according to Western jurists

Due to political upheavals in the mid-19th_{Century, the U.S. and other capital-exporting}

countries started to enhance the treaty language in their commercial treaties in order to attain satisfactory treatment for their nationals investing abroad.These treaty “fortifications” included pairing up the national treatment standard with the most-favoured-nation (MFN) provision, which in turn meant that national treatment increasingly became associated with the wider concept of “treatment no less favourable”. The link between national treatment and MFN is clear as they share the same modus operandi, i.e. both provisions position the foreign investor next to a comparator. In the case of national treatment, the comparator is limited to nationals of the host State and in MFN the comparator category is expanded to include nationals from other countries who are operating in the host State. By pairing up national treatment and MFN in treaties virtually any discriminatory behavior from the host state could be deemed as internationally unlawful.77_{These developments in treaty texts would later serve as basis for the}

Western jurists claim of the existence of an international minimum standard or “standard of civilization” in customary international law.78_{Today the national treatment and the MFN}

provisions have become standard provisions in both IIL and international trade law.79_{The vast}

76_{UNCTAD, National Treatment, p. 7.}

78_{Ibid, p. 418.}

79_{WTO, Understanding the WTO - principles of the trading system,}

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majority of BITs include these two provisions, either under a combined article or independently.80

In order to institute international liability for violations of the “updated” international minimum standard Western jurists tied the international minimum standard to the international law doctrine of State responsibility.81_{The doctrine of State responsibility contains secondary,}

procedural rules of responsibility, considered generally applicable and standardized.82_These

principles govern when and how a state is held responsible for violating an international obligation.83_{While the original international minimum standard only incurred international}

liability when aliens had obtained personal injuries and been denied subsequent proper administrative justice, Western jurists utilized the concept of “treatment no less favourable” to expand the denial of justice doctrine and claimed that the protection of property (foreign investment) had become part of the international minimum standard.84_{By claiming that}

property enjoyed the same international protective standards as the person, the international minimum standard now meant that essentially any international illegal act – be it to the alien’s person and/or property – incurred international liability under the doctrine of State responsibility.85_{Many of the rules linked to the doctrine of State responsibility had developed}

out of the sensitive relationship between the U.S. and Latin America.86_{Thus, by expanding on}

the substantive content of the international minimum standard and then linking it to the procedural doctrine of State responsibility, Western jurists managed to secure the property rights of aliens and elevate such rights from being an issue of national responsibility to a matter of international responsibility.

81_{UNCTAD, National Treatment, p. 37.} 82_{Crawford, State responsibility, p. 1.}

83_{Arbour, The responsibility to protect as a duty of care in international law and practice, p. 1.} 84_{Dickerson, Minimum standards, p. 12.}

85_{Focarelli, Denial of Justice, p. 6.}

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2.1.4 National treatment according to the Calvo doctrine

According to the Calvo doctrine the national treatment principle recognized that aliens were entitled to equal treatment as the nationals of the host state, no less and no more. As mentioned this was the original meaning of the national treatment principle.87_{Weiler states that from a}

functional standpoint, the total history of State practice shows that the fundamental basis (Grundnorm) for international law governing State treatment of aliens and their investments is equality and non-discrimination.88_{According to Weiler the Calvo doctrine was “founded upon}

the principle of sovereign equality, as mediated by principle of good faith” meaning that the guarantee of foreign investors to receive non-arbitrary, non-discriminatory treatment was based on the principled obligation of States to act in good faith. Weiler states; “the dispute between Calvo and his Western contemporaries centred upon where the fulcrum should be placed – as between the poles of sovereign equality and good faith…” and “…the nub of the dispute between Calvo and Western jurists concerned the question of who should decide whether the protection and security owed to aliens was effective in the circumstances at hand. Where one sat on the axis between the principles of sovereign equality and good faith would dictate his answer” and “reciprocity (between the two) was the basis upon which minimum standards of State responsibility should rest.”89_{From this it can be deduced that the Calvo doctrine stipulates}

that as long as a host State meets its international obligations in good faith there is no grounds for international liability, but such interpretations have been discredited in modern investment treaty arbitration, see e.g. the Mondev case where the tribunal issued the following sentiment.

“What is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith.”90

What is more, the burden of proving that a State has acted in bad faith is an unreasonable task, since a government can easily offer a public policy justification for its actions.91_{Thus, Western}

88_{Ibid, p. 1.}

Treatment in Historical Context, p. 111-112.

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legal theory deemed it necessary to venture beyond the principles of good faith and the equality doctrine and argued that when the international minimum standard had been breached (irrespective of good faith) an international adjudicating mechanism could hold the breaching host State responsible. 92 _{Western jurists argued that international liability under the}

international minimum standard could be invoked under the auspices of diplomatic protection, an enforcement mechanism which often meant threats of force i.e. “gunboat diplomacy” and actual military intervention. The notion that diplomatic protection authorized the use of military intervention was seen by Carlos Calvo as yet another baseless claim by Western jurists that undermined the sovereign equality doctrine.93

2.1.5 Diplomatic protection – a controversial enforcement mechanism

From the foreign investor’s perspective one of the most important aspect of investment protection is to have ready and available access to an efficient judicial remedy for the settlement of disputes with the host State.94_{Historically, under customary international law, sovereign}

states have been protected from direct claims by aliens due to the principle of sovereign immunity.95_{Instead injured aliens had three alternatives to resolve disputes with host states, i)}

negotiation, ii) exhaustion of local remedies and iii) diplomatic protection by their home government.96_{Diplomatic protection was the most controversial alternative of settling disputes}

since it by extension often meant threats of using force i.e. “gunboat diplomacy” and actual military intervention. 97 _{Western jurists argued that diplomatic protection and armed}

intervention was a legitimate under international law based on Vattel’s elementary principle of reprisal: “Whoever ill-treats a citizen injures the State, which must protect that citizen”.98_The

Permanent Court of International Justice affirmed this principle in the Mavrommatis case:

It is an elementary principle of international law that a State is entitled to protect its subjects, when injured by acts contrary to international law committed by another State, from whom they have been unable to obtain satisfaction through the ordinary channels. By taking up the case

92_{Vermeer-Künzli, As If: The Legal Fiction in Diplomatic Protection, p. 45.} 93_{Salacuse, The Law of Investment Treaties, p. 50-51.}

94_{Dolzer & Schreuer, Principles of International Investment Law, p. 42.} 95_{Subedi, International Investment Law: Reconciling Policy and Principle, p. 2.} 96_{Salacuse, The Law of Investment Treaties, p. 357.}

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of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights – its right to ensure, in the person of its subjects, respect for the rules of international law…. Once a State has taken up the case on behalf of one of its subjects before an international tribunal, in the eyes of the latter the State is sole claimant.99

As mentioned, in the colonial era, political conditions led to an expansion of the denial of justice doctrine which meant that essentially any internationally illegal act incurred international liability, i.e. diplomatic protection and the use of military force.100_{This aggravated Carlos}

Calvo who declared that such extensive interpretations lacked legal grounding since it departed from the modern positivist approach to international law. Hence, the Calvo doctrine, published in 1863, has been described as a positivist reaction to the idea that military action could be invoked under the auspices of diplomatic protection.101_{The Latin American countries had been}

especially vulnerable to diplomatic protection and suffered frequent armed intervention by the home states of aliens, especially the U.S., and it has been estimated that more than a hundred cases of “protection by force” between 1813 and 1927 was committed by the U.S. alone.102_As

a result, many Latin American countries adopted the Calvo doctrine into constitutions, municipal legislation and commercial contracts with foreign companies.103

2.1.6 The Calvo doctrine – reaffirming the exhaustion of local remedies rule

The Calvo doctrine is based on two principles: i) the principle of non-intervention and ii) the principle of absolute equality between sovereign states.104_{The principle of non-intervention}

dictates that sovereign states, being equal, should not have to endure “interference of any sort” by other states. The Calvo doctrine did not seek to abolish the doctrine of diplomatic protection, the purpose was rather to reject the Western notion that diplomatic protection sanctioned the use of military action and to reaffirm the customary rule to exhaust local remedies when settling disputes.105_{Furthermore, the Calvo doctrine argued that the only way diplomatic protection}

99_{The Mavrommatis Palestine Concessions (1924) PCIJ Ser. A. No. 2 at 12.} 100_{Focarelli, Denial of Justice, p. 6.}

102_{Ibid, p. 98.}

103_{Salacuse, The Law of Investment Treaties, p. 65-66.}

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could be invoked was if the exhaustion of local remedies rule had resulted in a denial of justice, (in Grotius and Vattel’s original definition of the term, i.e. failing to administer proper administrative justice).106_{The Latin American countries claimed that it had been far too easy}

for alleged injured aliens to receive diplomatic protection and that the home governments of aliens had abused their power by resorting to threats and violent intervention.107_Diplomatic

protection continued to be a highly political and sensitive issue until the early twentieth century with frequent use of “gunboat diplomacy”.108_{Finally, when the United Nations Charter was}

introduced in 1945 the extensive interpretation of diplomatic protection was prohibited.109

Article 2(4) of the UN Charter: “all Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state…”110

2.1.7 Early arbitral decisions on the international minimum standard

In the 19th_{to mid-20}th_{centuries, treaties and mutual agreements between states increasingly}

allowed for more peaceful settlement of disputes in the form of ad hoc arbitration and international claims commissions, the latter being a form of dispute settlement located in between diplomatic protection and judicial settlement.111_{Arguably the most important}

international claims commission during this period was the U.S. - Mexico General Claims Commission who decided two milestone arbitral cases on the basis of the international minimum standard in international law, the Neer case and the Roberts case. Important to note is that the jurisdiction of these tribunals was treaty-based and thus distinct from customary international law and the Calvo doctrine – which both maintained that aliens could only assert their rights before domestic courts.112

106_{Vinuesa, National treatment, p. 13-14.} 107_Ibid.

108_{Shihata, Towards a greater depoliticization of investment disputes: the roles of ICSID and MIGA, p. 1.} 109_{Vandevelde, A brief history of international investment agreements, p. 168.}

110_{UN Charter, article 2 (4).}

111_{Dolzer, Mixed Claims Commissions, p. 4.}

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2.1.7.1 U.S.A. (L.F. Neer) v. United Mexican States

American national Paul Neer was employed as superintendent of a mine in Mexico when on November 16, 1924 he was murdered by a group of armed men. His wife claimed that the Mexican authorities had shown a lack of diligence in the investigation of the murder and she therefore sought damages by the Mexican Government. The Commission noted that better methods might have been used but decided that it is not the prerogative of an international tribunal to decide which is the most effective procedure.113_{Rather it is the commissions duty}

to hold states accountable for breaches of international law principles such as the minimum standard. The Commission then outlined under what circumstances the international minimum standard has been violated:

“…the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency. Whether the insufficiency proceeds from deficient execution of an intelligent law or from the fact that the laws of the country do not empower the authorities to measure up to international standards is immaterial.”114

Out of this statement the “outrageous standard” was born and has subsequently been regarded as a benchmark of classical customary law since its authority is seemingly undisputed by all States.115_{The decision is in line with the Calvo doctrine’s requirement of states to act in good}

faith and furthermore the commission affirmed the Calvo doctrine’s position in the conflict with Western jurists on who should decide whether the protection and security owed to aliens was

effective in the circumstances at hand when it stated that it is the prerogative of host states, from

their unique perspective, to decide what the most effective procedure is to uphold international minimum standards of treatment.

113_{L.H.F. Neer and Pauline Neer (U.S.A.) v. United Mexican States, p. 62.} 114_{Ibid, p. 61.}

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2.1.7.2 U.S.A. (Harry Roberts) v. United Mexican States

American national Harry Roberts was taken prisoner in Mexico and held under detention for a period of nineteen months in a room that sometimes would hold up to forty prisoners with no sanitary accommodations, no furniture, no opportunity of physical exercise and scarce, unclean food. Mexico stated that Roberts had been given equal treatment as that given to all prisoners. In its decision the Commission stated:

“Facts with respect to 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. That test is, broadly speaking, whether aliens are treated in accordance with ordinary standards of civilization.”116

In the Roberts case the equality principle was not a sufficient excuse by the Mexican government and the commission points to “standards of civilization” indicating that the updated international minimum standard, as put forward by Western legal theory, had acquired legitimacy in international law. Shea, author of one of the most cited work on the Calvo doctrine (published in 1955), thus stated: “It can be asserted that the Calvo doctrine has failed to receive recognition as a principle of international law, and as such is now dead.”117_{Shea supported his}

rejection of the Calvo doctrine by the fact that it had been discredited by Western international jurists and arbitral commissions.118_{However, this was a somewhat hasty conclusion since the}

Calvo doctrine has re-emerged from time to time. A more accurate description would be that the Calvo doctrine lays dormant for the most part and awakes whenever political circumstances demand it.119_{In the post-colonial era, examined next, newly independent states challenged the}

legitimacy of international law and jointly tried to reclaim the original meaning of the national treatment standard in customary international law, a sign of the persistent qualities of the Calvo doctrine.

116_{Harry Roberts (U.S.A) v. United Mexican States, p. 80.}

117_{Shea, The Calvo clause: a problem of inter-American and international law and diplomacy, p. 20.} 118_Ibid.

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2.2 The Post-Colonial Era

Stretching from the end of World War II to the collapse of the Soviet Union in 1991 the post-colonial era witnessed three major events that would generate the modern system of investment protection under IIL.120

The first event was when the victorious allies agreed to liberalize trade, introducing a major multilateral regime, i.e. the General Agreement on Tariffs and Trade (GATT) in 1947.121

Parallel negotiations on a combined trade/investment multilateral regime also took place with the passing of the Havana Charter but it was never adopted due to lack of approval in the U.S. Congress. As a result, investment and trade were separated and developed within different legal frameworks.122_{The second major event was de-colonization and the emergence of a wave of}

new economically underdeveloped countries. The newly independent nations shared a general mistrust against international law on trade and foreign investments, which they viewed as exploitative neo-colonialism.123_{International law was seen as a continuation of colonial}

interests since it promoted the protection of foreign investment and property over the right of the host state to regulate economic activity and nationalize property, hence inhibiting their chances of economic progress.124_{As a result, India and many other underdeveloped countries}

sought to achieve self-sufficiency by adopting import-substitution policies under a planned economic system rather than adhering to the liberal free market economy.125_{In accordance with}

this political stance the Indian government rejected the doctrine of State responsibility, claiming it was “Euro-centric”.126_{A former judge in the High Court of Calcutta stated in 1961:}

“The law of responsibility…is not founded on any universal principles of law or morality. Its sole foundation is custom, which is binding only among states where it either grew up or came to be adopted. It is thus hardly possible to maintain that it is still part of universal international law. Whatever the basis of obligation of international law in the past, when the international community was restricted to only a few states…the birth of a new world community has bought

about a radical change which makes the traditional basis of obligation outmoded.”127

120_{Vandevelde, A brief history of international investment agreements, p. 162.} 121_Ibid.

122_Ibid. 123_{Ibid, p. 166.}

125_{Vandevelde, A brief history of international investment agreements, p. 167.} 126_{Krishan, India and International Investment Laws, p. 293.}

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The third and final event that would shape IIL was the rise of the socialist bloc under the Soviet Union. After the war socialist states began expropriating property belonging to the private sector on a massive scale, including foreign-held assets. Similar to the newly independent nations, the socialist states were convinced that international law had developed “in response to the requirements of the Western business civilization”.128

2.2.1 From NIEO to CERDS to BITs

During the decolonization wave the United Nations had received 42 new members. Sharing a common identity and eager to assert their position in the international context the newly independent nations and the socialist bloc utilized the UN and its principle “one state one vote” to issue joint resolutions in the General Assembly, demanding new international trade policies.129_{At the first UNCTAD conference in 1964 the following Joint Declaration was}

adopted:

“The unity of the developing countries in UNCTAD has sprung out of the fact that facing the basic problems of development they have a common interest in a new policy for international trade and development…The developing countries have a strong conviction that there is a vital need to maintain, and further strengthen, this unity in the years ahead. It is an indispensable instrument for securing the adoption of new attitudes and new approaches in the international economic field.”130

The official objective of the developing and socialist countries in the UN was to reform international law to better reflect their needs and interests.131_{Arguably the main issue on their}

agenda was expropriation and with a majority presence in the UN General Assembly they sought recognition of their right to expropriate foreign investment and property.132_{The first}

effort came in 1962 with the General Assembly Resolution 1803 on Permanent Sovereignty over Natural Resources133_{. Similar efforts continued throughout the 1960’s and 1970’s with the}

128_{Bring, Det folkrättsliga investeringsskyddet: En studie i u-ländernas inflytande på den internationella sedvanerätten, p. 29.} 129_{Ibid, p. 14–15.}

130_{Bring, Det folkrättsliga investeringsskyddet: En studie i u-ländernas inflytande på den internationella sedvanerätten, p. 14.} 131_{Salacuse, The Law of Investment Treaties, p. 68.}

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aim to revise established principles on the obligations to pay compensation for expropriation.134

The established international rules of expropriation essentially stated that nationalizing of private property triggered an obligation to pay ‘prompt and adequate’ compensation. In the 1930’s this rule was expanded upon with the Hull formula, another outgrowth of the international minimum standard, named after the U.S. Secretary of State Cordell Hull, which stipulated that compensation be “prompt, adequate and effective”.135_{In 1974 the General}

Assembly adopted the Declaration of the New International Economic Order (NIEO) declaring that states have “full permanent sovereignty” over their natural resources and other economic activities.136_{Later the same year the Charter of Economic Rights and Duties of States}

(CERDS)137_{was adopted by the General Assembly, which declared that compensation for}

expropriation be paid according to national laws and regulations.138_{CERDS made no mention}

of international law or international arbitration.139_{Hence, the CERDS resolution and the NIEO}

declaration reflected the normative ideals expressed in the Calvo doctrine.140

“During most of the last century, it has been the object of tension between developed and developing countries, with several countries challenging the existence (or persistence) of a customary norm of an international minimum standard. This tension had implications in several sectors, for example the League of Nations and the UN International Law Commission was unable to reach agreement on a codification of the law of State responsibility for injury to aliens…With their overwhelming majority within the UN General Assembly, the developing countries were able to assert the principle of national treatment as the rule in the case of expropriation”141

The increased risk of uncompensated expropriation did not sit well with the developed countries in the west who responded by introducing bilateral investment treaties.142_{Salacuse gives two}

reasons why a bilateral construct was preferred; i) a bilateral treaty only has to satisfy interests of two parties and hence less complicated than a multilateral treaty and ii) a bilateral situation allows the developed country to use its power more effectively and the developing country does

135_{Sasse, An Economic Analysis of Bilateral Investment Treaties, p. 42.} 136_{Vandevelde, A brief history of international investment agreements, p. 168.} 137_{G.A. Res. 3281 (XXIX), 12 dec. 1974.}

138_{Vandevelde, A brief history of international investment agreements, footnote 61.}

139_{Waibel, Kaushal, Chung & Balchin, The Backlash Against Investment Arbitration: Perceptions and Reality, p. 6.} 140_{Yearbook of the International Law Commission 2002, p. 65.}

India’s 2016 Model Bilateral Investment Treaty –