Has Foreign Investment Protection Standard of National Treatment developed into a norm of Customary International Law?

Photo Credit: United Nations Photo

Article by Hannepes Taychayev

The existence of customary international investment law is a contested matter. However, some scholars put forward a proposition that the standard of National Treatment (NT) under international investment law acquired a status of customary rule.  The main purpose of this piece is to argue against the proposition. The present post argues that the homogeneity of NT rule in International Investment Agreement (IIA) practice alone is not enough for it to become a rule of customary law.

National Treatment (NT) is one of the core investment protection treaty standards aimed at equalizing the playing field between international investors and local competitors. The standard is not absolute and traditionally the norm has not been recognized as part of customary international law. Article 85 (1) of India-Japan FTA provides a good example of a typical NT clause. It reads as follows:

“Each Party shall accord to investors of the other Party and to their investments treatment no less favourable than that it accords in like circumstances to its own investors and to their investments with respect to investment activities in its Area.”

The wording of NT clauses remains relatively same throughout International Investment Agreements (IIA). The basic idea behind it is that “the foreign investor is accorded treatment no less favourable than that which the host state accords to its own investors”. And it has been argued that relative homogeneity of the NT clauses made it easier to apply it in dispute settlement proceedings than other standards of protection.

Recently in academic discourse an argument has been put forward that:

[t]he relative homogeneity of NT in IIA practice around the world could indicate that it has itself become part of customary international law, precluding the need for it to be expressly granted in the text of a treaty.”

However, “[t]he fact that a large number of bilateral treaties of an identical or a similar nature are being concluded does not of itself entitle one to conclude that a new rule of customary law of a similar content has come into being.” The same logic applies to standards of protection contained in international investment treaties. In other words, no inference could legitimately be drawn as to the existence of a rule of customary international law in favor of the NT principle based on homogenous drafting of the rule in the vast network of IIAs and its practice alone. Considering the importance of the standard, it seems necessary to provide further qualification for the proposition that NT has developed into a norm of customary international law. The present post examines if homogeneity of NT rule in IIA practice in the aggregate, suffices to constitute for it to develop into a customary rule of international law.

It could be argued that initially protection of foreign investment was subject to protection of the rule of the custom under international law. However, nowadays, diplomatic protection regime has been replaced by the international investment protection law. The rules and standards of protection that exist under the umbrella of international investment law today are not mere reinterpretations of the traditional rules, such as those found in customary international law and diplomatic protection. There is a great deal of difference between norms of customary international law and treaty-based protections of foreign investment. As it stands now international investment law is dominated by treaties rather than custom. And the notion of existence of international customary investment law is highly contested. Simply put, international investment protection regime is by and large a treaty driven one.

There are two basic elements that constitute international customary rule: state practice and opinio juris. The two element mantra has been confirmed and reconfirmed by the ICJ in a number of decisions. The practice needs to be not only widespread but also consistent among the parties affected the most. Further, as is it was mentioned earlier, there also has to be the second internal point of view element – opinio juris. States need to “[feel] legally compelled to … [perform the relevant act] by reason of a rule of customary law obliging them to do so”. The psychological element is equally important as widespread and consistent practice. Opinio juris is the element that allows to distinguish the rules of law form other many international acts, which are performed and motivated by considerations of courtesy, convenience or tradition. Having that said homogeneity of a norm in a treaty practice alone is not enough for it to develop into a norm of customary rule the two elements constituting a custom need to be proved.

The homogeneity and widespread practice with regard to NT simply proves that there is a piling up of a large number of instances in treaty practice. The States that have NT provision in their IIA and are acting and applying the rule in the application of their IIA. As the ICJ pointed out in the North Sea Continental Shelf case, there could no legitimate inference drawn as to the existence of a rule of customary international law in favor of a principle that is being practiced in application of treaty obligations. In other words, it is not the practice of States that apply the rule in performing their treaty obligations that matters but the practice of States who practice the rule where no treaty obligation exists. Even there are States that apply the rule as between themselves without a treaty, the basis of their actions is speculative and “no inference could justifiably be drawn that they believed themselves to be applying a mandatory rule of customary international law.” One could conclude with rather high degree of confidence that applying the NT rule, or agreeing to apply it, does not speak of anything of a juridical nature. States could be willing to offer to apply the rule for the purposes of attracting investment. And in this case the application of the standard of protection could be a marketing tool for a host state intended at attracting the foreign capital.

In light of the foregoing arguments, it could be stated that even if there is a settled, widespread and consistent practice among states that apply NT rule not under a treaty obligation, there is no proof that they are doing it in a belief the practice is obligatory by the existence of a rule of law. And the practice alone is not enough to amount to rule of a legal obligation under the two elements required for a customary international norm to emerge. It is clear that as it stands now NT does not meet the necessary threshold to be a norm of customary law.

There are also other reasons and considerations why NT should be developed into a norm of customary rule. Discrimination is a valid and powerful means of regulating economic activities. Many of the investment protection treaty standards are granted on bilateral basis. For this reason, NT is included in bilateral treaties so as not to multilateralise the benefit to third parties and not be obliged to grant the benefits ensuing as a matter of customary international law.

One could also argue that forcing states to multilaterlise benefits usually contained in IIAs to third parties would diminish the role of the consent of States in international investment law. At the risk of stating the obvious it has to said that State consent is at the very foundation of international law and there is no higher norm in the international system from which a valid norm could be drawn. At least theoretically. It ensures the validity of all other norms and legitimacy of legal regimes under international law.

Concluding remarks

International investment law has been under attack for ad hoc nature of international investment regime, lack of consistency in the membership of arbitral tribunals, absence of doctrine of precedence, and different interpretations of investment treaties that result in obligations of indeterminate character. Ascribing NT status of custom would further complicate the matter. States should have broad margin of appreciation in deciding what norms they want to be bound with not, obligations arising from NT should be based on informed and explicit consent.

Hannepes TAYCHAYEV (Mr.)

Faculty of Law, American University of Central Asia

Hannepes TAYCHAYEV holds a BA degree in International and Comparative Politics from American University in Central Asia (AUCA), Bishkek, Kyrgyzstan; a Master of Law in International Law from Korea University, Seoul, South Korea. He joined AUCA Faculty of Law as a lecturer in law in August of 2018. At the moment he is teaching classes on Public International Law, International Humanitarian Law, and Law and Economics. His research interests primarily are focused on public international law, international investment law and international arbitration law