Increasing popularity of economic globalisation

Question: In The Light Of Thousands Of Bilateral Investment Treaties, Customary International Law Is Irrelevant For The Legal Protection Of Foreign Investors.



With the increasing popularity of economic globalisation, bilateral investment treaties have already had the universal and increasing influence on the development of protecting the interests of foreign investment. Although more and more countries have accepted the form of bilateral investment treaties to guarantee the investment between the two parties, there is a controversy over whether customary international law has impact on protecting of foreign investors or not. In this essay, it gives some points of view that customary international law does have some positive impacts on the protecting international investment, no matter guidance or supplement influence.

This essay aims to demonstrate that customary international law still plays an effective role in protecting foreign investors, despite some people still argue that bilateral investment treaties play an increasingly important role. That means customary international law is still relevant to the protection of the interest of foreign investors on legal level. In order to demonstrate that, this essay at first gives a description of the definition, the developing background of customary international law and bilateral investment treaties. Then, it focuses on analyzing the guidance and supplement impact on the bilateral investment treaties. The main way to discuss this is through the function that international minimum standard, which is the core part of the customary international law, plays in contemporary society and illustrating a case to demonstrate more persuasively. At last but not least, it sates a special part of diplomatic protection in customary law, to articulate the relevance between the customary international law and the protection of foreign investors in the occasional situation.


Customary International Law

Even though the concept “customary international law” has been used for the whole world for a long time, and been widely accepted as a resource of law, in this essay, it clarifies the meaning of it, to better demonstrate the relevant impacts on the development of protecting foreign investors.

It has been generally accepted that customary international law is an addition to treaties and other expressed or ratified agreement in the international community. Customary law are composed of legal rules which were from the consistent behaviour of States that playing the role that the law need them to do in that way. People believed that customary international law is, in a common sense, among states similar acts in the way of a wide range of conducts and acceptable sense of obligation. Together with treaties and primary principles of law, customary international law, as parts of international law, is considered by the ICJ, jurists, the United Nations, and its member states to be among the primary sources of the international law.

From the aspect of international investment law, on the base that the customary international has a long time impact on protecting the relevant interest party, naturally,it has a long history of development of how to protect foreign investor as well. In nineteenth century, the main form of customary international law of investment is the Treaties on Friendship, Commerce and Navigation (FCN). Treaties practice in that time protected alien property on the basis of referring to the domestic laws of the host country. Then the famous doctrine “Calvo doctrine” had been proposed. It is on the basis of the idea that foreigners could not exert their right by the means of diplomatic protection from their own country or access to international tribunals. This is been considered as an opposite conduct of gunboat diplomacy, which believes capital-exporting state could play its role of protecting investors under the name of the state. Hull Formula is another important land mark in the development of customary international investment law. It plays an important role in impacting bilateral investment treaties, with Calvo doctrine.

Bilateral Investment Law

Despite that the bilateral investment law is a new form of protecting of alien property, compared to customary international law, it has an explicit definition and numbers of case under the name of bilateral investment treaties, some of which still exerting their effect in the modern world.

The concept of bilateral investment treaties is widely accepted as an agreement establishing the terms and conditions for personal private investment from nationals or companies of one state to a different one. The investment mentioned before is a typical investment named foreign direct investment.

With the increase of international investment emerging in international community, the number of bilateral investment treaties is growing following it. Since the treaties on friendship, commerce and navigation are seemed as the precursor of bilateral investment law, the first BIT is generally acknowledged to be the treaties between Germany and Pakistan. In addition, in the modern international society, with more and more treaties turning up, there are numerous typical BIT models, such as German Model BIT (2005), UK Model BIT (2005), French Model BIT (2006) and so on.

Customary International Law Has Relevant Impacts On Legally Protecting The Interests Of Foreign Investors.

Despite that there are a lot of disputes regarding to whether customary international law exert its effect, the Statute of the International Court of Justice gives an implicit answer, as in the Article 38(1) (b). On the other hand, it has been adopted into the United Nations Charter by Article 92. The relevant description is that:

“ The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply…international custom, as evidence of a general practice accepted as law.”

Therefore it could not deny the influence that customary had on the protection of alien properties.

In this essay, it holds the point of view that customary international law and bilateral investment treaties have a relationship between co-operation and complementation. In other words, customary international law does give a general guidance to BIT on how to protect foreign investors and does play the supplement role in explaining the application of the BIT. That means customary international law really has relevance for how to protect alien investors.

International Minimum Standard As Guidance Impact

Fair And Equitable Treatment

As expressed in NAFTA, Article 1105, “Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security”, it could be seen that it is generally believed that treaties, of course including bilateral investment treaties, refer to customary law, especially in the term of international minimum standard. What's more, this interpretation has been accepted by NAFTA tribunals, such as in the case: Pope & Talbot n Canada, Award on Damages, 2002.

The international minimum standard is generally believed as the principle of the fair and equitable. For further speaking, the minimum standard of customary international law still gives a direct on how to protect alien properties. Therefore it could be said that it gives guidance to the bilateral investment treaty-making. The decision on the Neer claim in 1926, is a typical case for international minimum standard. After that, it gives the general test method on how to test whether it is acceptable, which is “… every reasonable and impartial man would readily recognize its insufficiency…” Adopting the Neer case formulation of minimum standard to asses practice, now it has been treated as an evolving standard.

From this aspect, it could be concluded that making BIT is just a method for customary international law to adjust the relationship between the capital-exporting party and capital-importing party. By all means, treaties on this level refer to customary law standard and seek to apply it broadly. No matter what way it obeyed, customary international law exerts its influence to protect the interests of foreign investors.

Calvo Doctrine

Although each state protects its own private property by its national laws, the properties of alien investor could not be guaranteed sufficiently only under the name of domestic law of the host country. In 1868, the Argentine jurist Carlos Calvo presented a new view of point, which expressed that foreigners have to assert their rights in front of domestic courts and have no right of diplomatic protection or to international tribunals. On the other hand, the main perspective of Calvo is that the situation of reduction of protection of property should come up to both of alien and nationals at the same time.

In the modern world, the Calvo doctrine was adopted by some Latin American countries in the way of establishing law and constitutions. This, form some point, reflects the tendency of the minimum standard of treatment for foreign investors in the legal frame of these countries. In these Latin American countries, the Calvo Doctrine really plays an important role in their frame when they sign the treaties about foreign investment. It contains the performance of languages and principles that notably stands behind the Calvo doctrine.

Hull Formulation

After the nationalization of US interests in Mexican agrarian and oil business by Mexico, in 1938, Cordell Hull, who is a US Secretary of State, wrote a famous letters about allowing expropriation of alien property, but requiring ‘prompt, adequate and effective compensation'. It has affected the following decades on the matters of expropriation in international investment projects.

Naturally, the Hull formulation and Calvo doctrine became an indispensable meaning of international minimum standard in the following years. Though, gradually, the differences between Calvo doctrine and Hull formulation are becoming more and more explicit, in 1962, GA Resolution 1803 stated that, in the case of expropriation, as a compromise between Calvo doctrine and Hull formulation, ‘appropriate compensation' must be compensated when one state nationalize the properties of a foreigner.

Frome what has been represented above, it can be clearly seen that Calvo Doctrine and Hull formulation both give a direct for countries, who want to co-operate an investment project with the host country, that once the project has to be expropriated, the appropriate compensation must be paid to the project holder, by other means the foreign investor.

International Minimum Standard As Supplement Impact


The guidance function is often used as a direct to making treaties, but supplement is another vital function of customary international law. It adjusts the relationship between countries, when dispute comes up, by the way of explaining the Article or the problem not stated in the treaties. The typical example is the role it plays of solving the problem of expropriation.

The concept of expropriation is widely accepted as the most severe form of interference with property. In case of this happens, so far as to without any adequate compensation followed, the properties of the alien in essence have totally been violated. If this occasional situation is not mentioned or not mentioned sufficiently in the treaties, customary international law now should play an important role in solving the problem or explaining the articles.

Case: Azurix Corp. V. The Argentine Republic

Azurix made an application for arbitration against the Republic of Argentina to the ICSID, aimed at asking for compensation from Argentina for its suffering made by the state. Azurix holds the idea that Argentina violated the 1991 Investment Treaty between United States of America and Argentina (BIT).

One of Azurix's claims is that Argentina did not successfully obey its promise in the BIT, which is fair and equitable treatment, full protection and security, and treatment required by international law (Article II (2) (a)). What's more, Azurix claimed that the BIT clauses in preamble, referring to fair and equitable treatment, the expression of which is that “… desirable in order to maintain a stable framework for investment and maximum effective use of economic resources…”

What worth noting is that fair and equitable treatment does not have a clear definition in this BIT. Therefore it has to be a determination by the tribunal that whether the fair and equitable treatment means the minimum standard required by customary international law or whether the phrase is an independent, self-contained principle as supported by Azurix. (CASE) At last, the tribunal had an expression to explain it, which is articulated as below:

“The clause… permits to interpret fair and equitable treatment…as higher standards than required by international law. The purpose … is to set a floor, not a ceiling, in order to avoid a possible interpretation of these standards below what is required by international law. ”

The tribunal made this decision by referencing to NAFTA cases, typical ones as Mondev and Loewen. The tribunal finally supported the opinion that the customary international law should be applied, however, not just limited to its own old definition, but extended its new meaning affected by the recent thousands of BITs.

As discussed in the above case, the customary international law plays supplement role in the explanation part to solving the dispute. Especially, when the BITs or other treaties, contracts are not clear or not mentioned, it is useful for tribunal to quote the customary international law to explain the clause and to analyze the case. Therefore it could be showed that the relevance between customary international law and the protection of foreign investors is explicit.

The Special Part Of Diplomatic Protection In Customary Law

At the background of traditional international customary law, diplomatic protection is one of the effective remedies for one country to protect protecting its nationals. Furthermore, if one has been injured by acts form another country violating international law, it is a fundamental rule that a State has the reason to assert its diplomatic right to protect its subjects, especially who could not claim its own right effectively. (Mavrommatis Palestine Concessions Case, PCIJ, (1924))

Nevertheless, diplomatic protection has its own limits. On the one hand, the subject could not be certain whether it could be protected by its country or if be protected how it will be done or whether it will be continued. There are so many uncertain elements for this. On the other hand, it has its own disadvantages which can be concluded that the remedy could disrupt the relationship between countries and leading a tedious proceeding problem.

This is the reason why in the modern international world, the tendency to assert the right of diplomatic protection is gradually reducing. Even the ICSID Convention, providing in its Article 27 and Article 64 has expressed the main idea that the right to diplomatic protection continues to exist, but investor-state may give the diplomatic protection or bring an international claim, with the first choice to settle the dispute is by negotiation or concern an agreement on another method of solving the controversy.

From what has been articulated above, it can be easily seen that, despite diplomatic protection is rarely used by most countries at present, it could not deny that it is one of the most effective remedies to protect the foreign investor. When all the other remedies have been exhausted, the only and the last method one can be pursued is to turn to their country for help. Therefore, from this point of view, customary international law, which contains the general rule of diplomatic protection, are still playing its protecting role for foreign investors.


As what has been discussed above, the purposes of this essay is to demonstrate the relevance between the customary international law and the legal protection of foreign investors, in spite of more and more bilateral investment treaties emerging in contemporary international world. This essay emphasizes the impacts from three aspects: the international minimum standard as guidance function, as supplement function and the diplomatic protection part.

The international minimum standard, which is steamed from the development of customary international law, is the main media which the customary international law taken through into practice. Therefore, to improve the relevance, the analysis of the impact of it as guidance to direct countries to build a more practical investment contract and as supplement explanations to deal with the unpredictable dispute is necessary. Furthermore, the influences on foreign investment protection also reflect on the part of diplomatic protection in the customary international law, especially in the case of expropriation without any fair and adequate compensation.

In conclusion, in order to protect foreign investors, the role of customary international law is played in the way of, on the one hand, directing countries to have a clearer clue to sign BIT, on the other hand, also explaining the clauses or dealing with the complicated situation, not stated in the BIT. The relevance is not only presented in the legislation system, but also in implement. Furthermore, it is believed that customary international law will continue to have impacts on protecting foreign investors in the future.


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