Controls by the host state
1. Regulation of entry
Until recently, the control of foreign investment was effected, if at all, through immigration laws. There were no specific rules which controlled the influx of foreign investment. In times of war, there was control over enemy businesses and restrictions were imposed on trading with the enemy and on the movement of alien businessmen present within the state.28 But, these measures were seldom continued into peacetime.29 Since state sovereignty provides the justification for such measures, there is no reason why such measures could not be continued in peacetime.30
In recent times, there has been a rapid movement towards the institu-tion of foreign investment laws on a global scale. In developed countries, nationalism and protectionism have been the motives for the restric-tion of foreign investments.31There is no uniform policy that is main-tained. The Canadian experience is instructive. The Foreign Investment Review Act was enacted in response to a report which indicated the dom-inance of US multinational corporations in the Canadian economy.32 But, the Canada–US Free Trade Agreement nullified the assumptions on which the legislation was based as it liberalises the flow of invest-ments between the two countries. Canada enacted new legislation in
28Even in times of war, an alien owed a duty of allegiance to his host state. De Jaeger v. AG of Natal [1907] AC 326.
29Martin Domke, Trading with the Enemy in World War II (1943).
30The Trading with the Enemy Act was continued in peacetime by the United States against states perceived as hostile states.
31Periodically, politicians emerge who seek popularity on the basis of protectionism. See further, for the United States, P. Choate, Agents of Influence (1990).
32F. P. Waite and M. R. Goldberg, ‘National Security Review of Foreign Investment in the United States’ (1991) 3 Florida JIL 191.
view of the treaty, but some limited controls over US investments still remain.33 The North American Free Trade Agreement entrenches that process. But, Canada was one of the early states to withdraw from the negotiations for a Multilateral Agreement on Investment sponsored by the OECD on the ground, among others, that open entry for investments would mean that its cultural industries would be swamped by foreign influences.
Nationalistic sentiments play a role in Australia’s foreign investment laws as well.34In Europe, the domination of the economy by US multina-tional corporations is a fear that has engineered indirect legal responses.35 The United States, despite its avowed allegiance to free market notions, does not permit certain types of investments to enter its territory. Its antitrust laws are used to prevent dominant foreign firms from entry into US markets. The United States has adopted legislation designed to keep out foreign investment inconsistent with its national security.36The legality of the measures that are adopted raise interesting questions. These measures are not dissimilar in effect to those adopted by the developing states. Their legality may be considered along with the legality of the measures taken by the developing states.
Many developing states, and more recently the erstwhile communist states of Eastern Europe, now moving towards market economies, have constructed more elaborate methods of foreign investment regulation.
The prevailing philosophy in the 1980s was that investment brought in by multinational corporations could be beneficial to the host states, provided such investment could be properly harnessed to the economic develop-ment of the host state. But, in the 1990s, the world was caught up in the vortex of economic liberalism for a variety of reasons. The prevailing philosophy was one of liberalisation and privatisation.37The laws insti-tuted in the 1980s came to be changed, though not entirely, in favour of the new philosophy of liberalisation. It is for this reason that there is an
33Raby, ‘The Investment Provisions of the Canada–United States Free Trade Agreement: A Canadian Perspective’ (1990) 84 AJIL 344.
34The fear of Japanese dominance is regarded as a reason for the controls that have been instituted. The Australian economy, however, has been traditionally controlled by foreign interests, British and American. See further D. Flint, Foreign Investment Law in Australia (1986).
35Reich, ‘Roads to Follow: Regulating Direct Foreign Investment’ (1989) 43 Int Org 543.
36The Exon–Florio Amendment to the Omnibus Trade and Competitiveness Act, 1988.
37See Diane Coyle, Governing the World Economy (2000) for a view favourable to economic liberalism.
apparent inconsistency within these new foreign investment laws. On the one hand, the laws that have been enacted provide guarantees relating to repatriation of profits and against nationalisation of the property of the foreign investor without payment of compensation. They contain many tax and other incentives in order to entice the foreign investor. On the other hand, these legislations also contain devices to screen the influx of foreign investment and to permit entry only to investment that is con-sidered desirable. They also contain many other regulations which seek to maximise the benefits which foreign investment could bring to the economic development of the host state but which appear to be restric-tive of the manner in which the foreign investor could operate within the host economy. The techniques that have been used need to be isolated and examined. First, the nature of the guarantees and incentives are examined, and this is followed by an examination of the types of regulation that con-trol the process of foreign investment. The study is comparative. There is a great deal of similarity in the legislation on foreign investment among developing states, presumably because states imitate the more success-ful devices used in other states or because they use models suggested by international organisations. Examples are taken from the legislation of the principal states which use the different techniques of foreign investment control.
1.1. Guarantees against expropriation
Legislation on foreign investment usually contains guarantees against the expropriation of the foreign investment without payment of compensa-tion. States with a history of expropriations are especially intent on giving such guarantees so as to remove any fear of expropriation that the investor may have on the basis of this history. Existing and erstwhile communist states are keen to give such guarantees in their legislation to dispel any idea that they still have ideological predispositions towards expropriation.
Thus, Article 5 of the Foreign Enterprise Law of China provides the most explicit guarantee possible, and states that in the event of any expropria-tion full compensaexpropria-tion will be paid.38This guarantee is intended to remove what the foreign investor fears to be the greatest threat to his investment.
Such guarantees are usually given by high-risk countries in the hope that risk perceptions arising from past nationalisations will be counteracted by
38But the internal laws of China are inconsistent. In the Joint Venture Law (Article 2), it is merely stated that foreign investment will be protected ‘according to law’.
the guarantees.39Low-risk states obviously have little need to issue such guarantees. These guarantees, along with bilateral investment agreements which are also entered into in large numbers by the same states, have a signalling function. They indicate to foreign investors that past policies relating to foreign investments have undergone dramatic changes.
The value of these unilateral guarantees is disputed in the literature.40 There are two opposing views. On the one hand, as a matter of internal constitutional law, it would appear that a guarantee given by one gov-ernment cannot be binding on a succeeding govgov-ernment, particularly if there has been a revolutionary change of governments.41 It is the latter type of regime change that poses the greatest threat to foreign investment.
Where the incoming regime has ideological stances different from those of the previous regime, it is arguable that there has been such a basic change within the state that the promises made by the previous govern-ment cannot be binding on the incoming revolutionary governgovern-ment.42
39The Eastern bloc states converting to an open economy and permitting foreign investment signalled their change in attitudes to nationalisation and the issue of compensation for nationalisation by guaranteeing against nationalisation and promising to pay compen-sation in the event of nationalicompen-sation. Under socialist theory, no compencompen-sation needs to be paid in the event of nationalisation. N. Katzarov, ‘The Validity of the Act of Nation-alisation in International Law’ (1959) 22 MLR 639. The new legislation promises the
‘actual value of the property’ as compensation. See e.g. Article 22 of the Act amend-ing the Enterprise with Foreign Participation Act 1990 of the old Soviet Union. There is stronger language on guarantees in the new Russian legislation on foreign investment.
See the introductory note and text in (1992) 31 ILM 397. Article 7 guarantees against expropriation and promises ‘swift, adequate and efficient’ compensation, a paraphrasing of the Hull standard. A decision as to compensation is to be made by the Russian Supreme Court. States like Myanmar (Burma) and Cambodia also include such guarantees because they are new to the idea of attracting foreign investments and have to signal changes of policy.
40The leading text on the subject is A. A. Fatouros, Government Guarantees to Foreign Investors (1962). Vagts observed that these guarantees ‘seldom have significant legal effect although it is conceivable that they could later disable the country from making various arguments to international tribunals in defense of measures taken against foreign investment’. D. Vagts,
‘Protecting Foreign Investment: An International Law Perspective’ in C. D. Wallace (ed.), Foreign Direct Investment in the 1990s (1990), 102 at 104. But, they have been given effect by arbitration tribunals. SPP v. Egypt 3 ICSID Rpts 101.
41I. Delupis, Finance and Protection of Investments in Developing Countries (1987), 27–32. For an Australian case involving later legislative changes to contracts contrary to guarantees given, see Commonwealth Aluminium Corporation v. AG [1976] Qd 231.
42Often explained as changes in the grundnorm. According to the theory of Hans Kelsen, all legal systems have a base in a fundamental legal principle which validates all other principles of the legal system. When a revolutionary change takes place, this fundamental or basis norm changes, justifying the making of changes to other legal principles in the system.
On this reasoning, the guarantees that are made in the foreign investment codes have no value or meaning at all except as devices to attract foreign investment.
On the other hand, there is the view that guarantees that are held out to foreign investors do have legal implications, despite regime changes. It is suggested that these guarantees have the effect of indicating a willingness on the part of the state to refer disputes that arise from the foreign invest-ments attracted by the guarantee to an international rather than a national tribunal for settlement. This would be especially so if the guarantee against expropriation is coupled with the promise of dispute settlement by an overseas tribunal. On this view, a unilateral guarantee against expropri-ation, at the least, provides support for transferring any dispute arising from the expropriation of the foreign investment into an international sphere. It is suggested that it will also ensure that the fact that a guarantee was made would be taken into account in determining the legality of the taking contrary to the guarantee and also in the calculation of damages.
This issue was raised in SPP v. Egypt.43The claimant had entered into an agreement to build a tourist complex near the Egyptian pyramids in response to a heavy investment campaign embarked upon by government agencies after the announcement of the liberalisation of Egypt’s foreign investment laws by the government of President Sadat. The building of the complex so close to historical monuments became a political issue.
The new government formed after the assassination of President Sadat cancelled the project. The question was raised as to the liability of the government and its tourist agency, which was a party to the agreement. In finding liability, an arbitral tribunal focused upon the fact that guarantees had been given to the foreign investor in attracting him to the country and that the violation of these guarantees must engage the liability of the state. The tribunal referred to the Egyptian investment legislation which stated: ‘Projects may not be nationalised or confiscated. The assets of such projects cannot be seized, blocked, confiscated or sequestrated except by judicial procedure.’ The tribunal relied on this and other provisions in the legislation to state that, as the ‘policy of the law is to accord greater security to the investment’, there was justification for an international arbitral tribunal to exercise jurisdiction over the dispute. The conclusion in the award is contestable. The guarantee in this particular award merely referred to the requirement of judicial procedure and not to a review of the
43(1983) 22 ILM 752.
taking by an international tribunal. Yet, the fact remains that unilateral guarantees are capable of being used at least as subsidiary arguments for exercising arbitral jurisdiction and awarding damages to the foreign investor where such guarantees have been violated.
However, as a matter of strict law, unilateral guarantees against expro-priation without full compensation have no international effect. Though unilateral acts of states do have some binding force, the instances in which such binding force has been ascribed to such unilateral acts have related to matters of international concern and have given rise to expectations as to the conduct of the state making the declaration in other states.44 This cannot be said of unilateral guarantees against expropriation which are directed to the foreign investor alone. The guarantees are addressed to individuals or entities such as multinational corporations which do not have personality in international law; just as treaties cannot be made with those who lack international personality, no obligations can flow from guarantees given to those who lack international personality. The guarantees obviously operate in the context of national law and not in the context of international law.45
But, to the extent that capital-exporting states now actively participate in insurance schemes for their nationals investing abroad and in other activities associated with foreign investment, it may be credibly argued that these guarantees are addressed to the home states of foreign investors as well as to the investor, particularly if the schemes were designed to ensure that the premiums payable for investments in the host country making the investments were reduced by the home state as a result of
44The French Nuclear Test Case [1974] ICJ Rpts 253 is cited as authority for a large number of wide propositions in this area. In that case, a unilateral statement made on television by a French minister that France would desist from further tests was used as a peg on which the International Court of Justice could hang its withdrawal from an embarrassing situation.
45The issue as to whether estoppel operates to prevent the state from arguing its entitlement to change the law is a possibility. Though estoppel applies in inter-state relations (Eastern Greenland Case (1933) PCIJ Series A/B No. 5), there is little authority that it applies in relations between a state and a private entity with no international personality. The validity of the legal commitment given to the foreign party is the crucial issue. In Oil Field of Texas v. Iran, the question of estoppel was raised, but this specific issue was not argued.
On estoppel, see further D. W. Bowett, ‘Estoppel Before International Tribunals and Its Relation to Acquiescence’ (1957) 33 BYIL 176. In a different context, see T. Nocker and G. French, ‘Estoppel: What’s the Government’s Word Worth?’ (1990) 24 Int Lawyer 409.
In municipal systems, it is doubtful whether estoppel lies against the government when it acts in the public interest. For the common law, see Brickworks Ltd v. Warrigah Shire Council (1963) 108 CLR 568.
the guarantees.46 If this argument is valid, a case can be made out for an obligation to the home state of the investor in situations where the guarantee had not been honoured.
To the extent that expectations were created in the foreign investor by the unilateral guarantee, the guarantee could have an effect on the assess-ment of compensation where he suffers damage as a result of action by the government contrary to the guarantee. It may also be an argument to support the payment of full compensation on the ground that the foreign investor was inveigled into the state through the guarantee.47As a general proposition and as a matter of domestic constitutional law, however, a guarantee addressed to entities such as multinational corporations which have no personality in international law can have no effect in international law other than as a pious declaration of intent.48
1.2. Guarantees relating to dispute settlement
Unilateral guarantees relating to the settlement of disputes that arise from a foreign investment by a neutral arbitration tribunal abroad can be seen in the foreign investment legislation of some states. These guarantees are given in the hope that there would be greater flows of foreign investment if impartial methods of seeking remedies in the event of government intervention are made available to the foreign investor.49Where a dispute subsequently arises between the state giving such a guarantee and a foreign investor, the dispute could be submitted to arbitration by a foreign arbitral tribunal in accordance with the provision. The theory on which arbitra-tion tribunals have accepted jurisdicarbitra-tion is that the legislative guarantee contains an offer to arbitrate which the foreign investor converts into
46A difficulty in maintaining this argument is that the insurance of foreign investment is an internal act of the home state. It is not one which would normally have international significance.
47The American Law Institute, Restatement on Foreign Relations Law (vol. 2, 199), which states a general principle of just compensation, thus departing from the traditional US stance of prompt adequate and effective compensation, argues that full compensation must be paid where the investment was specifically encouraged or authorised by the state.
48The domestic parallel to such guarantees is perhaps the letter of comfort. Such letters are ordinarily intended to provide some support for a course of action without creating any binding obligations on those issuing them.
49Examples of this are to be found in the legislation of many African states. The similarity in the forms of such legislation is remarkable. They result either from models or advice provided by international organisations or because of the competition that exists within the region to attract foreign investment.
an agreement to arbitrate by instituting proceedings before the tribunal.
He exercises an option under the law available to him, thereby granting jurisdiction on the usual contractual basis to the arbitration tribunal.50
There are, however, internal constitutional difficulties with such guar-antees. In constitutional systems that feature a separation of powers, it is a contentious issue as to whether the judicial power of decision over a dispute that arises within the territory of the state could be transferred to a foreign tribunal by the legislature in absolute terms in respect of all future disputes.51This is a matter that has not been litigated within those
There are, however, internal constitutional difficulties with such guar-antees. In constitutional systems that feature a separation of powers, it is a contentious issue as to whether the judicial power of decision over a dispute that arises within the territory of the state could be transferred to a foreign tribunal by the legislature in absolute terms in respect of all future disputes.51This is a matter that has not been litigated within those