31 I.L.M. 1379 (1992)
The Development Committee Recognizing
that a greater flow of foreign direct investment brings substantial benefits to bear on the world economy and on the economies of developing countries in particular, . . .
[t]hat these guidelines are not ultimate standards but an important step in the evolution of generally acceptable international standards which complement, but do not substitute for, bilateral investment treaties,
therefore calls the attention of member countries to the following Guidelines as useful parameters in the admission and treatment of private foreign investment in their territories, without prejudice to the binding rules of international law at this stage of its development. . . .
IV EXPROPRIATION ANDUNILATERALALTERATIONS ORTERMINATION OFCONTRACTS
1. A State may not expropriate or otherwise take in whole or in part a foreign private investment in its territory, or take measures which have similar effects, except where this is done in accordance with applicable legal procedures, in pursu- ance in good faith of a public purpose, without discrimination on the basis of nationality and against the payment of appropriate compensation.
2. Compensation for a specific investment taken by the State will, according to the details provided below, be deemed ‘‘appropriate’’ if it is adequate, effective and prompt.
3. Compensation will be deemed ‘‘adequate’’ if it is based on the fair market value of the taken asset as such value is determined immediately before the time at which the taking occurred or the decision to take the asset became publicly known.
4. Determination of the ‘‘fair market value’’ will be acceptable if conducted according to a method agreed by the State and the foreign investor (hereinafter referred to as the parties) or by a tribunal or another body designated by the parties.
5. In the absence of a determination agreed by, or based on the agreement of, the parties, the fair market value will be acceptable if determined by the State according to reasonable criteria related to the market value of the investment, i.e., in an amount that a willing buyer would normally pay to a willing seller after taking into account the nature of the investment, the circumstances in which it would operate in the future and its specific characteristics. . . .
6. Without implying the exclusive validity of a single standard for the fairness by which compensation is to be determined and as an illustration of the reasonable
determination by a State of the market value of the investment under Section 5 above, such determination will be deemed reasonable if conducted as follows:
(i) for a going concern with a proven record of profitability, on the basis of the discounted cash flow value;
(ii) for an enterprise which, not being a proven going concern, demonstrates lack of profitability, on the basis of the liquidation value;
(iii) for other assets, on the basis of (a) the replacement value or (b) the book value in case such value has been recently assessed or has been determined as of the date of the taking and can therefore be deemed to represent a reasonable replace- ment value. . . .
7. Compensation will be deemed ‘‘effective’’ if it is paid in the currency brought in by the investor where it remains convertible, in another currency designated as freely usable by the International Monetary Fund or in any other currency accepted by the investor.
8. Compensation will be deemed to be ‘‘prompt’’ in normal circumstances if it is paid without delay. In cases where the State faces exceptional circumstances, as reflected in an arrangement for the use of the resources of the International Mone- tary Fund or under similar objective circumstances of established foreign exchange stringencies, compensation . . . may be paid in installments within a period which will be as short as possible and which will not in any case exceed five years from the time of the taking, provided that reasonable, market-related interest applies to the deferred payments in the same currency. . . .
10. In case of comprehensive non-discriminatory nationalizations effected in the process of large scale social reforms under exceptional circumstances of revolu- tion, war and similar exigencies, the compensation may be determined through negotiations between the host State and the investors’ home State and failing this, through international arbitration. . . .
The World Bank Guidelines have had a mixed reception. On the one hand, the Guidelines have contributed to an evolving consensus in favor of strengthened protections for investors. They have influenced national legislation and bilateral treaties relating to the treatment of foreign direct investment, and have been cited in arbitration decisions.
On the other hand, the Guidelines have been partly superseded by the same forces that helped create the conditions making the Guidelines possible. The types of nationalizations and expropriations that fueled debate over the customary inter- national law obligations governing foreign direct investment peaked in the 1970s, declined sharply in the 1980s, and have now largely disappeared. With the collapse of socialism as a possible economic alternative to capitalism, developing countries throughout the world increasingly find themselves in competition with each other to attract foreign direct investment. Accepting treaty conditions favorable to investors is one way to compete. Accordingly, despite U.S. fears that the World Bank Guide- lines might impede the negotiation of bilateral investment treaties, such treaties have proliferated. As of 2004, there were over 2,000 BITs in place. Most developing countries, and virtually all developed states, continue to enter into new BITs. Where such treaties are in force, they take precedence over the Bank Guidelines.
Notwithstanding the proliferation of BITs, many states, including the United States, continued to favor the promulgation of a comprehensive, multilateral treaty governing foreign direct investment. Supporters sought a uniform set of rules to govern foreign investment comparable to the rules on trade associated with the World Trade Organization. In particular, supporters hoped for liberal rules on admission of investments, treatment for all foreign investors equivalent to that given to nationals or most favored nations, whichever was more favorable, strong legal protections in cases of expropriations, including the prompt, adequate, and effective standard for compensation, and effective dispute settlement procedures. The OECD began to draft such an agreement, the proposed MAI, in 1995, building on existing BITs, the World Bank Guidelines, NAFTA, and various other multilateral agreements with investment provisions. Initially, it appeared that the MAI was headed for rapid completion and broad acceptance. But the MAI soon ran into major obstacles. The United States insisted on investor protections comparable to those in the typical U.S. BIT; other states feared that developing countries would not accept investor protections stronger than those contained in most European BITs, which are generally less favorable to investors than U.S. BITs. Participants in the negotiations disagreed on the nature and extent of possible exceptions to the general principles of the treaty, including exceptions for public order, culture, and regional economic integration organizations. Perhaps most important, MAI supporters encountered unexpectedly strong opposition from environmental and labor groups, who feared the new treaty would impair national efforts at strengthening environmental and labor standards. As a result, the effort to create the MAI has largely ground to a halt. Similar efforts to create a comprehensive set of investment rules in the WTO and elsewhere have met with only limited success.
Notes and Questions
1. What role should the World Bank Guidelines play in a dispute over the compensation to be paid to a foreign investor for the expropriation of the investor’s property, assuming no BIT or other treaty is directly on point?
2. Did the World Bank Guidelines fulfill the role envisioned for them by their drafters? How should one judge the effectiveness of soft-law instruments? What are the advantages and disadvantages of such instruments in comparison to treaties or custom?
3. How would a decision maker know whether the World Bank Guidelines are becoming or have become hard law in the sense of conferring legally binding rights on investors? If the guidelines are becoming hard law, might one expect the Guide- lines to be invoked in international arbitrations? In other fora?
4. Recall the discussion at the beginning of this section on the ways in which different legal instruments may be hard or soft on various criteria. How hard or soft are the World Bank Guidelines? Note that the Guidelines are not legally binding, but they do help to clarify the meaning of ‘‘appropriate compensation,’’ a previously vague concept in customary international law. What are the implications of failure to comply with soft-law instruments such as the Guidelines?
5. Do the World Bank Guidelines favor the interests of a particular group of states? Which states could be expected to press for a more comprehensive and binding instrument, such as the MAI?
6. As Shihata points out, BITs generally ‘‘follow the lines of a standard text prepared by one party.’’ The United States essentially follows a ‘‘take it or leave it’’ policy with regard to its BITs. Why might developing countries accept agreements tendered to them without opportunity for meaningful negotiation?
F. Note on Incorporating Principles from Domestic Law
Article 38 of the Statute of the International Court of Justice identifies ‘‘general principles of law recognized by civilized nations’’ as a source of law separate from (and therefore implicitly independent of) treaties and custom. As a source of law, general principles are the subject of considerable debate, with respect to both their content and their jurisprudential underpinnings. Some positivist scholars maintain that general principles can be treated as binding only when states manifest their consent through widespread recognition of such principles as international law. Other scholars suggest general principles can be derived in part from natural law, without reference to state consent. Most scholars, however, regard general principles as those principles so basic to developed legal orders that they arise in most national legal systems and can therefore be ascertained through an objective, comparative assessment of municipal law in the relevant states.
In practice, courts and other tribunals rely on general principles largely as an adjunct to treaties and custom, to be invoked sporadically and only as necessary to supplement or extend those other forms of law or to fill gaps created when treaty and custom fail to supply all of the relevant rules for decision of a particular dispute. Principles invoked are usually very general rules of procedure, evidence, or liability. For example, the Permanent Court of International Justice announced in the Chorzow Factory case that ‘‘it is a general conception of law that every violation of an engagement involves an obligation to make reparation.’’ Chorzow Factory (Ger. v. Pol.), 1928 P.C.I.J. (Ser. A., No. 17) at 29. Other tribunals have relied on general principles for such basic precepts of law as res judicata, estoppel, that ‘‘a party cannot take advantage of his own wrong,’’ that no one shall judge his or her own case, that the passage of time may bar a claim through prescription or laches, and that cir- cumstantial evidence may be probative. Similarly, general principles have been accepted as sources for rules viewed as intrinsic to the logical function of a legal system, such as the rule that a law later in time takes precedence over an earlier law if both are from the same source.