FOREIGN DIRECT INVESTMENT
Course
Date
Foreign Direct Investment
Part A
An international investment arbitration tribunal is a body that seeks to regulate investor-state agreements towards development and dispute resolution. The host states have been provided appropriate space for regulating foreign investors concerning several aspects of domestic security despite the need for economic enhancement provided by international investments . The international investment arbitration tribunal allows host states to practice regulations regard to environmental issues, and sovereignty control over legal aspects of investor management. However, despite, the international investment arbitration tribunal offering the States the responsibilities and power to manage international investments in their countries, it is recommended for the body ensure that the host states does not abuse the sovereign power; rather it should be applied for proper legal purpose and in a proportional manner. The investment arbitration tribunal should aim in ensuring balance is developed regarding the rights to practice sovereign power by the host state and legal obligation it has to international investors in protecting their investments needs .
The State Sovereignty principle is used to determine the autonomy of a state to control activities within its boundaries, such as legislation rights, policy determination, and citizen control and maintenance. Sovereignty incorporates non-commercial aspects, legal, economic, and political decisions that are made to support various economic development within a government. With sovereignty power, host states hold a massive amount of power of dictating how the international investors conduct their businesses without a balance that considers the investor’s rights. Therefore, formulating constraints in sovereignty host state power based on principle of absolutism and control over immunity claims when it comes to dispute resolution, will enhance the formation of concepts that are more attractive and limited commercially and capable of preserving the interest of the host states. To archive the space for regulation for host states without sovereign power being abused by the host State, the paper considers the state sovereign power in relationship with international investors, the host state sovereign actions responsibilities based on customary international law, and the sovereign role of the host state in bilateral investment treaties (BIT) and investment contracts in enhancing economic developed and a good investor-state relationship.
Relationship of State Sovereignty with International Investors
Despite the existence of state sovereign power of making decisions within its territory, some investment agreements have enacted statuses that suit the sovereign interests of the state over and above commercial aspects. The sovereignty power of host states that create the relationship with foreign investors that should be carefully handled with abuse includes the right of supervision, which involves the host state holding power to supervise the international investor’s project and its progress. The supervision process is to ensure laws and regulations set in the State are being met by the investors. Some of the expected activities that international investors are required to meet while in the host state include licensing, registration, proper corporate records, and working in accord with the host state raison d’être. With proper supervision, the host state can ensure the investors are boosting the economic perspectives through compliance of the international investors with political, environmental, and welfare ethos of the host state .
The other relation developed by the host state sovereignty with international investors is through environmental protection and public health policies established in the country. The environment impact is caused by any activity that is conducted within the environment, which includes the soil, water, air, climate, human health and safety, landscape and physical structures. Environment protection is one of the major state sovereignty powers and is also supported by several multilateral investment treaties. Also, the state sovereignty should be used to ensure foreign investors are supporting local employment and domestic employment development. The host state ensures that the international investors are using employees that are better educated and skilled, which improves the local labour skills in commercial management in the State.
The sovereignty offers the host state the authority to regulate the international investments within their territory. The legal sovereignty holds that each host state is entitled to the right to supervise, regulate, and excise authority over international investments that are in the host state boundary and jurisdiction based on established laws and regulations. However, to ensure that host states are exercising their legal sovereignty power without being constrained to offer favored treatment to certain international investors, the ‘stabilization clause’ is introduced either in the contract of investment or BIT. The stabilization clause protects the foreign investor from any possible alteration to the laws and regulations relevant to the operation of the investment that might create a disadvantage to foreign investor.
Responsibility of the Host State for Its Sovereign Actions in Accordance With the Customary International Law
Sovereign actions of the host states demonstrate the level which the State values the appropriate space for regulation, in the public interest, the sovereign power. The responsibility of the host state determines the consequences that related to the number of investments and the rate of the state’s development economically. According to the first article of the Draft Articles on Responsibility of States for Internationally Wrongful Acts, the state’s wrongful actions internationally are considered international responsibility of that State. The state’s sovereign responsibilities and investor’s rights violation according to the customary international law include denial of justice, state responsibility for unjust enrichment, state responsibility for failure to protect international investment, and failure to provide “fair and equitable” treatment to foreign investors.
Denial of justice involves the use sovereign authority by the host state for distorting the national judicial proceedings wrongfully or inappropriately. The denial of justice can occur to ensure the host state holds an advantage over the international investor. Some of the examples of denial of just include arbitrary conduct by the Courts of host state, exhaustion of local remedies, judicial corruption such as bribery and interference of the judicial process by political factors, and the erroneous and unjust judgment. Unjust enrichment responsibility of the State requires the host state to have principles provided in law that control standards of justice in behaviour among international investors, citizens, and the State . The principles define the relevant state-investor relations and disputes. The host state failure to provide protection for the property and assets of the foreign investor within its State it warrants the investor compensation. The protection responsibility for host state is also provided in treaties between countries and individual investment.
Role of State Sovereignty in Bilateral Investment Treaties and Investment Contracts and Arbitration
Arbitration process of binding two or more parties in disagreement by both parties submitting to resolving the differences through a third party. The issues that occur between the host state and investors are solved through an investor-state arbitration process. Inventor-state arbitration plays a significant role in bilateral investment treaties (BITs) and investment contracts as it results in the development of investment-specific contracts, which allows the foreign investor to achieve compensation for loss of rights and entitlement. BIT aim is to ensure two or more sovereign states that want to attract more international investors to establish basic trade standards that are based on limiting behavioural irregularity of a host recipient. BIT enables the hosting state and the foreign investors to solve differences concerning breach of investment treaty or contract. Contracts and treaties mostly involve the arbitration clause that protects international investors from sovereign biased.
Basing on the information provided concerning the sovereignty authority, more development would be achieved by host state since sovereignty provides an opportunity to explore other factors that encourage international investors to invest in a State. Therefore, the international investment arbitration tribunal giving a host State appropriate space for regulation will boost State economic growth. However, the states with appropriate space for regulation should not abuse the sovereign power provided for legal purposes. The host state’s responsibilities for its foreign investment under the Customary International Law and Bilateral Investment Treaties (BIT) and Investment Contracts provide ways in which the host state can deter from abusing sovereign power of legal gain . With such measures in place, most host states will be in a better position to be allowed appropriate space for regulation, in the public interest, for environmental issues.
Part B
Outram Richardson Inc (ORI) discovery concerning FRF’s Federal Environment Act in Article 43.1.5, provided that the FRK would act in a proportional manner in the event that an environmental hazard is found to exist within the territory of the FRF. Before bringing the compensation proceedings against FRF for compensation, ORI should consider rising legal issues regarding the proceeding. The legal issues that should be considered include the “fair and equitable” treatment, expropriation, and compensation.
Fair and Equitable Treatment
Fair and equitable treatment entails a foreign investment provided a business environment that is stable legally by the host State as an essential element. The legal reasoning behind the issue of fair and equitable treatment can be brought against FRF by the ORI on the basis that FRK had failed to provide an agreement that covers all equal treatment standard that also includes investment full protection and security. The BIT provided to ORI did not consist the Federal Environment Act, requires FRK to act proportionally when an environmental hazard event occurs in its territory. The rising legal issue of fair and equitable treatment is compared to the CMS Gas Transmission Co. v. Republic of Argentina, ICSID Case No. ARB/01/8 (CMS v. Argentina), where the Tribunal noted that the BIT provided to CMS by Argentine lacked the fair and equitable treatment responsibility standards . The Tribunal articulated that the missing of BIT’s preambles in the agreement presented to CMS, denied CMS access to BIT’s preamble principle objective which includes creating and maintaining a framework that is stable for investments and maximum effective use of economic resources, which made the BIT crucial for CMS business operations. The elimination of the Federal Environment Act in the agreement between FRF and ORI can be considered to have had a significant impact on the operational approach through modification of the stability and predictability of the investment environment, and ORI key decision to invest on the outcast of Lavran City (paras. 266–269, Award) .
Expropriation
Another legal issue that ORI should consider before bringing the proceedings against FRK for compensation is the expropriation. Two expropriation issues should be considered by ORI; the powers of administrative authority to protect and regulate under the customary international law, with a warning and determining if the losses considered after the revocation of permits and barricading of the company premises with metal fences to prevent access were significant enough to support the compensation claim . For ORI to be successful against FRK for compensation, it must justify to the Tribunal that it the significant losses incurred were as a result but a matter of general international law, whereby the sovereignty power was misused by the authority based on laws and regulations that ORI should have been protected from. Based on the Methanex Corp. v. United States of America (Methanex v. United States), one of the issues in the case is the expropriation based on protect and regulate powers of the administrative authority under the customary international. In the case, Methanex tribunal provides that that ‘But as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation’ (Part IV, Chapter D, page 4, para. 7) . Based on the Methanex tribunal reasoning, ORI has a reasoning base that can be used when they bring the proceedings against FRK. The argumentative can include the reasoning that non-disclosure of the FRF’s Federal Environment Acts, had denied the company an opportunity for a non-discriminatory regulation for a public purpose in the agreement. However, with the Tribunal establishing that it FRK had intentionally eliminated the Act, it means that the ORI should be compensated since the Act had provided specific commitments contemplating investment that the government would refrain from such regulations.
Compensation
The last issue that ORI should consider before bringing proceedings against FRK is compensation, with the bases of addressing whether compensation amount targeted can be impacted by the public interest nature of the State’s unlawful actions. The company, after establishing ways to justify the reason for the settlement, it should also consider the impact of the public interest nature in the unlawful actions conducted by FRK on the expected amount of compensation. In Siemens A.G. v. Republic of Argentina, ICSID Case No. ARB/02/8 (Siemens v. Argentina), the Tribunal based on the International Law Commission’s Draft Articles on State Responsibility to determine the customary international laws of compensation. According to the Tribunal, the host State that is responsible for an internally wrongful act is liable to compensate damages incurred, insofar as such costs cannot be made right by restitution. The Tribunal also provided that the compensation shall, in all cases that the host state is determined to be responsible for the damage, cover any assembled finical damages, such as profit loss insofar as it is established. Therefore, if the compensation proceeding is successful, ORI would be compensated based on the cost incurred since the shutdown of the shelter’s operations including those due to inaccessibility to the smelting facility, employment compensation, and those related to projected profits during the entire period of lockdown.
ORI chances of acquiring successful proceedings for compensation against FRF depends on the three legal issues provided. ORI must justify beyond a reasonable doubt to the Tribunal that FRK did not fulfil the principal objective of BIT’s preamble, by eliminating the FRF’s Federal Environment Act, which in Article 43.1.5 provides that the FRF would act in a proportional manner if an environmental hazard is found to exist within the territory of the FRF. The elimination of the Act had a significant impact on the operational approach of ORI by altering the investment environment stability and predictability for crucial decision of investing. Expropriation legal issue will enable ORI to justify the unlawful action of FKF revoking its permit and locking down its smelting facility, despite ORI being protected by customary international law under special commitment under the regulating governing body. Lastly, ORI will evaluate the legal compensation issue, which involves the impact of the public interest nature in the unlawful actions conducted by FRK on the expected amount of compensation, concerning assembled finical damages.
Part C
The content in Part A involves the reasoning behind why the international investment arbitration tribunal should give a host State appropriate ‘space’ for regulation, in the interest of the public, of environmental issues; but with the State not abusing the sovereign power but used for proper legal processes and in a proportional manner. Where else, the information provided in Part B covers the legal issues arising regarding the ORI’s contemplation of brining proceedings against FRK for compensation. The matters provided in Part A and Part B are comparable on the facts that both issues analyze the sovereign power of the host state and the responsibilities the host state have for its sovereign actions for international investments under the customary international laws.
The other similarity that exists between the two Parts is that both considers the role played by the international investment arbitration tribunal that includes interpreting different customary international laws in various jurisdictions to fit the best way possible for BIT and investment contracts to enhance investor-state business relationship. The differences in the two Parts are that Part A question holds a broader perspective of the investor-state relationship. The issues raised in Part that do not exist in Part B include the rights provided to the host states by the sovereign power and the role of investor-state arbitration. On the other side, Part B issues that are not similar to those in Part A are the possible means that execution of investor-state arbitral provisions can be used against sovereign host states. Despite the similarities and discrepancies between the two Parts, Part A tend to hold a broader approach to the issues raised than Part B. Bibliography
Bibliography
[1] The United Nations. Resolution on the New International Economic Order (NIEO). 2009
[2] Galavan Robert, John Murray and Costas Markides, Strategy, Innovation, and Change: Challenges for Management (Oxford University Press New York 2008) 23
[3] Botchway Francis, Natural Resource Investment and Africa’s Development (Edward Elgar Publishing Ltd 2011) 124, and see Paul Comeaux and Norman Stephen Kinsella, Reducing Political Risk in Developing Countries: Bilateral Investment Treaties, Stabilization Clauses, and MIGA & OPIC Investment Insurance (1994) 15(1) New York Law School Journal of International And Comparative Law 20
[4] Lowe Sabine, Responsibility and Liability in General Public International Law and in the Law of Outer Space (7/1991) Institute of Air and Space Law McGill University Montreal 4-5
[5] Dixon Martin, Textbook on International Law (6th Edition Oxford University Press 2007) 255
[6] Art. 220 Qatari Civil Law No. 22/2004
[7] CMS Gas Transmission Co. v. Republic of Argentina, ICSID Case No. ARB/01/8 (CMS v. Argentina)
[8] RANJAN Prabhash, Police Powers, Indirect Expropriation in International Investment Law, and Article 31(3)(c) of the VCLT: A Critique of Philip Morris v. Uruguay, Asian Journal of International Law, 2018. DOI: https://doi.org/10.1017/S2044251318000139
[9] Methanex Corp. v. United States of America (Methanex v. United States)
[10] In Siemens A.G. v. Republic of Argentina, ICSID Case No. ARB/02/8 (Siemens v. Argentina)
[11] CMS Gas Transmission Co. v. Republic of Argentina, ICSID Case No. ARB/01/8 (CMS v. Argentina),
