The Colonial DNA of Modern Investment Law

Bilateral Investment Treaties (BITs) have become one of the most ‘popular’ tools of economic governance in the global order. Although they are often portrayed as tools to promote foreign direct investment (FDI) and economic growth, their underlying structure reflects a complex system of power that reproduces colonial-era patterns of domination and extraction. Far from being neutral legal instruments, BITs represent a form of neo-colonialism, a system through which former colonial powers and wealthy states maintain economic influence over developing countries, not through direct political rule but via legal and institutional control.

The historical evolution of international investment law makes these colonial continuities evident. Early frameworks for protecting foreign investments were explicitly grounded in the assumption of Western superiority and the perceived inadequacy of local legal systems.  What was later described as a  “post-colonial innovation” effectively served as a mechanism to safeguard the economic interests of former colonial powers against the regulatory autonomy of newly independent states. From the very start, investment arbitration entrenched rules that privilege foreign investors over domestic law, thereby reinforcing a structure that systematically benefited capital-exporting nations at the expense of capital-importing ones.

The Architecture of Asymmetry

Modern BITs continue to reflect and sustain the hierarchies of the colonial-era power structures. These treaties embed three major asymmetries. First, they prioritize investor rights while imposing obligations on host states. Second, they extend investor rights without attaching corresponding responsibilities. Third, they place the protection of private investments above broader public interest concerns.

Through tools such as the Investor State Dispute Settlement  (ISDS) mechanism, foreign investors are given exceptional privileges that are not available to domestic businesses or local communities. It enables investors to challenge state policies and regulations on the grounds that such measures threaten expected profits. In effect, ISDS transforms democratic policy-making into a potential liability, allowing private capital to discipline sovereign governments. It creates a parallel legal system that systematically favors foreign capital while excluding local voices from decision-making processes.

Research suggests that BITs exacerbate income inequality in developing countries through both direct and indirect mechanisms. Directly, these BITs discourage them to take any measure due to a perceived threat of claims by the investor (what is referred to as “regulatory chill”).  Indirectly, too, BITs can have an impact on the regulatory space of the host state. They embed attractive and favorable conditions for the investors and thus limit the government’s flexibility to address the challenges of their society without risking disputes or reputational damage. This creates a ‘policy lock-in’ for the host states, eroding their policy space to effectively address domestic problems. 

Where developing countries are, or may have the intention to be, bound by obligations under international law, such as human rights and environmental obligations, BITs create powerful mechanisms for foreign investors to challenge precisely those regulatory measures. This creates an asymmetrical legal relationship between States and investors that undermines the regulatory space of the states.

The concept of ‘regulatory chill’ captures this dynamic vividly. Regulatory chill occurs when governments refrain from enacting policies due to the looming threat of ISDS litigation. For instance, New Zealand delayed bringing plain packaging regulations till the same dispute against Australia was decided. Scholars argue this as an example of ‘regulatory chill’.  This phenomenon directly impacts human rights by discouraging governments from adopting measures beneficial for the public in anticipation of facing investor challenges. The high cost of defending such claims, averaging around $5 million in legal defense costs alone, deters developing countries from enacting human rights-protective regulations.

Case studies illustrate the human rights implications of this dynamic. In Colombia, human rights and anti-poverty groups expressed concern that the UK-Colombia BIT would make the Colombian government vulnerable to costly lawsuits, undermine land reform programs, and threaten the return of 5 million internally displaced people. Similarly, NGOs raised reservations about US-India BIT negotiations, particularly regarding how ISDS mechanisms compromise the regulatory space of the country.

The exclusion of affected communities from ISDS proceedings represents another dimension of the human rights deficit. While foreign investors enjoy direct access to international arbitration, human rights violations cannot be claimed as a standalone claim before the international tribunals. Local communities affected by investment projects must rely on their governments to represent their interests—the same governments that face powerful incentives to prioritize investor concerns over human rights protection.

The Fair and Equitable Treatment Standard: Colonialism by Another Name

The so-called “fair and equitable treatment” (FET) standard, present in virtually every BIT, illustrates how seemingly neutral legal language reproduces colonial power dynamics. While drafted to suggest reciprocity, in practice, it functions asymmetrically, consistently privileging the expectations of foreign investors over the regulatory authority of host states.

Investment tribunals have treated FET as an “autonomous standard,” stretching its meaning far beyond the bounds of customary international law. This expansive interpretation entrenches broad protections for investors while constraining governments’ ability to regulate in the public interest. The effect is to transform what should be a balanced relationship into one where developing states must perpetually defend their sovereign policy choices before panels of commercial arbitrators, many of whom have vested financial interests in sustaining an investor-friendly regime.

The colonial dimensions of this standard become especially clear in practice. When developing countries seek to regulate in areas such as environmental protection, labor rights, or access to essential services, they risk being accused of violating investors’ “legitimate expectations.” It relates to a scenario in which, through the conduct of the host state, a reasonable and justifiable expectation arises in the mind of the investors to act on it, and the non-fulfillment of which causes the investors to suffer damages. The doctrine of legitimate expectation is a dominant element in deciding the violation of the FET standard. The broad ambit of the doctrine and its friendliness towards investors result in a legal order where the economic priorities of wealthy foreign actors routinely override the human rights, welfare, and development needs of local communities.

The Economics of Extraction

The financial burden of ISDS cases can be devastating for developing countries, with some awards reaching billions of dollars, resources that could otherwise be invested in education, healthcare, and human rights protection. The rise of Third Party Funding (TPF) in investment arbitration adds yet another layer to the exploitative nature of the system. TPF funders deliberately target the BIT/ISDS regime as a speculative investment opportunity, capitalizing on its structural imbalances to secure lucrative “wealth transfers” from states and, ultimately, their citizens. In doing so, they convert disputes over public regulation, development, and human rights into profit-making ventures for international capital.

The UNCTAD database indicates that to date, the arbitration tribunal has granted compensation of more than $1 billion in 14 cases. The case of Process & Industrial Developments (P&ID) v. Nigeria starkly illustrates the vulnerabilities this creates for developing countries. Nigeria was initially ordered to pay an astonishing $6.6 billion to a British Virgin Islands company that had secured a contract through fraud and bribery. Although the English High Court later found the contract to be fraudulent, the case highlights how ISDS can be weaponized to extract vast sums from developing states, siphoning off resources that would otherwise support essential services and the protection of human rights.

Towards Decolonising Investment Law

The path toward reforming international investment law requires acknowledging its neo-colonial character and centering human rights in any reconstruction effort. Several developing countries have begun to recognize the exploitative nature of traditional BITs and are pursuing alternative approaches. Indonesia undertook a thorough review of its 64 BITs as well as five investment chapters under various free trade agreements, while India adopted a new Model BIT in 2015 that includes human rights considerations, albeit in a voluntary form. These reforms were triggered by the perceived threat of the BITs to the regulatory autonomy of the developing countries. 

Genuine reform must address the fundamental power asymmetries embedded in the current system. This includes establishing enforceable human rights obligations for investors, ensuring meaningful participation of affected communities in investment disputes, and creating safeguards that protect developing countries’ regulatory space for human rights protection. New-generation BITs, such as Ecuador’s 2018 model treaty, offer promising approaches by defining protected investments as those that “fully respect human rights” and providing for state reparations when investors breach human rights obligations. As several scholars note, “the seeds of reform have already been sown” through ongoing ISDS reform initiatives, which create genuine opportunities to reshape the system by embedding a stronger and more holistic commitment to human rights across all generations.

Conclusion

BITs are a neo-colonial tool to entrench historical patterns of domination. By prioritizing the economic interests of foreign investors above human rights and democratic governance, these treaties significantly narrow the policy space available to developing countries. The consequences manifest in the form of regulatory chill, weakened social protections, and structural barriers in fulfilling international obligations.

Addressing these challenges requires a fundamental re-imagining of international investment law to restore sovereignty, ensure investor accountability, and place human rights and sustainable development at its core. As more developing countries recognize the cost of maintaining the current regime, the impetus and momentum for transformative change grow stronger. 

---

Suryansh Pandey is a fifth-year law student at Dharmashastra National Law University, Jabalpur. The core idea for this piece emerged from discussions in his Human Rights class taught by Ms. Swati Singh Parmar, Assistant Professor of Law at DNLU, whose contribution he gratefully acknowledges.

---

Picture Credit: MiGdad