What is International Investment Law?

Introduction

International investment law, once regarded as an “exotic and highly specialized” domain, has become a key area of international law, driven by economic globalization and the rise of foreign direct investments. International investment agreements (IIAs) obligate states to protect foreign investors by ensuring fair treatment, non-discrimination, compensation for expropriation, and other safeguards. These agreements often include investor–state arbitration mechanisms, enabling foreign investors to bypass local remedies and directly challenge host states before arbitral tribunals, which are viewed as neutral forums for resolving disputes.

Investment disputes have touched critical sectors such as environmental protection, public health, and cultural heritage, often pitting state regulatory powers against investor rights. With awards reaching billions of dollars, the field has drawn intense scrutiny from governments, investors, and the public. However, the system faces a “legitimacy crisis,” with criticisms of its democratic deficit, perceived bias in favour of investors, and limited consideration of broader public interests, including human rights.

While some states, particularly in the Global South, have withdrawn from investor–state arbitration frameworks, others have refused to adopt them altogether, signalling widespread discontent.

What is International Trade Law?

International investment law is an instrument of public international law. It governs foreign direct investment and the resolution of disputes between foreign investors and sovereign States.[1] International investment law governs the admission and treatment of foreign investments. At its core, investment treaties serve as the foundation of this legal framework. These treaties are agreements concluded between two or more states, aiming to foster investment flows by establishing obligations related to the admission, treatment, and protection of foreign investments.

Who is a Foreign Investor?

A foreign investor, as recognized under investment treaties, can be either a natural person or a corporation. For natural persons, the definition usually ties to nationality, and in some cases, tribunals extend it to include permanent residents. For corporations, the criteria vary but often include factors such as incorporation or constitution under the laws of a treaty party, location of administration or management within the treaty party, or control by nationals of the treaty party. These definitions ensure that the investor qualifies for treaty protection. Investment treaties grant foreign investors, as nationals of a treaty party (the investor’s “home state”), the right to bring claims regarding their investments in another treaty party (the “host state”). However, the host state can challenge the tribunal's jurisdiction by disputing the claimant's status as a foreign investor of the relevant nationality.[2]

What is a Foreign Investment?

Foreign investments refer to the assets or activities that qualify for protection under investment treaties. The specific definition of an investment depends on the language of each treaty and may include a range of assets, such as direct and portfolio investments, intellectual property rights, and shares.[3] While some treaties provide an exhaustive list of illustrative categories, others rely on domestic laws of the host state or leave the interpretation to tribunals. Under the ICSID Convention, investments must meet both treaty definitions and additional criteria, such as regularity of profit, an economic operation of duration, assumed risk, and contribution to the host state's economic development. However, tribunals have varied in their application of these criteria, with some treating them as illustrative rather than mandatory. For instance, in the Philip Morris v Uruguay case[4], the tribunal ruled that demonstrating economic contribution to the host state was not a necessary condition for qualifying as an investment.

Types of Investment Treaties

Investment treaties are primarily bilateral, involving just two state parties, and focus exclusively on investment matters. However, regional and bilateral trade agreements often feature investment chapters, making them increasingly common. Due to the predominance of bilateral and regional treaties, the applicable law can vary depending on the host and home states of different investments.

Investment treaties primarily come in three forms: Bilateral Investment Treaties (BITs), Multilateral Investment Treaties, and Free Trade Agreements (FTAs) that include investment provisions.

1. Bilateral Investment Treaties (BITs): These treaties involve just two state parties and focus exclusively on investment matters. They establish the terms and conditions for private investments made by individuals or business entities from one sovereign state in another sovereign state. BITs provide legal protection to foreign investors and often grant access to Investor-State Dispute Settlement (ISDS) mechanisms for resolving disputes between investors and host states.
2. Multilateral Investment Treaties: These agreements involve more than two states and establish broad legal frameworks for the protection of foreign investment across multiple jurisdictions. The Energy Charter Treaty is an example, offering significant investor protections and covering industry-specific trade that is not geographically limited.
3. Free Trade Agreements (FTAs): These are bilateral or regional agreements that often include provisions aimed at encouraging foreign direct investment. FTAs provide guarantees and protections to individuals and companies from one contracting state who invest in another state (the ‘host’ state). Most FTAs also include arbitration clauses to resolve disputes between foreign investors and host states, aligning with international legal standards for investment protection.

Core Standards of Treatment in Investment Treaties

Investment treaties typically outline specific standards of treatment that states must adhere to. These include:

• National Treatment and Most-Favoured-Nation Clauses: These clauses require states to treat foreign investors or investments no less favourably than domestic investors (national treatment) or investors from other states (most-favoured-nation treatment).
• Fair and Equitable Treatment: This clause mandates that states treat foreign investments fairly, according to a minimum standard of fairness, irrespective of domestic rules.
• Full Protection and Security Clauses: These clauses demand that states take necessary steps to protect the physical and legal integrity of foreign investments.
• Expropriation Clauses: Such provisions restrict government’s ability to expropriate foreign investments, stating that expropriation must serve a public purpose, be non-discriminatory, and compensate investors according to agreed standards.
• Currency Convertibility and Profit Repatriation: These provisions ensure that investors can convert currency and repatriate returns from their investments.

Dispute Resolution Mechanisms

Investment treaties often provide investors the option to bring disputes against host states to international arbitration rather than national courts. Key arbitration centers include the International Centre for Settlement of Investment Disputes (ICSID), hosted by the World Bank. ICSID, alongside other arbitration institutions like UNCITRAL, handles numerous disputes each year.

In investor-state arbitration, the investor typically alleges treaty violations and seeks monetary compensation. Arbitral tribunals, usually comprising three private individuals, issue binding awards. These awards can be enforced internationally through multilateral treaties, allowing investors to seek enforcement in any signatory country where the host state holds assets.

Arbitration and Its Financial Implications

Arbitration can have significant financial consequences for host states. Multilateral treaties facilitate enforcement of arbitration awards, making it difficult for states to avoid compliance.[5] Governments, particularly in globalized economies, face pressure to honor these awards to maintain investor confidence. However, in recent years, some states have refused to pay arbitral awards, leading to tensions in international investment law enforcement.

The Role of Investment Treaties in Public Action and Regulatory Space

Investment treaties and arbitration empower private tribunals to review state conduct, including actions by democratically elected governments or national courts, based on broadly formulated treaty standards. This has led investors to challenge various measures taken by governments, such as environmental regulations, smoking bans, land redistribution, and other public policies.

These arbitration processes have raised concerns about the impact on “regulatory space,” or the freedom of governments to enact policies that promote social welfare. Large compensation awards and costly arbitration can discourage public authorities from taking socially beneficial actions, especially in low-income countries where public finances are constrained.

Grassroots Contestation and Regulatory Space

Investment treaties not only affect government actions but also provoke grassroots contestation. Disputes can arise when large-scale investments lead to adverse social or environmental impacts, such as land takings or pollution. In such cases, investors may use investor-state arbitration to challenge court actions initiated by civil society or the government’s failure to address direct grassroots action.

This highlights the complexity of regulatory space, which involves not only the freedom for public authorities to act but also space for negotiation and contestation by various public and private actors influencing national decision-making.

Conclusion

In their pursuit to attract foreign investment, states ratify IIAs, which often involve a limitation of sovereignty in exchange for economic benefits. However, IIAs are more intrusive than trade agreements, as foreign investments occur within the host state's borders, leading to significant challenges in balancing regulatory freedom with investor rights. While states have a right to regulate under international law, they also have a duty to safeguard internationally recognized values. This tension has led to concerns over the legitimacy of investment arbitration, especially given its impact on public policy and the potential bias against developing countries. It is argued that the system needs to better align with public international law, ensuring a balance between private investor protections and public interests. Constitutional principles, such as proportionality and reasonableness, can contribute to establishing a more balanced framework in international investment law and arbitration.

[1] Guides: International investment law research guide: Introduction Introduction - International Investment Law Research Guide-Guides at Georgetown Law Library, https://guides.ll.georgetown.edu/internationalinvestmentlaw.

[2] Who and what does international investment law apply to? Defining foreign investors and foreign investments World Health Organization, https://extranet.who.int/fctcapps/fctcapps/fctc/kh/legalchallenges/who-and-what-does-international-investment-law-apply-defining.

[3] Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2nd ed., 2012) p 60-61.

[4] Philip Morris Brands Sarl v. Oriental Republic of Uruguay, ICSID Case No ARB/10/7.

[5] Namely, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and, for ICSID awards, Article 54 of the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”).

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