Abdelhameed Dairy*
Introduction
The paper critically assesses the contemporary challenges facing the international investment regime, concluding that urgent reform is needed. It argues for abandoning Bilateral Investment Treaties (“BITs”) as the prevailing tools. The first part of this article characterizes the regime as an “imbalanced bargain” and highlights the regime’s inability to achieve objectives, leading to regulatory chill and hindering sustainable development goals. The second and third parts of the article propose a novel reform approach centered on the doctrine of acquired rights within a domestic legal framework, offering a comprehensive solution to existing challenges. The researcher advocates for terminating BITs, emphasizing the need for transformative legal adjustments to address the regime’s shortcomings. The methodological approach aligns with Sauvant’s emphasis on understanding the regime’s purpose as a foundation for meaningful reform discussions.
I. Background and Objectives
The global response to enhancing protection for foreign investors, framed as a “Grand Bargain,” has been subject to critical examination (Kaushal 2009; Salacuse and Sullivan 2005). Asha Kaushal revisits the history of the foreign investment regime to illuminate the present backlash against the regime, shedding light on its historical underpinnings. Kaushal’s findings underscore the tensions inherent in the BIT architecture, revealing a disconnect between the intended benefits of BITs and their actual impact on foreign investment flows (Kaushal 2009, p. 492-496). While these treaties were originally envisioned as a means to attract investment by trading regulatory sovereignty, recent studies suggest that they may not significantly influence investment patterns. Moreover, Kaushal argues that the real bargain underlying BITs involves developing countries relinquishing sovereignty in exchange for enhanced protection of foreign property and contract rights (Kaushal 2009, p. 495). This nuanced understanding of the BIT regime challenges traditional binary structures and highlights internal contradictions within the investment arbitration framework. Jeswald Salacuse and Nicholas Sullivan, in their evaluation of bilateral investment treaties, question the efficacy of the grand bargain inherent in these treaties (Salacuse and Sullivan 2005, p.77). The perceived imbalance in this arrangement stems from three key factors: states’ choice to enter into investment treaties in a “blind bargain” without full certainty as to their effects, provision of ‘more than just” protection for investments, and restrictions on the State’s right to regulate.
A. A Blind Bargain: A Historical Perspective
The historical evolution of international investment law, rooted in the assumption that BITs would spur economic development through increased foreign direct investments, is increasingly questionable (Kenneth Vandevelde 2009, p.21; Hallward-Driemeier 2003). The lack of empirical evidence supporting this assumption (Dolzer and Schreuer 2012, p. 23; Salacuse and Sullivan 2005, p.17) transforms entering the commitment to BITs into a speculative gamble. The early 1990s marked a shift toward neoliberal economic policies and the establishment of BITs, guided by the belief that they would foster economic development (UNCTAD 2006, p. 2, 6).
However, the paper contends that this anticipated correlation between BITs and economic development lacks empirical support. Hence, it characterizes the treaties as “blind bargains”. The paper also aligns with the view that while investment protection is an important objective, its direct translation to promotion and liberalization is not always guaranteed (UNCTAD 2003, p. 89).
B. More than Extra Protection
The surge in costly arbitration claims against host states, exceeding initial expectations, forms the second facet of the imbalanced bargain. This rise in claims, attributable to the expansive scope of BITs and their broad definitions of investments—such as in Joy Mining v Egypt (para. 45)—prompts a critical examination. Significantly, the origins of BITs are also implicated, with some arguing (Miles 2010) that the focus on investors’ interests may have led to the neglect of the host state’s interests. The unique privilege granted to foreign investors to initiate legal proceedings against host states is explored, emphasizing the need to redefine investments for better precision.
Upon revisiting the shared objectives of the regime and exploring its history, it is apparent that BITs were embraced with a specific goal: advancing the economic development of host states. This distinguishes BITs from human rights conventions. BITs focus on safeguarding investors’ property (Dolzer and Schreuer 2012, p. 60). The deliberate choice of developing countries to limit BITs to future investments highlights their core aim of promoting future Foreign Direct Investment (“FDI”), which contributes significantly to economic development Salacuse and Sullivan 2005, p. 80). Unfortunately, the lack of a precise objective definition in BITs’ preambles often leads to the inadvertent inclusion of potentially detrimental investments (UNCTAD 2011, pp. 1-13). This drafting oversight may stem from the novelty of this legal field, as acknowledged in the ICSID Convention (Mihaly International Corp. v. Democratic Socialist Republic of Sri Lanka, para. 33).
As we consider the focus of the next chapter of investment protection, a crucial question arises: is the optimal avenue for developing investment law through BITs or domestic law? Host states have, over time, attempted a political approach to rebalance the “bargain” by modifying definitions in BITs (Kenneth Vandevelde 2009, pp. 186-187). Arbitral tribunals, adopting a legal approach, refine their interpretation of “investment”. This approach is exemplified in the Fedax v. Venezuela case which employs a “criteria approach” to define investments and establish prerequisites for protected investments. The Salini v. Morocco case, known for creating the “Salini Test”, sets criteria for an investment’s eligibility. However, a recent divergence of opinion among tribunals, particularly regarding the development clause, indicates ongoing debate. (Victor Pey Casado and President Allende Foundation v. Republic of Chile, L.E.S.I. S.p.A. and ASTALDI S.p.A. v. République Algérienne Démocratique et Populaire; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine). The development clause, often included in investment agreements and BITs, aims to ensure that foreign investment is not protected unless it contributes positively to the economic, social, and environmental development of the host country.
In summary, host states, aiming to foster economic development, have provided additional protection for foreign investments through BITs. Despite efforts to rebalance the “bargain”, harmful investments still receive extensive protection, challenging sustainable development goals. To address this, a proposed solution involves establishing a “sustainable foreign direct investment definition” which excludes detrimental investments from BIT protection. Our proposal of domestic law solutions—explored later—offers a more effective mechanism for excluding harmful investments.
C. The State’s Right to Regulate
The third element of the “imbalanced bargain” focuses on the constriction of the state’s right to regulate by BITs. While protecting foreign investors from unfair measures is acknowledged, our suggestion delves into the challenge of distinguishing between opportunistic and bona fide regulatory measures. The legitimacy crisis surrounding the regime, and particularly the threat of regulatory chill, is discussed. These concerns arise from the difficulty in balancing the protection of foreign investors with the state’s regulatory autonomy, leading to potential reluctance in enacting or enforcing regulations perceived as necessary for public welfare.
This paper advocates for the termination of BITs, emphasizing that they have failed in achieving their objectives. The imminent termination of BITs is evidenced by states initiating the process in response to the prevailing legitimacy crisis. This proposal advocates a shift from international to domestic law, offering a pragmatic solution to core issues, and preserving international arbitration but introducing a doctrinal gateway for consistency.
II. The Doctrine of Acquired Rights
Our proposal advocating domestic law as an alternative to BITs is based on the doctrine of acquired rights. The concept of acquired rights is a legal principle that protects rights which have already been acquired or established by individuals or entities under the law. It is a pivotal element within our suggested domestic investment law.
A. International Doctrinal Confirmation
Anticipating criticism about the shift from international (BITs) to national (domestic law), we address the key question of state succession’s impact on “acquired rights”. Affirmed by international tribunals, this principle, rooted in public international and municipal law, gained legitimacy in the landmark Saudi Arabia and Aramco case (see also Golâenberq; Permanent Court of International Justice). The doctrine of acquired rights was historically controversial because newly independent Global South states perceived it to threaten their sovereignty. However, this controversy largely evaporated in the early 1990s as developing and developed countries came into agreement over the importance of Hence, I argue for a revival of the acquired rights doctrine. Apart from the historical controversies on the application of this doctrine in the international sphere and considering that in our proposal the disputes between host states and investors shall be settled through international arbitrators, the international formal recognition of the doctrine is attached to its importance in the field of investment law and confers upon its legitimacy in content and principle.
B. The Content of the Doctrine
The doctrine of acquired rights typically prevents governments or other parties from retroactively changing laws or regulations in a way that would deprive individuals or entities of rights they have already obtained. Initially, the doctrine was a safeguard against state interference with property rights, and has international recognition. Our proposed National Foreign Investment Law (“NFIL”) safeguards FDIs against post-investment regulatory changes. The scope of acquired rights within the NFIL is limited to rights explicitly acquired through it. We propose a definition encompassing tangible and intangible rights, aligned with NFIL standards. As compared to stabilization clauses, NFILs better ensure alignment with host state constitutional principles.
C. Acquired Rights and Sustainable Development in National Foreign Investment Law (“NFIL”)
In our proposed NFIL, the concept of “right” within “acquired rights” is pivotal. Valid legal rules establishing rights would seamlessly align with sustainable development goals due to the hierarchy of norms. The NFIL, being more adaptable than BITs, would be crafted to appeal to non-governmental organizations (NGOs) by incorporating constitutional principles. To exemplify, if principles like environmental protection are embedded in the host state’s constitution, any investor rights conflicting with these principles would be null and unconstitutional. This aligns investor interests with the host state’s constitutional values, increasing predictability for investors and fostering sustainable and responsible FDIs. As a result, the proposed regime aims to contribute to sustainable development goals by advocating for sustainable FDI rather than merely more FDI. Moreover, it has been noted that it is more beneficial for investors to conduct economic policies that reconcile with their stakeholders’ interests and hence avoid criticism of societies and NGOs.
In defining “acquired” within “acquired rights”, the distinction between pre-establishment and post-establishment rights is crucial. Our proposal addresses concerns around pre-establishment rights. We suggest that NFIL should refrain from granting such rights. Host states not obligated to admit foreign investments (Droit international économique. Dalloz 2003, pp. 361-365), gain more control over FDI inflow without compromising fairness. The absence of pre-establishment rights in NFIL avoids an overly liberalizing perception and allows states to tailor liberalization levels to their policy stances.
D. Stabilization Clauses and the Doctrine of Acquired Rights
Our proposal centers on activating the doctrine of acquired rights in the NFIL, akin to stabilization clauses but with notable distinctions. Stabilization clauses, often criticized for hindering sustainable development, freeze a broad scope of regulations (and sometimes freeze the whole legal framework) at the time of the investment. In contrast, our concept of acquired rights focuses on freezing specific regulations and offers more precise control. The proposed “right” concept, mandating alignment with constitutional principles, echoes suggested remedies for stabilization clause shortcomings related to environmental and social considerations.
In essence, our NFIL approach strikes a balance: it promotes sustainable FDI by aligning investor rights with host state values, avoids broad pre-establishment rights, and offers a nuanced alternative to stabilization clauses.
III. Domestic Law as an Alternative and a Solution
Following the examination in Part I, this Part questions the relevance of BITs and explores domestic law as an alternative. It proposes two remedies for investor disputes: an Investor-State Dispute Settlement (“ISDS”) clause within the NFIL and the theory of acquired rights. Domestic law, viewed through the lens of other legal frameworks like labor law, offers a stable source for managing host state-investor relationships. The chapter underscores the equivalence of domestic law to BITs’ goals and its effectiveness as a superior instrument.
A. Investor Remedies in Domestic Law
Our suggestion of a NFIL proposes incorporating an ISDS clause into the NFIL and utilizing the theory of acquired rights. It contends that domestic law can offer a stable legal framework, addressing investor concerns and facilitating long-term relationships between investors and host states. The next section challenges the notion that domestic law lacks stability and emphasizes the importance of aligning investor interests with host state constitutional principles.
B. Serving the Same Objectives
Comparing domestic law to BITs, our proposed NFIL represents a credible legal framework, providing stability, predictability, and precise obligations. The NFIL with ISDS clauses contributes to investment liberalization by supplanting the Most Favored Nation (“MFN”) treatment (in principle) with a standardized legal framework. The NFIL, characterized by its legal structure comprising general and abstract rules, encompasses all foreign investors within a unified legal framework. Consequently, it supplants the MFN standard of protection by incorporating all foreign investors falling under the definition of investment in the relevant NFIL, irrespective of the BITs their home country has established with the host state.
In the pursuit of a solution to balance investor protection and regulatory flexibility, the next section focuses on the role of domestic law. Our approach suggests a distinction between investors’ rights and privileges while maintaining the state’s right to regulate.
C. The State’s Right to Regulate
The suggested NFIL would offer a framework to differentiate between compensable and non-compensable measures. A NFIL should define investors’ rights and privileges at the time of investment, ensuring that acquired rights remain unchanged, while privileges, such as the renewal application for operating a hazardous waste landfill, may be subject to legitimate regulatory changes.
Regarding general regulatory measures, the NFIL allows states to enact measures for public interest reasons without arbitration concerns provided they do not infringe on acquired rights. This grants host states the flexibility to adjust policies for future investors without being bound by previous investors’ rights.
Privileges obtained by investors can be modified for public interest, yet opportunistic changes may lead to compensation claims. The NFIL’s meticulous drafting is essential to clearly define the scope of acquired rights, minimizing potential debates.
D. Achieving a Multilateral Agreement on Investment (“MAI”)
Our proposed NFIL serves as a potential solution for achieving a MAI by fostering consensus on standards of protection. By allowing states to freely compete within their domestic laws, regulatory competition emerges. This competition encourages jurisdictions to attract FDI by adopting protective frameworks in their NFIL.
The concept of “regulatory competition” within domestic law enables states to compete for FDI with shared objectives, such as protecting, attracting, and liberalizing investment. Countries could compete to attract FDIs by incorporating an extensive Fair and Equitable Treatment standard of protection in their NFIL. This form of competition through domestic law has been witnessed previously, such as in tax law competitions enacting lower minimum wages for employees compared to other countries, or enhancing flexibility in the labor market.
Some may argue that this competition results in a “race to the bottom” on environmental standards. However, as well as a “Delaware effect”—a race to the bottom with regard to lax restrictions—competition might alternatively result in a “California effect” —a race to the top with regard to restrictions on corporations.
Eventually, regulatory competition will reveal which tools work better to achieve the common objectives, as with different approaches competing through the NIFL, some will witness failure and others will witness success in attracting investment. As a result, states with approaches that have failed will tend to duplicate the approaches that have succeeded until we attain a consensus on at least fundamental substantive content, and hence regulatory competition will pave the way to attain a MAI on the substantive level.
In summary, the proposed domestic law approach offers a balanced mechanism, allowing states to regulate for the public interest while maintaining a competitive environment for attracting FDI. This perspective aligns with the principles of regulatory competition and has the potential to pave the way for a multilateral consensus on investment standards.
Conclusion
The international investment law framework, aimed at promoting FDI and ensuring its protection, faces a crisis due to insufficient empirical support, unintended extra protection through BITs, and concerns about encroachment on host states’ regulatory rights.
In light of these challenges, terminating BITs is essential. Domestic law is a superior tool. Domestic law can achieve common goals, remove constraints on regulatory capacity, and align with global sustainable development objectives. It also serves as a crucial step towards a multinational investment agreement, providing a standardized legal framework for international investment law.
*Abdelhameed Dairy is a seasoned legal professional with expertise in case management, legal research, and client relations.
