2 Role of the Home State Before the Development of Foreign Investment Law
Before the full development of international investment law as we know it today, the role of the home state was essentially limited to protecting its subjects at the international level. As pointed out by the Permanent Court of International Justice (PCIJ) in 1924, it was—and still 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”.
2
In protecting its subjects, the home state performed three main functions. First, it contributed to the setting of normative standards for what was essentially the protection of aliens and their properties abroad. This occurred at the level of customary international law through legal claims and counterclaims put forward—and often fiercely resisted—in official documents, such as diplomatic correspondence in the context of international disputes.
3
At the same time, states concluded increasingly sophisticated agreements, inter alia, for the promotion and protection of foreign investment. These agreements took typically the form of friendship, commerce and navigation (FCN) treaties and similar instruments. Initially dealing with a rather heterogeneous range of issues, these treaties progressively focused on economic matters. The most sophisticated of these treaties can be considered as the precursors of modern bilateral investment treaties (BITs).
4
Secondly, the home state played an important role in the adjudication of disputes concerning alleged violations of the international rules on the treatment of aliens and their properties. The typical mechanisms were claims commissions, mixed arbitral tribunals, and occasionally resort to the Permanent Court of Permanent Justice and later the International Court of Justice (ICJ).
5 These disputes were clearly interstate disputes in which the home state asserted its own rights or, more precisely, “its right to ensure, in the person of its subjects, respect for the rules of international law”.
6
This is evidenced by the fact that the home state was the claimant,
7 and therefore was in control of the presentation of the claim and the submission of evidence, although the affected nationals could marginally be involved in the proceedings. That the claim belonged to the home state was further confirmed by the calculation of compensation. As pointed out by the PCIJ, “the damage suffered by an individual is never […] identical in kind with that which will be suffered by a state; it can only afford a convenient scale for the calculation of the reparation due to the State”.
8
Thirdly, with regard to the enforcement of the rules on the protection of nationals and their properties, the home state characteristically acted in diplomatic protection, which was based on the legal fiction that “an injury to the national was an injury to the State”.
9 The home state did not hesitate to intervene militarily in a period in which, “from the nature of things and the absence of any common superior tribunal, nations [were] compelled to have recourse [to go to war], in order to assert and vindicate their rights”.
10 The action of the home state typically took the form of what was elegantly—but by no means less brutally—called gunboat diplomacy.
11 Significantly, the first treaty limitation on the use of military force related precisely to the recovery of contract debt claims claimed by one government from another government as due to the former’s nationals.
12
The exercise of diplomatic protection was opposed by several Latin American states, which developed the so-called Calvo doctrine.
13 According to the doctrine, foreigners were entitled to the same protection as nationals and could not lay claim to more extensive protection.
14 An important corollary of the doctrine was that states could not intervene in diplomatic protection. Latin American states sought to exclude diplomatic protection through the inclusion in contracts with foreigners of the so-called Calvo clause.
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4 Towards a New Role for the Home State
The role the home state is going to play in the future, and indeed the role it has already started to play, must be appreciated in the context of the reform that the entire investment treaty regime is currently undergoing.
58 After the golden period between 1990 and the 2000s, the popularity of investment treaties has significantly dropped. States are now rather reluctant to conclude investment agreements, although regionalism is still on the rise.
59 A significant number of BITs have been terminated and their global number has started to decline. States have responded differently to the three main concerns raised with regard to investment treaties: their manifestly unbalanced content;
60 the safeguard of regulatory powers, which many states perceive as inadequate;
61 and the lack of legitimacy and other shortcomings of investment arbitration.
62
Some states have modernized their BITs with a view to bringing them in line with the development of international law, rebalancing and better defining their substantive provisions, and recalibrating the host state’s exposure to arbitration.
63 States have also adopted new and more sophisticated model BITs, as the Model Text for the Indian Bilateral Investment Treaty adopted in 2015 (hereinafter Indian Model BIT), which will be used in the negotiations of BITs between India and other states and can also be expected to inspire other governments.
64 Other states have reconsidered their investment treaty policy and eventually decided to switch to domestic legislation. The adoption of the South African Protection of Investment Act (2015), which is largely pegged to the South African Constitution, is a good example.
65
The concerns under discussion are real and have been addressed primarily by striking a better balance between, on the one hand, the rights and obligations of the host state and, on the other hand, those of investors. Moreover, a few legal instruments have introduced provisions imposing obligations upon the home state and enhancing the collaboration between the host and home states, most prominently in the promotion of sustainable development, the fight against corruption and the liability of foreign investors.
From this perspective, the Economic Community of West African States’ (ECOWAS) Supplementary Act of 2008 can be considered as having pioneered a new approach.
66 Several of its innovative provisions have subsequently made their way into other African treaties as well as treaties outside that continent. The ECOWAS Supplementary Act includes an entire section on the rights and obligations of the home state, dealing with four issues, namely facilitation of foreign investment, disclosure of information, liability of investors, and the fight against corruption.
67
In accordance with the ECOWAS Supplementary Act, first, the home state
may facilitate cross border investment and is obliged to inform the host state of the measures adopted in this regard.
68 Second, and more incisively, the home states shall, on request and subject to a confidentiality caveat, promptly provide a potential host state with the information expected to enable the latter to comply with its obligations under the treaty and domestic legislation. The home states shall also, on request, promptly provide information on standards that may apply to investors, and most prominently, those related to social and environmental impact assessments.
69 On the latter point, it is worth stressing that the home state may contribute to standard-setting and to the review of standards applicable to the authorisation and management of investments made by its own investors in the host state. The main aim of these provisions is to optimise the impact of investment projects as well as to enhance compliance by the host state with its international commitments.
With regard to the liability of its own investors, the ECOWAS Supplementary Act imposes upon the home state the obligation to ensure that its legal system allows for, or does not prevent or unduly restrict, civil action before its courts in relation to liability for damages resulting from alleged acts or decisions made by investors in the territory of the host state. The host state laws on liability shall apply to such civil proceedings.
70
The above provision on liability has been reproduced in the Southern African Development Community (SADC) Model BIT Template (2012),
71 in the BIT between Morocco and Nigeria,
72 and more importantly the 2015 Indian Model BIT.
73 However, and quite significantly, the provision has not been included neither in the BIT concluded between India and Belarus on 24 September 2018,
74 nor in the Investment Cooperation and Facilitation Treaty concluded between India and Brazil on 25 January 2020.
75 This is a clear reminder that states may be reluctant to accept international obligations in this respect.
As pointed out by the Indian Law Commission in its analysis of the 2015 Indian Model BIT, the provision aims at removing or minimising jurisdictional constraints that could prevent civil action before the tribunals of the home state, most prominently under the
forum non conveniens doctrine on grounds that there is a more appropriate forum to hear the case.
76 This would be typically the case of a dispute such as the one related to the infamous Bophal incident,
77 which was expressly mentioned by the Indian Law Commission.
78
Enhancing the liability of the home state has found the support of Nobel Prize economist Joseph Stiglitz, who emphasised, with regard to the liability of multinational companies under the United States Alien Tort Act,
79 that civil claims “will not harm economic development of least developed countries, United States businesses operating abroad, or investment in the United States”.
80
Coming back to the ECOWAS Supplementary Investment Act, investors must refrain from engaging in practices of corruption.
81 Connivance in corruption certified by a court of the host state would deprive the investor of the right under the treaty to bring a claim against the host state.
82 Interestingly, not only the host but also the home state may object, on grounds of violations of the above provision, to the jurisdiction of any tribunal before which the investor has brought a case under the treaty.
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Moreover, the host state must make corrupt practices criminal offences and investigate, prosecute and punish them with appropriate sanctions.
84 The home state, in turn, must ensure that any money or other benefits obtained through these practices is not recoverable or deductible through any fiscal or tax policies. The home state must also provide all available information that might assist a tribunal dealing with a claim brought under the treaty in determining whether there has been a breach of an anti-corruption obligation.
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Furthermore, both the host and the home state may initiate proceedings against the investor in case of breaches of the prohibition to become involved in corruption, or in case of persistent failure to comply with domestic obligations related to hygiene, security, health and social welfare, human rights and fundamental labour standards, as well as corporate governance and practices.
86 The dispute will fall within the jurisdiction of a tribunal established in accordance with the Supplementary Act. This part of the provision remains obscure as the Supplementary Act expressly provides only for the judicial settlement of a dispute between the host state and investors.
87 This serious shortcoming notwithstanding, the provision shows that states can go as far as envisaging a role for the home state in the judicial enforcement of the obligations of its own nationals under the treaty.
The above provisions design a role for the home state that is much more complex than the traditional norm-setting and protection of national investors and investments. They have introduced new responsibilities for the home state that, at least potentially, enhance the collaboration with the host state, increase the standard of liability for foreign investors, and ultimately may improve the legitimacy of foreign investment law.
5 Conclusions
Traditionally, the home state acted as the protector of national investors and could make investors’ claims its own for the purpose of diplomatic protection. The establishment and development of increasingly sophisticated and efficient international mechanisms for the settlement of disputes between investors and the host state have profoundly modified the situation. On the one hand, foreign investors have been fully emancipated and can normally bring their own claims before international arbitral tribunals. They are in control of the entire process of adjudication, although they may need the support of their own state in case of non-compliance with the arbitral award. On the other hand, the home state has been relegated to a rather marginal role as demonstrated, inter alia, by the scarcity of state-state investment disputes. During the proceedings, the presence of the home state has become much more discrete and it is not necessarily supportive of the national investors’ claims, as in the case of non-disputing party submissions.
Recently, however, a few investment treaties provide for a more active role of the home state. Although such treaties still remain rather isolated, it is possible to detect a relatively clear trend. Home states are progressively called to play a role that goes well beyond the traditional protection and may contribute to the reform of the investment treaty regime. Such a role is emerging in areas where the public interest is of paramount importance, such as the protection of the environment, the fight against corruption, and the liability of multinational companies. Yet, borrowing from the nomenclature of Hollywood’s Oscar awards, the home state will probably never be nominated for a leading role. This will remain the domain of the host state and foreign investors. But in due time the home state may receive a nomination for a supporting role.