International Investment Treaties and the Formation, Application and

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All Chinese Journal of International Law

International Investment Treaties and the Formation, Application and Transformation of Customary International Law Rules Congyan CAI

Volume 7, Issue 3 November 2008

Article Contents Abstract



Author Notes

Chinese Journal of International Law, Volume 7, Issue 3, 1 November 2008, Pages 659–679, http://doi.org/10.1093/chinesejil/jmn035 Published: 25 September 2008 PDF

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Abstract International custom is one of the main sources of international law. As a relatively new branch of international law,

I. Introduction

international investment treaties, emerging in the late 1950s and having been very energetic since the mid-1990s, have become a

II. Investment treaties and the formation of CIL rules III. Application of CIL rules in investment treaty arbitration IV. International investment treaties and the transformation of the current CIL rules V. Concluding remarks < Previous

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driving force and an important forum for the formation, application and transformation of the customary international law rules.

Issue Section: BRIEF COMMENTS, ESSAYS AND NOTES

I. Introduction 1. International investment treaties, which are mainly composed of bilateral investment treaties (BITs), emerged in the late 1950s with the aim of regulating international investment affairs. The emergence of such a new kind of international treaties, in the circumstance that international investment activities have boomed since the end of World War II, effectively redressed the drawback that traditional international law has hardly touched international investment affairs. Since the mid-1990s, international investment treaties have 1

proliferated. Up to the end of 2006, the number of international investment treaties has amounted to 5500, which is far more than those international treaties in any other international legal field, and the number is increasing. At the same time, up to the year 2007, the number of reported investment arbitration cases based upon investment treaties has climbed to 290. As the sole multilateral body for settling investment disputes, International Centre for Settlement of Investment Disputes (ICSID), which was established under the Convention on the Settlement of Investment Disputes between the States and Nationals of Other States (ICSID Convention or 2

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Washington Convention), has registered 182 cases from 1973 to 2007, which is much more than those cases heard by the 4

International Court of Justice (ICJ) from 1947 to 2007, and the number of investment disputes resorted to arbitration is also increasing. International investment treaty practice is so active that some commentators argue that nowadays the most remarkable developments are related to international investment treaties. 2. Being so energetic, international investment treaties undoubtedly serve as a driving force to influence the operation of the customary international law (CIL), which is a main source of international law. Actually, how to deal with CIL rules is a heated issue in the current international investment treaty practice. Furthermore, as the author knows, whether or not to accept the “minimum treatment standard,” which is regarded as a rule with CIL status, raises great concerns on the part of the Chinese government during her forthcoming negotiation with the United States to conclude BIT. In this article, the author examines the formation (Part II), application (Part III) and transformation (Part IV) of CIL rules in the current international investment treaty practice.

II. Investment treaties and the formation of CIL rules II.A. Mechanism of the formation of CIL rules 3. Historically, international custom, rather than international treaties, was the oldest and original source of international law and nowadays many international lawyers, especially those from Anglo-Saxon countries, still insist that international custom remains as 5

the most important source of international law. As stipulated in Article 38(1)(b), international custom is listed as a main source of international law, while paragraph (1)(a) lists treaties. 4. Article 38(1)(b) of the ICJ Statue stipulates “international custom, as evidence of a general practice accepted as law”. It was widely believed that two requirements should be met in order for international custom to form: general practice and opinio juris. The former is the “material requirement” or “objective requirement” and the latter is the “psychological requirement” or “subjective requirement”.

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5. According to the prevailing international legal theories, “general practice” refers to the repeated and similar State practice and such State practice includes both action and inaction. Whether or not general practice exists can be proved from the following three aspects. The first aspect is the generality of practice. Generally speaking, this requirement is met if those States being capable of participating in the general practice or those States having interests in the objects of the general practice actually participate in it. In other words, as 7

Ian Brownlie said that “universality if not required”. The second aspect is the uniformity and consistency of practice. This requirement is met if the same specific activities are often conducted and meet no opposition. However, the uniformity and consistency requirement is not absolute; otherwise any CIL rule can hardly emerge. As a matter of fact, occasional deviations from the established CIL rules could be actually tolerated. The third aspect is the duration of State practice. According to Ian Brownlie, if the consistency and generality of a practice are proved, no particular duration is required since the passage of time will certainly be a part 8

of the evidence of generality and consistency. LI Haopei was of a similar opinion. He proposed that the duration of the practice should depend upon the density of specific international relations case by case.

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6. It is harder to identify the existence of opinio juris. Article 38(1)(b) of the ICJ Statute speaks of “accepted as law”. This is taken as opinio juris. Some scholars have argued that “accepted as law” means that a specific practice is recognized by States as obligatory. However, some international lawyers did not read it in this way. As pointed out by Hudson, it can be only inferred from “accepted as 10

law” that a specific practice is “required by, or consistent with, prevailing international law”. The extreme view is that opinio juris is 11

not required. As far as the ICJ judicial practice is concerned, there are two different approaches to opinio juris: in many cases, the ICJ tends to infer the opinio juris from evidence of a general practice, or upon a consensus in the literature, or upon the previous determinations of the ICJ or other international tribunals; in relatively small cases, the ICJ adopted a strict approach in the 12

determination of the legally psychological condition of State practice. In this respect, the recent insightful argument by Antonio Cassese should be particularly mentioned. In his opinion, not only the strict opinio juris but also his so-called opinio necessitates, that 13

is, social, economic or political exigencies, can serve as physiological factor in the formation of CIL rules. This argument seems acceptable to us since it correctly reflects modern understanding of the foundation of international custom since the 1970s at least: international custom solidly lies in the very need of international society, but not necessarily reflects the so-called “implied consent” or “collective legal conscience” of various members of international society.

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7. On the basis of the above-mentioned observations, it could be summed up that, besides general practice, though some kind of psychological condition is generally considered as a requisite ingredient, such condition is not necessarily labelled as “obligatory” one. 8. According to the United Nations International Law Commission (ILC) and most international lawyers, the evidence of CIL rules can be distilled from three sources: inter-State diplomatic relations, which take the forms of treaties, declarations and other diplomatic documents; international institutional operation, which takes the forms of decisions, judgments, etc.; intra-State actions, which take the 15

forms of law and regulations, judgments and administrative decision, etc. What is not clear is whether these different forms have different weight in establishing CIL rules. However, what is clear is that controversies have arisen towards what roles treaties, especially different types of treaties, play in the formation of CIL rules. As to treaties generally, in the North Sea Continental Shelf Cases, though confirming that CIL rules could be established through treaty practice, the ICJ also warned that the effect of treaties 16

should not be exaggerated and it was necessary to discern the intentions of contracting parties. As to the weight of different types of treaties in the formation of CIL rules, van Hoof proposed that treaties concluded by States in the capacity of the “producer” or “lawmaker” of international law and “consumer” or “legal subject” of international law have different implications in the formation of CIL 17

rules, and it is a failure to make the distinction that sometimes resulted in the overestimation of certain types of State practice. It is evident that van Hoof accepted the well-known classification of so-called “law-making treaties” and “contractual treaties”. Generally speaking, multilateral treaties are regarded as law-making treaties, otherwise other treaties including bilateral ones are treated as contractual treaties. However, such a classification was not accepted by the ILC, and the Vienna Convention on the Law of Treaties (VCLT) actually treats all kinds of treaties equally. Moreover, it is not welcome by many contemporary international lawyers 18

nowadays. For example, as Oppenheim's International Law rightly pointed out, all kinds of treaties were law-making ones since “they lay down rules of conduct which the parties are bound to observe as law” and the distinction of law-making and non-lawmaking treaties is “merely one of convenience”.

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9. It could be maintained that the effect of treaties in the formation of CIL rules should not be overestimated. The reason is that, State practice in the national arena where States are free to act on the basis of their real will and expectations; on the contrary, power politics in the international society leads to a situation where numerous inter-State diplomatic intercourses, including the negotiation and conclusion of treaties in many cases are only the result of political struggles, and even undue pressures. In other words, many treaties are brought out in the absence of free will of the contracting parties. Thus, one should be cautious in identifying the opinio juris from treaties. As to the issue whether multilateral treaties and bilateral treaties have different implications in the formation of opinio juris, my answer is YES. However, my answer is not based upon the unsound classification of different treaties into law-making ones and contractual ones, but upon the perception of different negotiation foundations of multilateral treaties and bilateral treaties, respectively. That is to say, there are often huge disparities of power both in the negotiation of multilateral treaties and bilateral treaties: in the negotiation of multilateral treaties, the “multilateral game mechanism” engaged in by all negotiating States makes it possible to redress to a large extent such disparities of power between pairs of negotiating States; on the contrary, in the negotiation of bilateral treaties, “bilateral game mechanism” engaged in by only two negotiating States in many cases leads to direct confrontation between the two States, the result of which is either the breakdown of negotiation or the success of negotiation at the expense of the interest of one party. Thus, the foundation of multilateral treaties is more equitable than that of bilateral treaties. It is this perception that makes it necessary for one to be extremely cautious to assert the existence of opinio juris. 10. However, the formation of CIL rules through treaty practice is anyway supported by the ICJ. The VCLT also takes a positive attitude towards it. As Article 38 of the VCLT Convention reads, the relativity of treaties does not “preclude a rule set forth in a treaty from becoming binding upon a third State as a customary rule of international law, recognized as such”. Furthermore, with the gradual improvement of international rule of law, treaties between or among States, especially those respecting international rule of law or having good relationship with each other, should be much easier to be concluded out of opinio juris. Furthermore, compared with other inter-State activities such as diplomatic statements, notes or speeches by heads of State, the conclusion of treaties by diplomatic agents and especially the ratification of such treaties by national legislature undisputedly constitutes a very solemn legal act, and the perception of legal rights and obligations imbedded in the process of conclusion and ratification is to be expected.

II.B. Effect of international investment treaties on the formation of the CIL rules II.B.i. Theoretical analysis 11. There are obviously different attitudes towards the role played by international investment treaties, especially BITs in the formation of CIL rules. Some Western commentators argue that BITs have served as an important instrument to establish CIL rules. The main reasons are as follows: first, the number of BITs has been increasing significantly and then the effect is multiplied by most favoured national (MFN) treatment clauses; second, States that previously rejected the traditional Hull Rule standard of compensation 20

have signed BITs with that rule; third, the traditional definition of CIL is perhaps flawed, or at least incomplete as regards 21

international investment law. On the other hand, some other Western commentators maintained that BITs do not play an important role in the formation of CIL rules. The main reasons include: first, although the number of BITs has significantly increased and there are many similarities among them, BITs signed by developing countries were not out of the conviction of obligations or not with the aim to clarify the relevant legal obligations. Those developing countries just wanted to pursue economic interest—the attraction of 22

foreign investment—through the BIT mechanism, which resulted in the absence of the opinio juris. Second, although the structure and contents of BITs tend to be more and more standardized, the available empirical surveys have found that “so much uncertainty and contradiction, so much fluctuation and discrepancy in the rapid conclusion of BITs, and the practice has been so much influenced by considerations of political expediency in the various cases, that it is not easy to discern in all the treaties any constant and uniform 23

usage, accepted as law regulating foreign investment.”

12. As far as I know, it seems that almost all Chinese international lawyers are of the opinion that BITs just play a limited or even negligible role in the formation of CIL rules. Besides arguing the conspicuous inconsistencies of BITs, some Chinese commentators especially emphasize that developing countries are motivated by economic considerations to negotiate and sign BITs, and thus it is impossible to form opinio juris.

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13. The author also maintains that the effect of international investment treaties in the formation of CIL rules should not be overestimated. On the one hand, there are some important differences among various BITs and thus the requirement of general practice is arguably hard to be met. An important survey towards BITs conducted between 1995 and 2006 by United Nations Conference on Trade and Development (UNCTAD) reveals that there are some important inconsistencies among current BITs. Taking the rule of expropriation and compensation as an example, UNCTAD finds that, although four elements for legal expropriation, that is, public purpose, non-discrimination, due process and “prompt, adequate, effective” compensation, have prevailed in most BITs, there are different understandings of “due process”. In some BITs, “due process” refers to “legality,” while it 25

is supposed to include effective judicial review in some other BITs. It should be particularly noted that some developing States, 26

especially Argentina, have frequently been sued in international arbitral tribunals in recent years. This unpleasant situation probably will prompt some of them to adjust their current liberal BITs strategy, the result of which may lead to some conservative rules to be included in the future BIT. It is a profoundly uncertain factor to affect the role of BITs in the formation of CIL rules. 14. On the other hand, as to those Chinese and Western commentators' argument that, based upon the general observation of opinio juris in treaty practice, there is no opinio juris in BITs, the author also supports the argument that the role played by BITs in the formation of customary law rules should not be overestimated. However, the author does not think the reason—that developing countries only are inspired by economic considerations to sign BITs—given by the Sino-Western commentators for their position is acceptable. As pointed out before, the ILC itself does not support the so-called clarification of law-making treaties and contractual treaties. As to the specific case of BITs, the author considers that actually all States conclude international treaties out of the pursuit of interests of this or that kind and international treaties are an instrument for interest allocation just as any other legal instruments. Therefore, it is unreasonable to deny the existence of opinio juris solely on the basis of the distinction of “economic” interest and other kinds of interests. In fact, along this line, these commentators would find it necessary to answer the question whether or not developed countries, which seek to provide their overseas investors with “legal” protection through the BIT mechanism, have any opinio juris. In my opinion, the appropriate justification to deny the existence of opinio juris from some developing countries in BIT is that in many cases these countries conclude BITs either as the result of undue pressure from developed countries or as a result of their aspiration for 27

international legitimacy during economic or political transformation. Under such circumstances, it is really unreasonable to find opinio juris in the conduct of developing countries. However, supposing that developing countries express definite opinio juris in support of the existence of some kind of obligation, at least they are not opposed to such an existence, and considering the conclusion of BIT by diplomatic agents and ratification by national legislature is a solemn legal act, it is not unreasonable to argue that the requirement of opinio juris is met. 15. The following factors make it necessary to pay attention to the role of international investment treaties in the formation of CIL rules. 16. First, in the past, the evaluations of the role of international investment treaty practice in the formation of CIL rules were mainly based upon BIT practice before the mid-1990s; many important developments after the mid-1990s were hardly touched. According to 28

the UNCTAD, the number of BITs was less than 1500 in 1995, but it amounted to 2573 at the end of 2006, and this number is still continually increasing. Furthermore, in addition to BITs, other international treaties containing investment rules, one typical form being free trade agreement (FTA), have been blooming since the mid-1990s. Up to 2006, the number of FTAs is more than 240,

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and this corpus is still expanding. It is reasonable to argue that such a large corpus of international investment treaties is an indication that numerous States are willing to reach some kind of consensus towards international investment affairs. As a matter of fact, investment affairs are so-called “low politics” and thus it is much easier to arrive some consensus among States towards them than towards political affairs under “high politics”. More importantly, compared with the contents of traditional international investment treaties, the contents of the recently concluded international investment treaties become much more similar and actually there are many completely identical rules in them. Therefore, international investment treaties now are more likely to satisfy the material element of general practice. 17. Second, in the past, international lawyers seemingly focused on examining whether or not general CIL rules, which apply to all States, are established in the international investment treaty practice, while they neglected regional or local CIL rules which apply to only some States. Although according to the formal text of Article 38(1) of the ICJ Statute that CIL rules only refer to general CIL 30

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rules instead of regional or local CIL rules, the ICJ affirmed in Asylum Case, U.S. Nationals in Morocco Case and Right of 32

Passage over Indian Territory Case that CIL rules included general ones and regional ones. Of course, aware that it is difficult for regional or local CIL rules to form, the ICJ maintained the establishment of regional or local CIL rules should satisfy stricter criteria.

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18. As all know, regional economic integration has been flourishing since the mid-1990s. In this new context, FTAs and other instruments concerning regional economic integration have become new forms of international investment treaties and new sources of 34

international investment law. These new legal instruments, especially their interactions with BITs, will enhance the formation of regional CIL rules. 19. Third, in the past, international lawyers who examined the role of international investment treaties in the formation of CIL rules mainly relied upon legal texts, but they paid much less attention to other aspects including but not limited to investment dispute arbitrations and government statements. Obviously, they simplified the mechanism of formation of CIL rules. For example, in the 1990s, although it was hard to say that all developing States had accepted the Hull Rule, nearly all international arbitral tribunals did award damage in accordance with the Hull Rule. Another example, although the legal nature of Fair and Equitable (F&E) Treatment is not defined in Article 1105(1) of NAFTA, the Tribunal noted that (i) the numerous transmittal statements by the United States of BITs contain language similar to that of NAFTA and the relevant official statements repeatedly referred not to “the” minimum standard of treatment, but to “a” minimum standard of treatment; (ii) as to Canada, Canadian Statement on Implementation of NAFTA stated that Article 1105(1) “provides for a minimum absolute standard of treatment, based on longstanding principles of customary international law”; and (iii) Mexico also supported the argument of Canada.

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20. Fourth, even though the argument that developing States concluded BITs purely in pursuit of economic interest, thus negating the existence of opinio juris is sound in some sense, this argument seemingly is no longer valid to those developing States newly emerging as capital exporters. The reason is quite obvious—that is, as capital exporters, these developing States also seek to provide their overseas investors with “legal” protection.

II.B.ii. Empirical analysis: legal nature of F&E treatment standard and the Hull Rule II.B.ii.a. The F&E treatment standard as regional CIL rule 36

21. The F&E treatment, which originated from the 1948 Havana Charter for the International Trade Organization, is an absolute treatment standard in international investment treaties. In recent years, foreign investors frequently resorted to international arbitral tribunals for the host States' breach of the F&E treatment standard, and in many cases their claims were successfully supported by tribunals. As to the legal nature of F&E treatment standard, three arguments have been made: the standard is based upon international minimum standard required by CIL; the standard is based upon international law including all sources and the standard is an independent self-contained treaty standard.

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22. As far as legal texts are concerned, Dolzer and Stevens found that in some BITs, the F&E treatment standard was placed at the beginning of the general treatment clauses; in other BITs, the F&E treatment standard was combined with the provision on the protection and security of the investment; in still other BITs, the F&E treatment standard was connected with the provision on the 38

prohibition of discriminatory measures, or with the national and MFN standards. It could be maintained that the requisite general practice for the formation of CIL rules has not been met yet. However, these discrepancies and controversies did not prevent from defining the legal nature of the F&E treatment standard under NAFTA system. 23. Article 1105(1) of NAFTA reads: “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”. Article 1105(1) indeed does not define the F&E treatment standard as a CIL rule. Anyway, in several cases, foreign investors claimed the breach of the F&E treatment standard by the relevant NAFTA host States, and arbitral tribunals explained the standard in a very loose way. In Metalclad v. Mexico, the F&E treatment standard was connected with transparency by the Tribunal, holding that Mexico's failure “to ensure a transparent and predictable framework for Metalclad's business planning and investment” simultaneously constituted the breach of the 39

F&E treatment standard. In S.D. Myers v. Canada, the Tribunal held the fact that host State's breach of a rule of international law 40

that is specifically designed to protect investors will also constitute the breach of the F&E treatment standard. In Pope & Talbot v. Canada, the Tribunal considered that the F&E treatment standard should be interpreted to include the “fairness elements under 41

ordinary standards applied under NAFTA countries”. It is the very general explanations of the F&E treatment standard by NAFTA Tribunals that placed NAFTA member States in a very disadvantageous situation. On 31 July 2007, the Free Trade Commission (FTC) of NAFTA, which was established under Chapter 11 of NAFTA, issued a celebrated Note, in which FTC declared that

1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.

24. Although the FTC Note itself aimed at limiting the discretion of NAFTA tribunals in the explanation of the F&E treatment standard, the Note also contributed to the establishment of the F&E treatment standard as a regional CIL rule under NAFTA system. 25. Of course, as the ICJ said in the Asylum Case, “The Party which relies on a custom of this kind must prove that this custom is 42

established in such a manner that it has become binding on the other Party.” Since Article 1105(1) of NAFTA, as a treaty rule, certainly is binding on all three member States, as far as the F&E treatment standard, the special requirement for the formation of regional CIL rules is satisfied. 26. Although the status of CIL as a whole was considered to decline gradually in the international law, van Hoof believed that 43

regional CIL may still play a considerable role in certain field of international law. In this author's opinion, the importance of regional CIL rules should be evaluated from two perspectives. First, compared with the formation of general CIL rules, the formation of regional CIL rules is less difficult. It is well known that international society was divided into so-called Eastern–Western blocs and South–North blocs, and States in different blocs were heterogeneous in terms of political, economic or social and legal systems, which may obstruct the formation of CIL rules. On the contrary, the affinities in terms of geography, political, economic, legal systems and historical tradition make countries within a regional area quite homogeneous and it is easier for regional CIL rules to emerge from such areas. In this sense, people should not be surprised to find that the F&E treatment standard was established as a CIL rule in less than ten years' operation of NAFTA. The experience of the F&E treatment standard under NAFTA system not only manifests the prominent effect of international investment treaties in the formation of CIL rules, but also shows the importance of the foundations in the formation of CIL rules. Second, as D'Amato rightly commented, general CIL rules are too vague to cover a specific area and a 44

decisive role might be played by regional CIL rules. It is widely known that, compared with international treaties, vagueness and uncertainty are the conspicuous drawbacks of international custom and the major reasons for the decline of CIL as a whole in the international law. Evidently, the specificity and certainty of regional CIL rules are very important factors to maintain and strengthen the role of CIL rules, at least regional CIL rules, in the international law.

II.B.ii.b. The Hull Rule as a general CIL rule? 27. Full compensation for expropriation was a common practice in Europe in the early twentieth century. In The Chorzow Factory Case, the Permanent Court of International Justice stated that, in the case of expropriation, reparation “must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.” In 1938, in a diplomatic note to the Mexican Ambassador to the United States concerning the confiscation of the property of American nationals by Mexican government, the US Secretary of State, Cordell Hull, put forward what has become the leading formulation of the full compensation standard:

The Government of the United States merely adverts to a self-evident fact when it notes that the applicable precedents and recognized authorities on international law support its declaration that, under every rule of law and equity, no government is entitled to expropriate private property, for whatever purpose, without provision for prompt, adequate, and effective payment.

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28. The above-mentioned “prompt, adequate, and effective payment” is the very Hull Rule on compensation for expropriation and it has been regarded as a CIL rule by Western powers. 29. For a long time, developing States were critical of the Hull Rule. In the 1970s, developing States made great achievements in challenging the Hull Rule, the milestone of which was the approval of Charter of Economic Rights and Duties of States (Resolution 46

3281) by the General Assembly in 1974. The Charter states that each State has the right to “nationalize, expropriate of transfer ownership of private property, in which case appropriate compensation should be paid by the State adopting such measures.” The emergence of “appropriate compensation” standard forcefully assaulted the Hull Rule. Since then, the Hull Rule had been rejected in most BITs concluded between developing States and developed States. 30. However, in the process of international investment liberalization since 1990s, developing States' traditional critical attitude to the Hull Rule has changed dramatically. The UNCTAD found out that most BITs have now included language that has the effect of 47

applying the standard of “prompt, adequate and effective” compensation. As Comeaux and Kinsella argued, the prevailing 48

stipulation of “full” compensation constitutes the evidence of the CIL status of the Hull Rule. A Chinese commentator also warned that, if most developing States accept the Hull Rule in BITs, it is possible for the Hull Rule to become a CIL rule.

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31. To sum up, the fact that the Hull Rule was widely accepted in BITs since the 1990s indicates that it is possible for some general CIL rules to emerge in the field of international investment.

III. Application of CIL rules in investment treaty arbitration 32. CIL rules have profound implications for the operation of the international investment arbitration mechanism. Actually, CIL rules 50

have been applied frequently in ICSID cases. Since international investment treaties mainly consist of so-called primary rules rather than secondary rules in dealing with the relationship between host States and foreign investors, those CIL rules concerning State responsibility, e.g. denial of justice, are especially important in investment arbitrations. In fact, the huge demand to apply CIL rules in investment arbitrations provides these international rules with a precious opportunity to demonstrate their significance and make them perfect.

III.A. The legal and jurisprudential basis of application of CIL rules in the international investment treaty arbitration 33. At the legal text level, the application of CIL rules by investment arbitral tribunals is permitted and required by the relevant international investment treaties. For instance, Article 42(1) of the Washington Convention reads that “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable” (emphasis added). Since the “international law” in Article 42(1) has the same meaning as “international 51

law” stipulated in Article 38 of ICJ Statute, it is undoubtedly legitimate for ICSID arbitral tribunals to apply CIL rules. Similar provisions can be found in NAFTA and the Energy Charter Treaty (ECT).

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34. In contrast, Article 3(2) of the Understanding of Disputes Settlement Procedure and Rules (DSU) annexed to the Agreement Establishing the World Trade Organization (the WTO Agreement) stipulates that “recommendations and rulings of the Disputes Settlement Body (DSB) cannot add or diminish the rights and obligations provided in the covered agreements”. This stipulation is regarded as evidence that the WTO agreements are self-contained. Thus the DSB could only apply the WTO-covered agreements 53

while any other international law including CIL rules (but not including customary rules of interpretation) are not applicable. Article 3(2) of the DSU and the so-called “self-contained” characteristics of the WTO legal system remind us that, though Article 42(1) of the Washington Convention provides the legal basis for the application of CIL rules by ICSID tribunals, it could not answer the question why the application of CIL rules is so important in the investment arbitral tribunals. In this author's opinion, this issue should be analysed from the perspective of jurisprudence. 35. The major reason is that the formal rationality of BITs is much poorer than that of many other international treaties. In this respect, it is easy to find that until the mid-1990s the framework and contents of BITs are very simple, generally with only 10–15 articles. Evidently, it is impossible for these BITs to cover all issues related to the legal relationship between a host State and foreign investors, not to mention dealing with them in detail. Unfortunately, this situation has not been improved significantly yet. Therefore, these BITs could not constitute “self-contained” legal systems, as does the WTO legal system. Under this circumstance, arbitral tribunals cannot but resort to other international legal rules including CIL rules in order to conduct arbitration proceedings. In contrast, the WTO legal system is so huge and complex as to be qualified as a “self-contained” one. Therefore, the DSB can settle trade disputes without resorting to other international law rules outsides the WTO-covered agreement.

III.B. The main factors affecting the application of CIL rules 36. Although increasing investment disputes provide abundant opportunities for the application of CIL rules, three factors may impede their application. 37. The first factor is the attitude of developing States towards CIL rules. It is widely admitted that most CIL rules were produced by Western countries and most developing States did not participate equally in this process. Therefore, many developing States are doubtful and critical of some CIL rules. Although the established CIL rules also are binding to those countries which did not participate in the process of formation unless these CIL rules would be replaced by new CIL rules or treaty rules, the fact that those CIL rules criticized by developing States are applied frequently may erode the confidence of these States towards international arbitration mechanisms. 38. Take the rule of respect of acquired rights as an example. In accordance with it, the specific legal status or legal rights accorded by host State to foreigners shall be respected. The rule of respect of acquired right was invoked as a defense of nationalization, expropriation and justification to require compensation. In a few cases, e.g. Amoco v. Indonesia, the ICSID tribunal invoked the rule 54

of respect of acquired rights and argued that foreign investment shall be protected in cases of expropriation. It seems that, however, this rule has seldom been invoked in investment arbitrations in recent years. With the increasing strength of political and economic power, developing States might express more critical attitude to some CIL rules that had totally been produced by developed States. Thus, it is expected that the application of some CIL rules, e.g. the rule of respect of acquired rights, might be diminished gradually. In a word, it is crucial to increase the confidence of developing States in CIL. 39. The second factor is how CIL rules keep up with the times. It is not difficult to find that many CIL rules had been formed on the basis of the political, economic and social backgrounds in the early twentieth century and in an even earlier time. Evidently, how these CIL rules could avoid being out of times is a challenging issue. 40. The issue was raised in recent NAFTA arbitrations concerning the meaning of minimum standard of treatment. According to the FTC Note, the minimum standard of treatment of foreign investment prescribed in Article 1105(1) of NAFTA is the same as the minimum standard of treatment of aliens provided in CIL. According to the prevailing international legal theory and practice, the minimum standard of treatment in CIL was authoritatively proclaimed in the Neer case in 1927 and some other similar cases in the 1920s. In the Neer case, the Mexican Claims Commission held that when there is a breach of international law, “the treatment of an alien ... should amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short 55

of international standards that every reasonable and impartial man would readily recognize its insufficiency.”

41. However, the question is whether or not the minimum standard of treatment prescribed in the FTC Note is the same as proclaimed in the Neer case and other relevant cases. In this aspect, all three NAFTA member States, tribunals and claimants unanimously argued that the minimum standard proclaimed in the Neer case could not be applicable in current NAFTA cases. For instance, in ADF v. 56

United States, the Claimant argued that “international law” in Article 1105(1) could not be read as “customary international law.”

The aim of this argument is obviously to preclude the application of the Neer standard. The United States argued that the CIL referred to in Article 1105(1) was not “frozen in time” and that the minimum standard of treatment did evolve. The Tribunal also declared that CIL projects are “not a static photograph” of the minimum standard of treatment of aliens as in 1927 when the Award in the Neer case was rendered.

57

42. However, “deconstruction” is much easier than “construction”. Currently, what does the minimum standard of treatment in CIL really mean? In addition to the general arguments that “the threshold for finding violation of the minimum standard of treatment is still 58

59

high,” made by Canada, and CIL “as it exists today,” made by the United States, the meaning of the minimum standard of treatment prescribed in Article 1105(1) in NAFTA remains ambiguous and has not yet been set as definite as that in the Neer case, which undoubtedly undermines the applicability of the rule of the minimum standard of treatment. For example, in ADF v. United 60

States, the Tribunal argued that neither the Claimant nor the Respondent had been able to persuasively demonstrate their respective contentions concerning the meaning of the minimum standard of treatment, but unfortunately the Tribunal itself did not give its understanding of the standard, either. 43. The third factor is whether or not, and to what extent, CIL, a “general law,” is applicable to international investment law, a “special law”. Compared with international investment treaties, the generality of CIL could be discerned from two perspectives: (i) CIL basically did not deal with international investment affairs; (ii) traditional international law aimed to govern the inter-State relationship, whereas international investment treaties fundamentally regulate the relationship between host States and foreign investors. 44. As noted by a study group of the ILC, one of the characteristics of contemporary international law is that “general law” has been gradually precluded from being applied as a result of the emergence of numerous “special law,” which has brought about the 61

fragmentation of international law. In this aspect, WTO law is a typical case. As to international investment law, as pointed out above, international investment treaties could not constitute a “self-contained” legal system as the WTO legal system. Furthermore, States, international tribunals and international lawyers seemingly have not opposed openly to the application of CIL rule as general law in the investment arbitrations based upon international treaties as special law. However, preliminary doubts and controversies exist. For example, in Mondev v. United States, one of the reasons that the Tribunal denied the application of the minimum standard of treatment established in the Neer case is that that case was not concerned with the treatment of foreign investment, but the physical security of the alien. Furthermore, in the Neer case, the issue was whether or not Mexico was responsible for “private acts,” that is, the killing of a United States national by some armed Mexicans. In contrast, the treatment of foreign investment is accorded by the very “host State itself” under the NAFTA system, and, therefore, it is unjustifiable that provisions of NAFTA are confined to the Neer 62

standard of outrageous treatment. Indeed, some commentators also proposed that the Draft Articles on Responsibility of States for Internationally Wrongful Acts adopted by the ILC is only concerned with inter-State responsibility, and thus the application of these 63

legal rules to the international responsibility of host States to foreign investors is open to doubt. In BG Group Plc. v. The Republic of Argentina, the Tribunal ruled against the applicability of this “general law”. It noted that Article 25 (the state of necessity) of the ILC Drafts Articles on Responsibility of States for International Wrongfulness Acts (hereafter refers to the ILC Articles on State Responsibility) “may relate exclusively to international between sovereignty States. From this perspective, Article 25 would be of little assistance to Argentina as it would not disentitle BG, a private investor, from the rights to compensation under the Argentina-U.K. 64

BIT”. And also, in an authoritative report concerning the Washington Convention, the Board of Directorates of World Bank also noted that Article 38 of the ICJ Statute is originally applicable to disputes arising between sovereign States.

65

45. Of course, it cannot be said that CIL, a “general law,” does not apply at all in the filed of international investment law, a “special law”. As a matter of fact, CIL as a “general law” includes some contents, e.g. procedural impartiality, which can definitely be applicable in any case, irrespective of the particularity of specific international legal relations. However, we also cannot ignore that disparities exist between the context in which CIL as a “general law” operates and the context in which international investment law as a “specific law'' operates. Therefore, it might also be expected that, if a tribunal gives an award with possible profound legal and even economic and political effect, one of the three just mentioned factors may provoke controversies as to whether or how to apply CIL rules, as the Neer principle has experienced under the NAFTA arbitral system. 46. Moreover, the perplexing issue is that effective responses have not been available in theory and, in particular, in practice. For example, it is not totally impossible to design another body of legal rules that would exclusively govern international responsibility arising between the State and aliens. However, since the legal rules on inter-State responsibility have not been codified yet, it is evidently impossible for international community to seek to establish another set of State responsibility rules. Anyway, more and more controversies will result from the application of CIL rules in ever increasing investment arbitrations.

IV. International investment treaties and the transformation of the current CIL rules 47. As LI Haopei has pointed out, CIL does not remain static for good. CIL rules may be changed or replaced by different later CIL 66

rules. In the following part, the possible transformation of CIL rules regarding the State of necessity and the exhaustion of local remedies will be examined.

IV.A. Elaboration of CIL rules through international investment treaty practice: taking the state of necessity rule as an example 48. According to State practice and international judicial practice, that a State could invoke necessity as a ground for precluding the 67

wrongfulness of an act not in conformity with an international obligation is a long established CIL rule. In Gabcikovo-Nagymaro, the ICJ held that “the state of necessity is a ground recognized by customary international law for precluding the wrongfulness of an 68

act not in conformity with an international obligation.” In the Israel Security Wall case, the ICJ also confirmed “a state of necessity 69

as recognized in customary international law.”

49. The state of necessity rule was also included in the ILC Articles on State Responsibility. Article 25(1) of the ILC Articles reads in part:

1.Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: a. Is the only way for the State to safeguard an essential interest against a grave and imminent peril; and b. Does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole.

70

50. It was well established that four conditions shall be met for the invocation of the rule of state of necessity. First, acts which would breach specific international obligation must be taken to protect an “essential interest”. Second, such essential interest must be under “a grave and imminent peril”. Third, the measures at issue must be “the only way” to protect the essential interest. Fourth, the acts in issue shall not “seriously impair” an essential interest of the State or States towards which the obligation exists, or that of the international community as a whole. Furthermore, according to Article 27 of the ILC Articles on State Responsibility, the invocation of Article 25 is without prejudice to “the question of compensation for any material loss caused by the act in question”. 51. Several recent investment arbitration cases touched upon the state of necessity rule. In these cases, the international tribunals have clarified some ambiguities and loopholes inherent in the rule. Although these clarifications are not always consistent, they do help to improve the rule of state of necessity in international investment law. 52. As to the meaning of “essential interest,” several Special Rapporteurs of the ILC on the topic and most international lawyers supported the view that the term “essential interest” should not be confined to “interest of existence”. Special Rapporteur Roberto Ago pointed out that “essential interest” included those interests concerned with “different matters such as the economy, ecology or 71

other”. Special Rapporteur Julio Barboza firmly argued that the threat to an “essential interest” would be identified by considering, among other things, “a serious threat against the existence of the State, against its political or economic survival, against the maintenance of its essential services and operational possibilities, or against the conservation of internal peace or its territory's 72

ecology.” However, the 2001 ILC Articles on State Responsibility itself did not define this term. In LG&E v. Argentina, the claimants reiterated that “essential interest” did not include “economic interests–only defense or military concerns. They compare a 73

State's interest in essential security to a national security threat”. However, the Tribunal definitely argued that “essential interest” should not be limited to those interests referring to “existence” and “economic, financial or those interests related to the protection of the State against any danger seriously compromising its internal or external situation are also considered essential interests”.

74

53. As to “the only way,” Article 25 of the ILC Articles on State Responsibility requires that the questioned measures should be “the only way” to protect the essential interest of the States in question. But how to define “the only way” is a debatable issue. In CMS v. Argentina, the Tribunal considered that “which of these policy alternatives would have been better is a decision beyond the scope of the Tribunal's task, which is to establish whether there was only one way or various ways and thus whether the requirements for the 75

preclusion of wrongfulness have or have not been met.” However, in LG&E v. Argentina, the Tribunal argued that “an economic recovery package was the only means to respond to the crisis, although there may have been a number of ways to draft the economic 76

recovery plan.” It is easy to find conspicuous differences in the explanations of “the only way” in two cases: in CMS v. Argentina, the Tribunal defined “the only way” from the perspective of “a specific” measure, while in LG&E v. Argentine, the Tribunal identified “the only way” from the perspective of “a package of” measures, which obviously encompass numerous specific measures. 54. As to compensation for the damage in the state of necessity, Article 27 of the ILC Articles on State Responsibility does not provide whether and how the compensation is decided. As Special Rapporteur Crawford said, State parties to disputes are expected to 77

agree on the compensation issue. However, if State parties to disputes could not reach an agreement on this issue, the proceedings of dispute settlement would go into a dilemma. In CMS v. Argentina, after the Tribunal noted that Article 27 of the ILC Articles on State Responsibility did not resolve the compensation issue, it firmly declared that “it is quite evident then that in the absence of 78

agreement between the parties the duty of the Tribunal in these circumstances is to determine the compensation due.”

IV.B. Erosion of CIL rules by international investment treaty practice: taking the rule of exhaustion of local remedies as an example 55. The rule of exhaustion of local remedies is a long established CIL rule. In the Interhandel Case, the ICJ stated that “the rule that 79

local remedies must be exhausted before international proceedings may be instituted is a well-known rule of international law.”

Thus, before reasonable exhaustive use of all local remedies including administrative and judicial remedies, aliens in a dispute in the host State shall not be allowed to resort to any international remedies including diplomatic protection. The rule of exhaustion of local remedies certainly applies to international investment treaty practice, among which the “Calvo Doctrine” is a typical one, which was first proclaimed by some Latin American countries and then supported by most developing countries.

80 81

56. However, the traditional rule of exhaustion of local remedies had been eroded by the Washington Convention. Traditionally, non-stipulation of local remedies in the provision on dispute settlement generally does not constitute an implied waiver of the rule of 82

exhaustion of local remedies. For example, in the Norwegian Loans Case, neither State parties nor the ICJ judges argued that the 83

submission to the ICJ was tantamount to the waiver of the rule of local remedies. In other words, the express stipulation of the rule of exhaustion of local remedies in a specific international treaty is not necessarily a prerequisite for the invocation of this rule. Compared with the traditional pattern, Article 26 of the Washington Convention stipulates that “A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.” In other words, the express stipulation of the rule of exhaustion of local remedies in a specific international investment treaty is needed for the invocation of this rule. Needless to say, Article 26 significantly eroded the traditional rule of exhaustion of local remedies. Under the NAFTA system, the rule of exhaustion of local remedies has been completely abandoned under the treaty regime. According to Article 1116 of NAFTA, foreign investors can freely resort to the NAFTA dispute-settlement mechanism without any consent of the NAFTA member State in question. 57. Although Article 26 of the Washington Convention deviated from the traditional rule of exhaustion of local remedies, which was a great setback, most BITs signed by developing States before the mid-1990s expressly required that foreign investors seek and even exhaust local remedies before resorting to international arbitration, which made developing States retrieve in the bilateral arena (BIT) what they have lost in the multilateral arena (the Washington Convention). However, since the mid-1990s, developing States have further eroded this legal rule on the bilateral level. According to UNCTAD, most BITs concluded from 1995 to 2006 do not include the rule of exhaustion of local remedies; some BITs require that only administrative remedies shall be exhausted, while some BITs even stipulate that foreign investors shall not be required to exhaust local remedies if they choose international arbitration.

84

Obviously, this new kind of BITs further strengthen the effect of erosion spearheaded by Article 26 of the Washington Convention. 58. The experience with the rules of state of necessity and of exhaustion of local remedies reminds us that the transformation of CIL rules by international investment treaty practice is complicated. On the one hand, it can improve CIL rules and further enhance the process of codification of CIL rules. On the other hand, it may damage the interests of some countries. Therefore, it is not sensible to evaluate this ongoing phenomenon with a dichotomist thinking of “good” or “bad”.

V. Concluding remarks 59. In this new changing context of international investment law, it is absolutely necessary for international society to examine the formation, application and transformation of CIL rules with an open mind. In this respect, international investment treaty practice, which is now mainly composed of by more than 2500 BITs, 240 FTAs and 290 investment arbitrations cases, can certainly become a forceful impetus to reshape the picture of CIL rules: they not only serve as a main arena for the application of CIL rules, but transform existing CIL rules, enhance them or form new CIL rules, especially regional CIL rules. In this sense, although international treaties are playing an increasingly important role in regulating international affairs, the status of CIL rules is not necessarily eroded in a linear way. In the field of international investment treaties at least, the viability and energy of CIL rules will continue and probably be strengthened.

1 UNCTAD, World Investment Report 2007, United Nations, New York and Geneva, 2007, xvii. 2 Convention on the Settlement of Investment Disputes between the States and Nationals of Other States, www.worldbank.org/icsid/basicdoc/basicdoc.htm, last visited on 1 June 2007. 3 UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA MONITOR No. 2 (2008), UNCTAD/WEB/ITE/IIA/2008/3, 1. 4 From 22 May 1947, when the first case was submitted, to 18 September 2007, ICJ has registered 136 cases, www.icj-cij.org/docket/index.php?p1=3&PHPSESSID=3a4e7fb76e2408cc3a3190e84f847ab6, last visited 18 September 2007. 5 G.J.H. van Hoof, Rethinking the Sources of International Law (Kluwer Law and Taxation Publishers, 1983), 113. 6 However, some international lawyers placed greater emphasis on opinio juris, whereas some others were more concerned with general practice, and even disregarded opinio juris. See G.J.H. van Hoof, ibid., 85–87. 7 Ian Brownlie, Public International Law (6th edn, Oxford University Press, 2003), 7. 8 Ibid. 9 See LI Haopei, Guoji Fa De Gainian Yu Yuanyuan (Concepts and Source of International Law) (Guizhou People's Press, 1994), 91. 10 Cited from Ian Brownlie, above n.7, 8. 11 Ian Brownlie, above n.7, 8. Also see G.J.H. van Hoof, above n.5, 86. 12 Ian Brownlie, above n.7, 8. 13 Antonio Cassese, International Law (2nd edn, Oxford University Press, 2005), 156. 14 LI Haopei, above n.9, 101. 15 WANG Tieyia (ed.), Guoji Fa (International Law) (Law Press, China, 1995), 15. 16 ICJ Reports 1969, 4. 17 G.J.H. van Hoof, above n.5, 88. 18 Ian Brownlie, above n.7, 608–609. 19 Robert Jennings and Arthur Watts (eds), Oppenheim's International Law (9th edn, Vol. 1, Longman Group UK Limited, 1992), 1203–1204. 20 F.A. Mann, British Treaties for the Promotion and Protection of Investments, 52 BYBIL (1982), 249. 21 Andreas F. Lowenfeld, Investment Agreement and Investment Law, 42 Columbia JTL (2003), 130. 22 Andrew T. Guzman, Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Virginia JIL (1998), 685–687. 23 Bernard Kishoiyian, The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law, 14 JIL & Business (1994), 372. 24 LIU Sun, International Law for Protecting International Investment (Law Press, China, 2002), 468–469; YANG Weidong, Bilateral Investment Treaties as the Source of Investment Law, 5 Zhongguo Guoji Jingji Fa Xuekan (Chinese JIEL) (2002), 324. 25 UNCTAD, Bilateral Investment Treaties 1995–2006: Trends in Investment Rulemaking, UNCTAD/ITE/IIT/2006/5, New York and Geneva, 2007, 47–48. 26 Carlos E. Alfaro and Pedro M. Lorenti, The Growing Opposition of Argentina to ICSID Arbitral Tribunals—A Conflict between International and Domestic Law?, 6 The Journal of World Investment & Trade (2005); CHEN An and CAI Congyan (eds), Guoji Touzi Fa De Xin Fazhan Yu Zhongguo Shuangbian Touzi Tiaoyue De Xin Shijian (New Developments of International Investment Law and New Practices of Chinese Bilateral Investment Treaties) (Fudan University Press, 2007, Chapters 13, 14). 27 As a former member of the US State Department BIT negotiating team, José E. Alvarez admitted: For many, a BIT relationship is hardly a voluntary, uncoerced transaction. They [U.S. BIT partners] feel that they must enter into the arrangement, or that they would be foolish not to…thinsp;[But] the truth is to date the U.S. model BIT has been regarded as, generally-speaking, a “take it or leave it” proposition…A BIT negotiation is not a discussion between sovereign equals. It is more like an intensive training seminar conducted by the United States, on U.S. terms, on what it would take to comply with the U.S. drafts.

Cited from Gennady Pilch, The Development and Expansion of Bilateral Investment Treaties, 96 ASIL Proceedings (1992), 552–553. Similarly, as observed by Vandevelde, political considerations have been playing an important role in the negotiation of BIT between the United States and some developing countries and Eastern European countries after the collapse of the Soviet empire and it is hardly possible for them to bargain with the United States on the equal foot. See Kenneth J. Vandevelde, United States Investments: Policy and Practice (Law and Taxation Publisher, 1992), 26–28. 28 UNCTAD, Investor-State Dispute Settlement and Impact on Investment Rulemaking, UNCTAD/ITE/IIA/2007/3, 2007, 3. 29 Ibid., 3. 30 ICJ Reports 1960, 7. 31 ICJ Reports 1952, 199–200. 32 ICJ Reports 1960, 39–43. 33 ICJ Report 1950, 266. See also Anthony D'Amato, International Law Sources (Martinus Nijhoff Publishers, 2004), 204–206. 34 See YU Jinson, Investment Liberalization Issue in Regional Arrangements, in: WANG Guiguo (ed.), Quyu Anpai Falv Wenti Yanjui (Legal Issues of Regional Arrangements) (Peking University Press, 2004), 44–74. 35 See Mondev International Ltd. v. United States of America, ICSID Case No. ARB (AF)/99/2, Award (11 October 2002), paras 111–112. 36 Havana Charter Art. 11(2) reads “to assure just and equitable treatment for the enterprise, sills, capital, arts and technology brought from one member country to another”. 37 OECD, International Investment Law: A Changing Landscape (2005), 81. 38 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995), 58– 59. 39 Metalclad Corporation v. Mexico, ICSID Case No. ARB (AF)/97/1, Final Award (30 August 2000), paras 75– 76; 99–100. 40 S.D. Myers Inc. v. Canada, Final Award on the Merits (13 November 2000), paras 262–264. 41 Pope & Talbot Inc. v. Canada, Final Merits Award (10 April 2001), para. 118. 42 ICJ Reports 1950, 266. 43 G.J.H. van Hoof, above n.5, 115. 44 Anthony D'Amato, above n.33, 208. 45 See Green H. Hackworth, Digest of International Law (1942), 658–659. 46 Charter of Economic Rights and Duties of States, GA Res 3281 (XXIX), UN GAOR, 29th Session Agenda Item 48, UN Doc./A/RES/3281/(XXIX)(1974), reprinted in 14 ILM (1975), 251. 47 UNCTAD, above n.25, 48. 48 Paul E. Comeaux and N. Stephan Kinsella, Protecting Foreign Investment Under International Law (Oceana Publication Inc., 1997), 76. 49 ZENG Huaquan, The Expropriation of Foreign Investment and the Standard of Compensation: Historical Division and Practical Challenge, 13 Zhongguo Guoji Jingji Fa Xuekan (Chinese JIEL) (2006), 68. 50 See Christoph H. Schreuer, The ICSID Convention: A Commentary (Cambridge University Press, 2001), 612–614. 51 Ibid., 609. 52 Para. 1, Art. 1131 of NAFTA stipulates that a Tribunal established under Chapter 11 of NAFTA shall decide the issues in dispute in accordance with NAFTA and “applicable rules of international law”. See also Art. 26 of ECT. 53 Joel P. Trachtman, The Domain of WTO Dispute Resolution, 40 Harvard ILJ (1999), 347. 54 See CHEN An (ed.), GuoJi Touzi Zhengduan Zhongcai (International Investment Disputes Arbitration) (Fudan University Press, 2001), 417. 55 U.S.A. (L.F. Neer) v. United Mexican States, decision of the General Claims Commission, United States– Mexico, 15 October 1926, Opinions of Commissioners, 1927, 1, reproduced in the American JIL (1927), 555– 556. 56 ADF Group Inc. v. United States of America, Case No. ARB (AF)/00/1, Award (9 January 2003), para. 70. 57 Ibid., para. 179. 58 Ibid., n.170. 59 Ibid., para. 179. 60 Ibid., para. 183. 61 See ILC, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International, A/CN/.4/L.682, 13, April 2006, Part C. 62 Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Award, para. 115. In ADF v. United States case, the Tribunal also argued that “it is no logical necessity and no concordant State practice to support the view that the Neer formulation is automatically extendible to the contemporary context of treatment of foreign investors and their investments by a host or recipient State”. Above n.56, para. 181. 63 Kaj Hobér and Mannheimer Swartling, State Responsibility and Investment Arbitration, 3, www.ilahq.org/pdf/Foreign%20Investment/ILA%20paper%20Hober.pdf, last visited 1 July 2007. 64 BG Group Plc. v. The Republic of Argentina, Final Award (24 December 2007), para. 408, ita.law.uvic.ca/documents/BG-award_000.pdf, last visited 1 March 2008. 65 See Christoph H. Schreuer, above n.50, 609–610. 66 LI Haopei, above n.9, 96–97. 67 As to the development of rule of state of necessity, see Yearbook of the International Law Commission, 1979 (Vol. II, Part Two, 1980), 36–44. 68 Gabcikovo-Nagymaros (Hungary v. Slovakia), Judgment of 25 September 1997, para. 51, www.icjcij.org/docket/index.php?pr=267&p1=3&p2=1&case=92&p3=6, last visited 1 July 2007. 69 Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, ICJ Advisory Opinion (9 July 2004), para. 140. 70 However, in two cases including “(a) The international obligation in question excludes the possibility of invoking necessity; or (b) The State has contributed to the situation of necessity,” the state of necessity could not be invoked as excuse to preclude wrongfulness. See Art. 25(2) of ILC Articles on State Responsibility. 71 A/CN.4/SER.A/1980, 174. 72 A/CN.4/SER.A/1980, 174. 73 LG&E Energy Corp., LG&E Capital Corp., and LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (3 October 2006), para. 222. 74 Ibid., para. 251. In CMS v. Argentina case, the Tribunal spoke of a similar position. See CMS Gas Transmission Company v. The Argentine Republic, Case No. ARB/01/8, Award (12 May 2005), para. 359. 75 CMS Gas Transmission Company v. The Argentine Republic, CASE NO. ARB/01/8, Award (12 May 2005), para. 323. 76 Above n.73, para. 257. 77 James Crawford, The International Law Commission's Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge University Press, 2001), 190. 78 Above n.75, para. 394. 79 ICJ Reports 1959, 27. 80 See in detail, YU Jingson, Guoji Touzi Fa (International Investment Law) (Law Press, People's Republic of China, 1997), 394–400. 81 Of course, the erosion of the rule of exhaustion of local remedies was tolerated by developing States with the aim of enhancing the confidence of foreign investors, but it also led to some byproduct effects. As a commentator said, these effects include (i) that domestic courts are prevented from delivering justice; (ii) foreign investors no longer have duty to take into account the local remedies; (iii) there is often no chance for the host legal system to correct any wrong act to foreign investors and the host State has to be liable for acts of officials and bodies without any review by its courts or senior decision-makers. Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press, 2007), 110. 82 Chittharanjan Felix Amerasinghe, Local Remedies in International Law (2nd edn, Cambridge University Press, 2003), 250–251. 83 ICJ Reports 1957, 9. 84 UNCTAD, above n.25, 108–109.

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