A plurilateral investment treaty: marrying trade and investment to re-establish a customary international norm.

Author:Travis, Kellie
 
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ABSTRACT

Despite some inherent risks, foreign direct investment (FDI) is for some the preferred method of investment. The rising number of bilateral investment treaties governing FDI is merely reflective of this investment vehicle's popularity. Since the early-nineteenth century, developed countries have sought to gain protection for investors engaging in these investment opportunities. One such protection, the Hull Doctrine, requires national governments to fully compensate investors in cases of unlawful expropriation. Until World War II, when developing countries began applying their own domestic eminent domain law to foreign investors, the Hull Doctrine was considered binding, customary international law. This Note analyzes the effects of recent trade treaties, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, and assesses whether these treaties' inclusion of the Hull standard re-establishes the doctrine as a twenty-first century customary international norm.

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND A. When Developed Western Nations Governed Customary International Law B. The Aftermath of World War II: The Rise of State Sovereignty and a Rejection of the Norms of Colonizing States C. The TPP's and TTIP's Revolutionary Impact on International Investment Law III. ANALYSIS A. The TPP's and TTIP's Foreign Investment Expropriation Provisions B. From Paquete Habana to Filartiga: Discerning Evidence of a Customary International Law Norm C. The Status of the Hull Doctrine in Twenty-First Century Customary International Law IV. SOLUTION A. How the Adoption of a Comprehensive Plurilateral Treaty on Investment within the WTO Would Establish Customary International Law 1. The WTO as a Promising Venue for Concluding the Next Global Investment Treaty 2. Concluding a Plurilateral Agreement: On the Road to a Customary International Norm B. Pro-Investor or Pro-Western: Is the Hull Doctrine the Right Solution for Developing Countries? V. CONCLUSION I. INTRODUCTION

Foreign shareholders had invested billions of dollars in one of Russia's largest oil companies, Yukos Oil Company, when suddenly the Russian government rendered that investment practically obsolete. (1) The Russian government "leveled massive [tax] claims against Yukos." (2) Shortly thereafter, Yukos' Chief Executive Officer, Mikhail Khodorkovsky, was arrested under suspicious circumstances and imprisoned for over ten years. (3) Immediately following Khodorkovsky's arrest, Yukos conveniently sold most of its assets to a Russian government-owned oil producer and declared bankruptcy. (4) Yukos shareholders challenged Russia's actions as an unlawful expropriation. (5) Ultimately, the Permanent Court of Arbitration awarded Yukos shareholders over $50 billion in what remains "one of the largest commercial arbitration awards in history." (6)

Although the Yukos arbitration is certainly an exceptional case, (7) it demonstrates the relevance of investor protection, investment risk, and expropriation laws in the twenty-first century. Investors engaging in foreign direct investment (FDI), a type of investment in which investors purchase ownership interests in a foreign business, are foremost concerned about investment risks. (8) Investment risks are heightened in FDI because national governments may choose to expropriate a business (9) by nationalizing or otherwise "taking [the] privately owned property." (10) Before World War II, customary international law dictated that governments pay investors "prompt, adequate, and effective compensation" upon expropriation. (11) This compensation standard was most commonly referred to as the Hull Doctrine. (12) This doctrine has since fallen out of favor, resulting in the absence of a uniform international norm to govern compensation owed to investors as a result of an unlawful expropriation. (13)

This Note will assess the impact of the Trans-Pacific Trade Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), two massive interregional trade agreements that have yet to be ratified, on the Hull Doctrine's status as a customary international norm. In particular, this Note analyzes whether these large interregional trade treaties have catapulted the Hull Doctrine once again to the status of a customary international law norm.

Part II provides a historical background on the law of expropriation and compensation. Part II details how the Hull Doctrine fell out of grace with the international community and explores the competing doctrine, the Calvo Doctrine, which developing countries supported following the world wars. Part III examines the expropriation provisions in the TPP and the TTIP, as well as other sources, to determine whether the Hull Doctrine has gained the requisite support to be considered customary international law in the twenty-first century. Although this Note recognizes a trend toward adopting the Hull Doctrine, it concludes that the Hull Doctrine cannot yet be considered customary international law. This Note then recommends, in Part IV, that states conclude a plurilateral agreement on investment law within the auspices of the WTO to re-establish the Hull Doctrine as a customary norm. Establishing a plurilateral investment agreement would not only be indicative of widely-held support for the Hull Doctrine, but encouraging FDI in a plurilateral investment agreement may also incentivize capital investments abroad and improve economic conditions in developing countries.

  1. BACKGROUND

    1. When Developed Western Nations Governed Customary International Law

      Twenty-first century developing countries are often adverse to the Western idea, embedded in international investment law treaties, that states fully compensate foreign investors for property a state chooses to expropriate. (14) The historical development of international investment law demonstrates why developing countries are adverse to this international investment norm of expropriation, commonly referred to as "full compensation" or the Hull Doctrine. (15)

      International investment laws, particularly those aiming to protect foreign-owned property, first developed in early seventeenth-century Europe when the rise in trade and investment among European nation-states called for a more uniform body of trade law. (16) In the century that followed, colonialism led to the geographic expansion of Europe's investment laws that were rooted in protecting property rights, (17) which naturally favored European interests. (18) As the number of foreign investments surged during the nineteenth century, (19) a new field within international investment law, commonly referred to as "diplomatic protection of aliens," emerged. (20) This field "was premised on the theory that an injury done to a foreigner was an injury done to their state, and, as such, enabled the home state to take action on their nationals' behalf." (21)

      The adoption of the "diplomatic protection of aliens" arose, at least in part, because Western states were eager to establish binding customary international law that protected their citizens' investments and ensured that developing nations would fulfill international expectations by adhering to foreign investment commitments. (22) Hence, a state that interfered with a foreign investor's expectations by nationalizing foreign-owned property violated international investment law unless "the following conditions were met: a) the expropriation was carried out for a public purpose; b) it was not arbitrary or discriminatory; and c) prompt, adequate, and effective compensation was paid." (23)

      A more familiar recitation of this international norm is articulated in a dispute that arose between Mexico and the United States in 1938. (24) The Mexican government had expropriated oil fields, located in Mexico, that had been owned by Mexican as well as American and British citizens. (25) Initially, the Mexican government refused to reimburse foreign investors with full compensation. (26) The United States Secretary of State, Cordell Hull, "declared that the property of aliens was protected by an international standard under which expropriation was subject to limitations, which required that there be 'prompt, adequate and effective compensation.'" (27) In practice, "[compensation is considered to be prompt if paid without delay; adequate, if it has a reasonable relationship with the market value of the investment concerned; and effective, if paid in convertible or freely useable currency." (28) Consistent with customary international law, the governments of Mexico, Britain, and the United States reached an agreement that resulted in Mexico compensating foreign investors approximately $159 million. (29) Secretary Hull's interpretation of this compensation standard is now commonly referred to as the Hull Doctrine. (30)

      The Mexican government's initial rejection of the Hull Doctrine did not necessarily negate its status as a binding customary international norm during the early-twentieth century. During this time, there were approximately sixty cases presented in front of the Permanent Court of International Justice, "many dealing with claims arising out of takings of alien property. Although their reasoning is sometimes obscure, none held that the appropriate measure of compensation was less than the full value of the property taken, and many specifically affirmed the need for full compensation." (31) In the Chorzow Factory case, the Permanent Court of International Justice held that Poland's unlawful expropriation of a foreign-owned company violated international law and required Poland to compensate investors with "the just price of what was expropriated, measured as the value of the undertaking at the moment of dispossession, plus interest to the day of payment." (32) Not only did these international tribunals side with Western conceptions of full compensation, but the United States also affirmed the...

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