Introduction

Although a single, comprehensive text governing international investments does not exist, the legal framework for international investment law comprises nearly 2,500 bilateral treaties currently in effect. The evolution of international investment law since the conclusion of the Second World War exhibits a distinctive contrast with the multilateral progression observed in other domains of international economic law, notably international trade and international monetary law. In these other fields, multilateralism prevailed in the realm of international relations, marked by the establishment of organisations like the General Agreement on Tariffs and Trade (GATT), later succeeded by the World Trade Organization (WTO), as well as the International Monetary Fund (IMF). In stark contrast, multiple endeavours aimed at establishing a multilateral framework for investment governance via a comprehensive multilateral treaty have met with repeated failures.

In the contemporary landscape, the historical failure to establish a comprehensive multilateral investment framework may represent a pivotal factor contributing to the breakdown of the global investment system following the COVID-19 pandemic. The pandemic has resulted in the cancellation of multiple negotiation rounds for bilateral investment treaties (BITs) and treaties featuring investment provisions (TIPs). Additionally, it has led to the postponement of numerous high-level bilateral summits traditionally dedicated to addressing trade and investment agreements. In this context, the absence of a multilateral legal instrument tailored to such exigencies could have played a pivotal role in mitigating the challenges encountered. However, efforts to formulate a comprehensive theory of international investment law face challenges due to its reliance on numerous bilateral treaties and the ad-hoc establishment of arbitral panels to implement these treaties. This complexity paints a picture of a fragmented and disorderly legal landscape, with varying levels of protection contingent on the sources and destinations of foreign investment.

This piece is divided into three parts. Part I advances the argument that, notwithstanding its bilateral forms, international investment law fundamentally exhibits multilateral characteristics. Building on this premise, Part II lays down the potential inconsistencies that exist when establishing a multilateral system of investment law, particularly through incoherent decision-making by investor-state arbitration. As a solution to this, Part III advocates for developing a multilateral framework of investment law by resolving these inconsistencies through emerging practices in investor-state arbitration.

Part I: Establishing Multilateralism in International Investment Law

Historical Evolution

Efforts to create multilateral regulations for investment protection were initiated shortly after the conclusion of the Second World War. These early endeavours (p. 31) were made alongside the International Trade Organisation as a component of the Havana Charter in 1948, and later, the 1967 OECD Draft Convention on the Protection of Foreign Property. Unfortunately, the finalized Havana Charter contained only rudimentary provisions for safeguarding foreign investments that were unenforceable (p. 33). As for the 1967 Draft Convention, it faltered in achieving a consensus, mirroring the challenges faced by the Havana Charter. This impasse primarily stemmed from conflicting viewpoints between capital-importing and capital-exporting countries regarding the appropriate extent of foreign investment protection under international law.

Despite its ultimate lack of success, the 1967 OECD Draft Convention and its direct predecessors left a significant imprint on the formation of bilateral treaties negotiated during that era, especially those created by OECD Member States. The 1967 Draft served as a template for subsequent BITs, including the Model BITs of France, the United States, Germany, and the United Kingdom. As a result, the multilateral nature of the OECD Draft from which it drew influence remains a key factor in explaining the homogeneity observed within BITs. This historical trajectory leading to the emergence of BITs can, therefore, be traced back to an initial intent for multilateralism, which evidences the fact that the divergence in approach does not reflect any procedural or systemic shortcomings in the approach itself.

Uniformity created by BIT clauses.

Depending on the relative bargaining power of the parties involved in negotiating a BIT, one would anticipate that the divergent and sometimes conflicting interests of States would result in markedly different outcomes in bilateral negotiations, hindering the establishment of uniformity in international investment law. However, contrary to this apparent expectation, international investment treaties have exhibited a surprising degree of uniformity in their structure, often converging in language and endorsing consistent principles of investment protection. 

For example, when examining how the term “investment” is defined across various BITs, a noteworthy degree of consistency emerges. Although most BITs commonly adopt either the asset-based or enterprise-based approach when articulating the concept of “investment”, it’s essential to highlight that the Salini Test has emerged as the prevailing standard for determining and defining an “investment” under international investment law. Originally developed under the framework of The International Centre for Settlement of Investment Disputes (ICSID) Convention, and initially applied exclusively to ICSID arbitrations, the Salini Test has gained widespread recognition to the extent that tribunals operating outside the ICSID jurisdiction have been seen to apply this test. This propensity towards using the Salini criteria has in fact compelled drafters to use it in order to carve out the scope of the term “investment” under a BIT.

Uniformity created by investor-state arbitration

Contemporary investment treaties deviate from the traditional practice of entrusting enforcement solely to the State. Instead, they grant investors the ability to seek recourse through investor-state arbitration, allowing them to directly allege violations of the respective investment treaty. This marks a departure from the original method of inter-State arbitration, which was influenced by various extra-legal factors, including inter-State diplomatic relations and broader geopolitical considerations. It is noteworthy that these factors were primarily rooted in bilateral inter-State relations. In the modern approach to resolving disputes through investor-state arbitration, there is a deviation from the earlier approach where States could incorporate diplomatic considerations stemming from bilateral motivations when espousing cases of their investor nationals. This shift paves the way for a framework that is fundamentally multilateral in nature.

Moreover, contemporary investment protection mechanisms bestow considerable rule-making authority upon tribunals, particularly when there exists vagueness or ambiguity regarding fundamental investor rights. For instance, when examining the fair and equitable treatment standard, which seeks to ensure stability and predictability in domestic legal systems, tribunals have maintained that “fair and equitable treatment is a classical international law standard” and “classical international law doctrine considers certain elements to be firm ingredients of fair and equitable treatment, including non-discrimination, the international minimum standard and the duty of protection of foreign property by the host State.” This represents another avenue of multilateralization, enabling tribunals to address widespread uncertainties present across various BITs and establish a consistent standard.

Although tribunals may be called upon to employ their prior experience in treaty interpretation to resolve these uncertainties, States often bypass the standard set by the tribunal by subsequently amending the treaty pursuant to Articles 39 and 40 of the Vienna Convention on the Law of Treaties (VCLT), or by attaching interpretative notes as per Article 31(2) of the VCLT. This accompanied by the lack of uniformity in the institution of the present investor-state dispute settlement (ISDS) system leads to a fragmented and disharmoniously constituted framework of international investment law, which is discussed in the next Part.

You can read part II here.

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Lavanya Bhattacharya is a student at Jindal Global Law School, India.

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