“International Investment and the Role of Treaties: Balancing Rights and Responsibilities in a Globalized Economy” – Aya El Mehdi,

First-year Master’s student in International Business Law at the International University of Casablanca (UIC).

Abstract : In these modern times, the landscape of international investment law is increasingly complex, shaped by the tension between established legal theories, such as Kelsen’s positivism, and the realities of globalization. International investment agreements are crucial in providing a predictable and protective framework for investors, yet must also accommodate the diverse practices and interests of states. The increasing significance of ‘soft law’ is examined, illustrating how non-binding norms influence corporate behavior and guide multinationals towards responsible practices. Dispute resolution mechanisms, particularly the preference for international arbitration, are also explored. Ultimately, a key challenge is balancing investor protection with state sovereignty in a rapidly evolving global environment.

Introduction : 

Kelsen’s positivist theory of law^[1], which advocates a hierarchical system of norms independent of morality or politics, is being called into question by globalisation and international law.  The absence of borders and of a single state authority makes it difficult to impose standards.  International law favours coordination over subordination, forcing jurists to refer to principles of justice and equity.  Moreover, the proliferation of international guiding principles, which are non-state sources of law, contradicts Kelsen’s vision.  The study looks at international investment agreements, reflecting these tensions and the importance of reconciling the interests of investors and states in a context of legal uncertainty.  These agreements, which are essential to economic growth, seek to establish a predictable and protective framework, despite the challenges posed by the diversity of state practices and interests.

Part 1 : Challenges and evolution of international investment law

A- Balancing sovereignty and investor protection in treaties :

The legal framework for cross-border investment is an essential component of the global economy, governing interactions between states and investors while ensuring a stable environment for foreign capital. However, this area is fraught with significant legal complexities, requiring a thorough understanding of the various sources of international law.

Investment treaties, whether bilateral (BITs) or multilateral (MITs), are binding instruments for signatory states, setting out clear rules for the protection and treatment of investments. The main aim of these agreements is to establish a stable legal framework capable of securing foreign investment by mitigating the political and legal risks that investors may face in a foreign country. BITs, which bind two countries, are the most common because of their flexibility and ease of negotiation. By contrast, MITs, which bring together several countries, are rare because they are more complex to ratify due to the varied interests of each country.

Protection and security clauses in Bilateral Investment Treaties (BITs)^[2][3] illustrate the ongoing tensions between the sovereignty of states and the rights of investors. These clauses are designed to ensure that investors from one state receive fair treatment and protection when they invest in another state. However, this often leads to complex legal and diplomatic challenges, as the rights and responsibilities of both parties must be balanced carefully. One prominent case that highlights these issues is Philip Morris v. Uruguay^[4]. In this case, Philip Morris International, a major tobacco company, challenged Uruguay’s stringent antismoking regulations. These regulations included graphic health warnings on cigarette packages and restrictions on branding, which Philip Morris argued were detrimental to their business interests and violated their investment rights under BITs. Despite the company’s claims, the arbitral tribunal ultimately ruled in favor of Uruguay. This decision underscored a crucial principle: that the protection of public health could take precedence over commercial interests and investor rights. The tribunal’s ruling demonstrated that states could enact regulations to protect the health and welfare of their populations without necessarily violating international investment agreements.

Another significant issue within BITs is the concept of expropriation, which can be either direct or indirect. Direct expropriation involves the outright nationalization or seizure of an investor’s assets by the state. Indirect expropriation, however, is more subtle and can occur when state actions significantly impair the investor’s use or enjoyment of their investment, without a formal takeover. The Biloune v. Ghana⁴ case provides an illustrative example. In this dispute, the ICSID tribunal found that actions taken by the Ghanaian government, which severely disrupted the investor’s construction project, amounted to indirect expropriation. The investor’s activities were so hindered that the tribunal ruled in favor of recognizing these actions as expropriation, despite the absence of a formal seizure. This case highlights the challenges that arise when determining what constitutes expropriation, emphasizing the need for clear legal frameworks and fair arbitration processes to resolve such disputes.

These cases reflect the ongoing need to balance state sovereignty with the rights of investors, ensuring that international investment law evolves to address the complexities of modern global commerce while respecting the regulatory autonomy of states.

B- Controversies in investment law : 

Controversies in investment law are a significant area of discussion, particularly when examining the influence of multilateral investment treaties and the controversies they generate. These treaties are designed to facilitate international trade and investment by providing a stable legal framework. However, their implications can be far-reaching and sometimes contentious.

Two prominent examples that illustrate these points are the Energy Charter Treaty (ECT)^[5] and the North American Free Trade Agreement (NAFTA). The ECT was initially crafted to protect energy investments in the former Soviet bloc countries, aiming to create a secure and stable environment for energy companies. However, it has faced criticism for its negative impact on environmental policies. Critics argue that the treaty’s provisions can hinder countries’ abilities to implement necessary environmental regulations and transition to sustainable energy sources. This controversy was highlighted by the European Union’s decision to withdraw from the ECT in 2024. A specific example of this tension is the Hulot law in France, which aimed to promote environmental sustainability but was challenged by a Canadian company under the ECT, demonstrating how such treaties can impede energy transitions.

Similarly, NAFTA has been at the center of debates regarding its impact on national economies and employment. Critics like Ross Perot famously warned of a “giant sucking sound”^[6] of jobs moving to countries with cheaper labor costs (Mexico). Both Barack Obama and Hillary Clinton have also critiqued NAFTA^[7], highlighting concerns about job offshoring and its effects on American workers. In response to these criticisms, under President Trump, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA), also known as AEUMC. This new agreement aimed to address some of the criticisms of NAFTA by clarifying investment rules, limiting arbitration claims, requiring the exhaustion of local remedies, and providing a clearer definition of expropriation. In the face of these challenges, there is a growing recognition of the importance of soft law instruments. These non-binding guidelines and principles offer flexibility and adaptability, addressing some of the limitations and complexities inherent in traditional treaties. Soft law can provide a more dynamic approach to international investment, allowing for the incorporation of evolving norms and practices without the rigidity of formal treaties. Overall, the controversies in investment law highlight the delicate balance between protecting investor rights and allowing states the regulatory freedom to pursue public policy objectives. As the global landscape continues to evolve, so too must the frameworks governing international investment.

At the same time, ‘soft law’ also plays a role in guiding the practices of multinationals, although it is not binding. This indirect influence encourages companies to adopt responsible behaviour, in addition to the formal obligations imposed by treaties. When a dispute arises, particularly between an investor and a host state, international arbitration becomes the solution of choice for resolving disputes neutrally and efficiently.^[8]

Part 2 : Innovations in investment dispute resolution

A-  The rise of Soft Law and non-binding principles : 

Catherine Thibierge argues that ‘soft law’ is not simply a set of non-binding norms^[9], but has a normative force that evolves gradually. In her view, this force can range from a simple influence on behaviour to a power of enforcement almost equivalent to that of formal law.

Although ‘Soft Law’ is often seen as opposed to the strict rules of ‘Hard Law’, Thibierge shows that this dichotomy is in fact more nuanced. Certain ‘soft law’ texts, such as the OECD’s recommendations^[10] or the United Nations’ guiding principles on business and human rights, can exert significant normative pressure on players, encouraging compliance by means of reputation, social responsibility or standards commonly accepted in international circles. Although these texts are not immediately enforceable, in certain contexts they can strongly influence corporate practices and even judicial or arbitration decisions. The gradual approach to ‘soft law’ proposed by Thibierge therefore underlines its central role in the evolution of international standards, particularly in areas where binding laws are more difficult to establish.

It’s important to discuss the concept of soft law as international principles, highlighting its adaptability and role in international relations, particularly concerning investment. We can take the OECD Guidelines for Multinational Enterprises as a prime example. These guidelines, stemming from the 1976 OECD Declaration on International Investment and Multinational Enterprises, offer recommendations for responsible business conduct across various areas, including disclosure, labor relations, environment, anti-corruption, consumer interests, competition, and taxation.  The guidelines operate through a two-tiered system: National Contact Points (NCPs) at the national level handle implementation and complaints, while the Investment Committee at the central level ensures consistent interpretation and supports NCPs. Although not legally binding, the OECD Guidelines promote responsible investment and offer mechanisms for mediation and conciliation, contributing to conflict reduction between investors and states.

The United Nations Principles for Responsible Investment (PRI), launched in 2006, encourage the integration of environmental, social and governance (ESG)^[11] criteria into investment decisions.  These principles, adopted by various global financial players, represent a voluntary commitment to more responsible investment practices.  The emphasis placed on the environmental (‘E’) pillar of the ESG criteria reflects growing concerns about climate risks and the energy transition.  This pillar assesses companies’ environmental impact, their efforts to reduce carbon emissions and their support for renewable energies, thereby guiding investors towards more sustainable choices.  The six PRI principles encourage active shareholding and ESG transparency.  Although non-binding, these principles are gaining in influence, inspiring national legislation and international agreements, and thus contributing to the evolution of international law and the promotion of corporate social responsibility.  Their growing adoption reflects their growing importance in the global financial landscape.

International investment disputes can be resolved through a number of mechanisms, often set out in investment treaties between states. Among these, international arbitration is particularly popular because of its impartiality and speed, which make it more attractive than national courts that are often perceived as biased or slower. By opting for an arbitration framework, foreign investors and governments can expect disputes to be settled in a way that is less likely to be influenced by national interests and more in tune with international economic realities. In-depth knowledge of these procedures is a strategic asset for stakeholders, enabling them not only to anticipate and assess the risks associated with their investment commitments, but also to put in place conflict prevention measures. In addition, an examination of legal precedents for arbitration can help to guide practices and provide greater predictability in the resolution of disputes. In short, mechanisms for settling investment disputes, particularly international arbitration, play a crucial role in guaranteeing a framework of confidence and stability, which is essential for encouraging investment flows in a globalised context.

B- International arbitration as a pillar of stability : 

International arbitration, whether conducted on an ad hoc basis, frequently following the guidelines of the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules^[12], or within an institutional framework under the auspices of established organizations, stands as the most widely adopted mechanism for resolving cross-border disputes. This process is particularly prominent when one of the parties involved is a sovereign state, such as in disputes arising from foreign investments. Institutional arbitration, in contrast to ad hoc arbitration, offers a structured environment supported by established institutions that provide administrative services, procedural rules, and other resources to facilitate the proceedings.

One of the primary institutions in this arena is the International Centre for Settlement of

Investment Disputes (ICSID)^[13], established by the Washington Convention (also known as the ICSID Convention) in 1966, which operates under the auspices of the World Bank. ICSID was specifically designed to create a stable and transparent forum for resolving disputes between foreign investors and host states, with the aim of fostering a secure investment climate worldwide. This convention-based institution provides a robust legal framework to ensure the enforceability of awards and offers distinct benefits, including a set of procedural rules tailored to investor-state arbitration and immunity from domestic court interference in ICSID member states.

In addition to ICSID, several other reputable organizations also play significant roles in international arbitration. For example, the International Chamber of Commerce (ICC), with its International Court of Arbitration based in Paris, is widely recognized for its effectiveness in handling international commercial disputes. Known for its stringent procedural rules, the ICC offers comprehensive administrative support that appeals to parties seeking predictability and rigor. Furthermore, the Permanent Court of Arbitration (PCA), headquartered in The Hague, provides services for the resolution of both inter-state and investor-state disputes. It also caters to a broad array of public international law issues and offers flexibility by adapting to various legal traditions.

Another prominent institution is the International Centre for Dispute Resolution (ICDR), the international branch of the American Arbitration Association (AAA), which serves parties seeking a straightforward and flexible arbitration process. The ICDR offers a more costeffective option for parties who prioritize efficiency and speed in arbitration proceedings, particularly in disputes between companies that value practical and swift dispute resolution.

Ultimately, the choice of arbitral institution depends on multiple factors^[14], which are carefully considered by the parties at the outset. These factors often include the degree of procedural flexibility desired, the projected costs, and the anticipated speed of the proceedings. Each institution’s unique procedural offerings, rules, and costs must align with the particular requirements and strategic objectives of the parties. By selecting an appropriate arbitral framework, parties can tailor the arbitration process to ensure that it best serves their interests and facilitates the resolution of complex, high-stakes international disputes.

The arbitration procedure for investment disputes is based on a precise sequence of steps designed to ensure an impartial and structured settlement. It begins with an arbitration agreement, which sets out the terms of the arbitration and may be contained in an international treaty, a commercial contract or imposed by law. Once this agreement has been drawn up, the investor submits a request for arbitration to the relevant institution, setting out the details and basis of the request. This is followed by the constitution of an arbitral tribunal, usually consisting of three arbitrators selected by the parties to ensure balanced and neutral representation. The procedure then enters a phase of written exchanges and hearings, where the parties present their arguments, evidence and expert opinions, enabling the arbitrators to gain a deeper understanding of the dispute. At the end of this phase, the tribunal issues an arbitration award, a final decision that is binding on the parties. Although appeals are limited to preserve the speed and efficiency of arbitration, the enforcement of awards is based on international agreements, in particular the 1958 New York Convention, which obliges signatory states to recognise and enforce awards. This structure ensures that disputes are resolved in a way that respects the interests of investors and governments, while complying with the rules of law.

Arbitration institutions oversee the process, from the request to the award, managing the administrative and procedural aspects.  UNCITRAL, a UN body, has drawn up arbitration rules that are widely used for ad hoc proceedings, particularly in the context of investment treaties such as NAFTA and the ECT.  These rules aim to harmonise international commercial law and are regularly updated to adapt to the specificities of investor-state arbitrations.

Investment arbitration is based on rules and principles derived from international treaties and conventions, which are often at the heart of complex criticisms and challenges. Although this mechanism offers a neutral and effective structure for resolving disputes between investors and states, it is accused of lacking transparency and impartiality, particularly when its decisions influence public policy and compromise the sovereignty of states. The confidentiality inherent in arbitration is perceived as an obstacle to transparency, which is essential for public access to information and understanding of decision-making mechanisms, and this has prompted many stakeholders to campaign for greater openness of procedures. In addition, the impartiality of arbitrators^[15] is called into question, as certain professional relationships or financial interests can lead to potential bias. Added to this are the impacts on the sovereignty of states, particularly in the areas of economic, social and environmental regulation, where the risk of costly litigation can dissuade governments from legislating in the public interest. These issues, combined with the need for reforms to ensure a balance between investor protection and state sovereignty, highlight the need to strengthen the rules of fairness and transparency to ensure the legitimacy of arbitration in the context of international investment law.

National and international courts, as well as various institutional mechanisms, play an essential role in enforcing arbitration awards and protecting investments. The 1958 New York Convention requires national courts to recognise and enforce foreign arbitral awards, although there are differences between jurisdictions, as illustrated by the Yukos v Russia case^[16]. In addition, international institutions such as the International Court of Justice (ICJ) and the World Trade Organisation (WTO) contribute indirectly to the resolution of investment disputes. In the Barcelona Traction case, the ICJ demonstrated the limits of diplomatic protection by refusing Belgium’s intervention on behalf of a company of Spanish origin. As for the WTO, although it deals mainly with trade, it does intervene in disputes relating to investment in services. Other organisations, such as the Organisation for Security and Cooperation in Europe (OSCE) and the Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA), promote a climate conducive to investment. OHADA^[17], for example, offers legal certainty in Africa, which boosts investor confidence, as demonstrated by the Getma International v Guinea case.

Conclusion : 

In conclusion, the legal framework for international investment is fundamental to promoting a secure and predictable business climate, while balancing the interests of investors and the sovereignty of states. Bilateral investment treaties (BITs) and multilateral investment treaties (MITs) provide legal safeguards and mechanisms to protect against political risks, thereby boosting the confidence of foreign investors. International arbitration, in particular, plays a

crucial role in providing a neutral and reliable means of resolving disputes between investors and governments. Although this procedure is based on international conventions, such as the 1958 New York Convention, it relies on national courts to enforce decisions, which can sometimes lead to divergent interpretations and challenges from one country to another.

Furthermore, the limits of state sovereignty are sometimes put to the test by the protection of investments, as illustrated by the Philip Morris v. Uruguay case, which highlight the complexity of expropriation issues and compliance with public policies. In Africa, OHADA stands out by harmonising legal rules, offering an effective model for dispute resolution in a regional context. The diversity of dispute resolution mechanisms, from arbitration to mediation, demonstrates the importance of tailored solutions for each situation, contributing to a more stable and dynamic investment environment. In short, international investment law is a delicate balance between investment security and respect for public policy, where each decision contributes to shaping a fairer and more transparent framework for all parties.

[1] Kelsen, H. (1934) Pure Theory of Law. LGDJ.

[2] Danic, O. (2012) ‘The Emergence of International Investment Law: Contribution of Bilateral Investment Treaties and ICSID Jurisprudence’. Law. Paris 10 Nanterre University. Available at: https://hal.science/tel-

[3] /

[4] Philip Morris v. Uruguay, ICSID Case No. ARB/10/7. Available at: https://www.italaw.com/cases/460 ⁴ Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana, Award on Jurisdiction and Liability, 27 October 1989, 95 ILR 184. Available at:

https://jusmundi.com/en/document/decision/en-biloune-and-marine-drive-complex-ltd-v-ghana-investmentscentre-and-the-government-of-ghana-award-on-jurisdiction-and-liability-friday-27th-october-1989

[5] See. Hobér, K. (2010). Investment arbitration and the energy charter treaty. “Journal of International Dispute Settlemen”, 153-190

[6] Grabow, C. (2014) ‘NAFTA: 30 Years of Driving Free Trade Critics Crazy’, American Institute for Economic Research, 13 March. Available at: https://www.cato.org/commentary/nafta–30–years–driving–free–trade–criticscrazy

[7] See. Presidential Debate in Ohio, 27 February 2008. Available at: https://www.npr.org/2008/02/27/55140288/obama–clinton–tangle–over–nafta

[8] Duplessis, I. (2007) ‘The Vertigo of Soft Law: Doctrinal Reactions in International Law’, Revue québécoise de droit international, p. 247, accessed 20 August 2024.

[9] Thibierge, C. (2008) ‘At the Heart of Norms: Tracing and Measuring. For a Distinction between Norms and Legal Rules’, Archives de philosophie du droit.

[10] See. DAVARNEJAD, Leyla. In the shadow of soft law: the handling of corporate social responsibility disputes under the OECD guidelines for multinational enterprises. J. Disp. Resol., 2011, p. 351.

[11] Kim, S., & Yoon, A. (2023). Analyzing active fund managers’ commitment to ESG: Evidence from the United Nations Principles for Responsible Investment. Management science, 69(2), 741-758.

[12] United Nations Commission on International Trade Law (UNCITRAL) (n.d.) ‘UNCITRAL Arbitration Rules: There are currently four different versions of the Arbitration Rules: the 1976 version; the revised 2010 version; the 2013 revision, which includes the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration; and the 2021 revision, which includes the UNCITRAL Expedited Arbitration Rules’. Available at:

https://uncitral.un.org/fr/texts/arbitration/contractualtexts/arbitration

[13] See. Shaw, G. J. (2023). The 2022 ICSID Rules: A Leap Toward Greater Transparency in ICSID Arbitration. ICSID Review-Foreign Investment Law Journal, 38(1), 54-71.

[14] See. Moser, M. J., & Yeoh, F. (2006). Choosing an Arbitral Institution in Cross-Border Commercial Arbitration. In-House Persp., 2, 18.

[15] See. Fry, J. D., & Stampalija, J. I. (2014). Forged independence and impartiality: conflicts of interest of international arbitrators in investment disputes. Arbitration International, 30(2), 189-264.

[16] Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. 2005-04/AA227. Available at: https://www.italaw.com/cases/1175

[17] See. Awe Dzama, P. M. M. (2023). La réforme du droit OHADA des investissements: une éradication des pratiques contractuelles déloyales par l’introduction d’un Acte uniforme relatif aux investissements.