The question of the existence of legal protection for foreign investors under customary international law has long been controversial. Indeed, as a result of a perceived lack of established customary principles, states concluded thousands of bilateral investment treaties (BITs) in the 1990s for the promotion and the protection of investments. Despite this early lack of consensus, it is undeniable that there now exist some rules of customary law in the field of international investment law. However, not all authors share this view. For instance, Professor Sornarajah argues that ‘it would be difficult to show that there was free consent on the part of all the developing states to the creation of any customary international law’ in international investment law.Footnote 1 He also believes that even ‘if there was such customary international law, many developing States would regard themselves as persistent objectors who were not bound by the customary law’.Footnote 2
Sornarajah's argument draws on the much-debated theory of the ‘persistent objector’. In principle, a rule of customary international law is binding on all states. However, some have argued that a state should not be bound by a rule if it objected to it in the early stages of its formation and continued to do so consistently thereafter.
Articles recently published about the theory focus on its specific application in different areas of international law,Footnote 3 including international humanitarian lawFootnote 4 and human rights law.Footnote 5 This paper intends to examine critically the concept of persistent objector – which is largely supported in doctrine – in its application to international investment law. An argument based on this concept was first raised in the context of investor–state investment arbitration in the 2007 case of BG Group v. Argentina.Footnote 6 It was later raised by the United States in its written submissions in the context of a NAFTA Chapter 11 arbitration, Grand River Enterprises Six Nations Ltd. et al. v. United States, when the concept was described as one ‘which States and scholars regard as central to the legitimacy of an international legal order governed by rules of customary international law’.Footnote 7
The first part of this article outlines the few rules of custom that have emerged in the area of international investment law. The second part deals with the basic definition of the concept of persistent objector and its conditions of application in general international law. This part intends to analyse briefly the different grounds of criticism that have been raised against the concept. Our survey will show that there is only very weak judicial recognition of the theory of persistent objector and that there is no actual state practice supporting it. It will also be shown that the theory is logically incoherent and that its application is inconsistent. The third part of this article examines the concrete application of the theory to investor–state arbitration proceedings and the two recent cases where it was for the first time raised. Finally, we shall submit three reasons why, in our view, the concept of persistent objector should not be successfully used in investor–state arbitration proceedings to prevent the application of a customary rule of international investment law by an arbitral tribunal.
1. Rules of customary international law in international investment law
Custom is one of the sources of international law.Footnote 8 Custom has two constitutive elements: a ‘constant and uniform’ (but not necessarily unanimous) practice of states in their international relations and the belief that such practice is required by law (opinio juris).Footnote 9 This double requirement is one of the most well-established principles of international law. It has been recognized as such by several decisions of the International Court of Justice (ICJ).Footnote 10 For instance, in the Continental Shelf (Libya v. Malta) case the Court stated that ‘[i]t is of course axiomatic that the material of customary international law is to be looked for primarily in the actual practice and opinio juris of States.’Footnote 11 The double requirement of custom also applies in the context of investor–state arbitration. For instance, the UPS Tribunal stated that ‘to establish a rule of customary international law, two requirements must be met: consistent state practice and an understanding that the practice is required by law’.Footnote 12
This first part examines the historical development of the few existing rules of customary international law in the field of international investment law.Footnote 13
1.1. From a lack of consensus to the proliferation of BITs
The question of the treatment to be accorded to foreign investors under customary international law has been very contentious for decades. The debate was summarized as follows by Judge Schwebel:
Capital-exporting States generally maintained that host States were bound under international law to treat foreign investment at least in accordance with the ‘minimum standard of international law’; and where the host State expropriated foreign property, it could lawfully do so only for a public purpose, without discrimination against foreign interests, and upon payment of prompt, adequate and effective compensation. Capital importing States maintained that host States were not in matters of the treatment and taking of foreign property bound under international law at all; that the minimum standard did not exist; and that States were bound to accord the foreign investor only national treatment, only what their domestic law provided or was revised to provide. The foreign investor whose property was taken was entitled to no more than the taking State's law afforded.Footnote 14
A compromise between these different approaches was eventually reached in 1962 with the adoption by the United Nations General Assembly of the Resolution on Permanent Sovereignty over Natural Resources, affirming the right of host states to nationalize foreign-owned property, but nevertheless requiring ‘appropriate compensation’ in accordance with international law.Footnote 15 The so-called ‘Hull formula’ supported by developed states (providing for ‘prompt, adequate and effective’ compensation in the event of expropriation) was, however, rejected by developing states in 1974 with the adoption by the General Assembly of the Charter of Economic Rights and Duties of States.Footnote 16 Under this ‘New International Economic Order’ the requirement to provide ‘appropriate compensation’ for expropriation still existed, but any related disputes (or ‘controversy’) had to be ‘settled under the domestic law of the nationalising state and by its tribunals’ and not by an international tribunal under international law.
No broad international consensus emerged on the existing protection for foreign investors as a result of these persisting differences of approach between developed and developing states. The absence of consensus consequently prevented the development and crystallization of rules of customary international law in the field of international investment law. In the famous 1970 Barcelona Traction case, the ICJ drew the same conclusion:
Considering the important developments of the last half-century, the growth of foreign investments and the expansion of international activities of corporations, in particular of holding companies, which are often multinational, and considering the way in which the economic interests of states have proliferated, it may at first sight appear surprising that the evolution of the law has not gone further and that no generally accepted rules in the matter have crystallized on the international plane.Footnote 17
The 1990s were marked by a new era of globalization, whereby private foreign investments were (almost) universally deemed by states to be an essential tool for their economic development.Footnote 18 At the time, uncertainty still remained on the types of legal protection existing for foreign investors under custom. Not surprisingly, efforts by the Organization for Economic Co-operation and Development (OECD) in 1995 to negotiate a comprehensive Multilateral Agreement on Investment (MAI) were unsuccessful.Footnote 19 As explained by scholars, it is precisely because ‘customary law was deemed to be too amorphous and not to be able to provide sufficient guidance and protection’ to foreign investors that capital-exporting and developing states frenetically started to conclude BITs.Footnote 20 It is now estimated that over 2,500 such BITs have been concluded worldwide (the vast majority in the 1990s).Footnote 21
The substantive rules for the protection of foreign investments are found in these bilateral and multilateral investment treaties.Footnote 22 Such investment treaties regulate the treatment of foreign investors and their investments in the host state. Investment treaties typically contain detailed definitions of who qualifies as an ‘investor’ and what constitutes a protected ‘investment’. They normally provide for equal treatment of domestic and foreign investors (the so-called ‘national treatment’ and ‘most-favoured-nation treatment’ clauses), a minimum standard of treatment to investors (the obligation for the host state to provide a ‘fair and equitable treatment’), compensation in case of expropriation of an investment by the host state, and dispute resolution by international arbitration. In other words, investment treaties provide foreign investors with significant legal protection over and above the traditional protections otherwise available to them.Footnote 23 Of particular importance is the ability for foreign investors to resolve investment disputes by bringing claims to international arbitration directly against the states in which they invest.Footnote 24 As a result of these developments, the number of arbitration cases between investors and states is booming.Footnote 25
1.2. An outline of existing customary rules
Despite the controversy about the interaction between custom and BITs, it is undeniable that some principles of customary international law have emerged in the last decades in the field of international investment law. In the Generation Ukraine case, the Tribunal stated that ‘[i]t is plain that several of the BIT standards, and the prohibition against expropriation in particular, are simply a conventional codification of standards that have long existed in customary international law.’Footnote 26 Some of the principles which have been considered as customary rules by arbitral tribunals and writers will now briefly be mentioned.Footnote 27
The obligation for the host state of an investment to provide foreign investors with the ‘minimum standard of treatment’ is a norm of customary international law.Footnote 28 This is clear, for instance, in the context of the North American Free Trade Agreement (NAFTA), as explained by the Free Trade Commission in its Note of Interpretation.Footnote 29 More controversially, the obligation of the host state to provide foreign investors with fair and equitable treatment is considered by some to have crystallized as a norm of customary international law.Footnote 30 It has also been argued that the related principles prohibiting denial of justiceFootnote 31 and requiring the host state to exercise due processFootnote 32 in protecting foreign investors have become customary rules, while the principles of transparencyFootnote 33 and that of legitimate expectation have not.Footnote 34
Under customary international law, the host state cannot expropriate a foreign investor's investment unless four conditions are met: the taking must be for a public purpose, as provided by law, conducted in a non-discriminatory manner, and with compensation in return.Footnote 35 It has been argued by writers,Footnote 36 and by arbitral tribunals,Footnote 37 that the standard of compensation under customary international law is ‘full’ compensation. According to an UNCTAD study, ‘the overwhelming majority of BITs provide for prompt, adequate and effective compensation, based on the market or genuine value of the investment’.Footnote 38
2. The concept of persistent objector in international law
2.1. What is a persistent objector?
A rule that has already crystallized into customary law is binding on all states of the international community.Footnote 39 A state is not allowed to opt out unilaterally.Footnote 40 The ICJ has clearly stated that customary rules ‘by their very nature, must have equal force for all members of the international community, and cannot therefore be the subject of any right of unilateral exclusion exercisable at will by any one of them in its favour’.Footnote 41 One controversial question is whether a state should nevertheless be allowed not to be bound by a rule of customary law because it objected to this rule in the early stage of its formation (before its crystallization into a rule of law) and actively, unambiguously, and consistently maintained such an objection thereafter.Footnote 42 It should be stressed at this juncture that the only direct potential effect of a state's timely objection to the formation of a new customary rule is that it would not be bound by that rule. Its opposition would not prevent the rule from eventually crystallizing into customary law and, therefore, being recognized as general international law among all other states.Footnote 43 However, this distinction is not always easy to make in reality.Footnote 44
2.2. The persistent objector under attack
Supporters of the legitimacy of the concept of persistent objector argue that it is ‘firmly established in the orthodox doctrine on the sources of international law’.Footnote 45 This is in fact the prevailing position in doctrine.Footnote 46 It is also the position adopted by the International Law Association (ILA) in its Final Report on customFootnote 47 and that of the American Law Institute in its 1987 Restatement of the Law Third, The Foreign Relations Law of the United States.Footnote 48
However, the concept of persistent objector has been criticized by several leading scholars.Footnote 49 The debate among writers has been described as a ‘theological war of principles’.Footnote 50 In the following subsections we shall examine three grounds of criticism that have been raised against the concept in general international law: its weak judicial recognition (2.2.1), the lack of actual state practice supporting it (2.2.2), and its logical incoherence and inconsistent application (2.2.3).
2.2.1. The weak judicial recognition of the concept
The only ICJ decision that ever dealt with the question of persistent objector in the context of ‘general’ customary law is the Fisheries Case.Footnote 51 In that case, Norway had adopted its own traditional system of delimitation (the method of ‘straight lines’) in order to determine the drawing of the baseline for measuring the breadth of the territorial sea or fisheries zone with respect to bays. The United Kingdom only accepted the legitimacy of that method for ‘historical bays’. It argued that another method of delimitation (the ‘ten miles rule’) had become customary law for all other situations and should, therefore, be applied by Norway. In their respective pleadings both states acknowledged the existence of the persistent objector principle.Footnote 52 The Court held that the ‘ten miles rule’ method had not acquired the authority of a general rule of international law. It then added that ‘[i]n any event the ten-miles rule would appear to be inapplicable as against Norway inasmuch as she always opposed any attempt to apply it to the Norwegian coast’.Footnote 53 The relevant quote is therefore a mere obiter dictum; the Court had already decided to reject the existence of any customary rule on other grounds.
Supporters of the concept of persistent objector often refer to the separate or dissenting opinions of judges in ICJ cases to sustain their claim.Footnote 54 In the present author's view these do not represent the strongest and most persuasive authorities in support of the concept of persistent objector.Footnote 55
The concept of persistent objector was dealt with by the Inter-American Commission on Human Rights in two ‘reports’.Footnote 56 In Roach & Pinkerton,Footnote 57 the Commission recognized that a customary rule ‘does not bind States which protest the norm’ and concluded that ‘[s]ince the United States has protested the norm, it would not be applicable to the United States should it be held to exist’.Footnote 58 The Commission, however, held that no customary norm prohibiting the execution of juveniles existed and therefore did not apply the concept.Footnote 59 In the other case, of Michael Domingues,Footnote 60 the Commission also recognized the concept of persistent objector.Footnote 61 It concluded that the United States was nonetheless bound by a norm prohibiting the execution of juvenile offenders since it had become jus cogens.Footnote 62 In both cases the Commission's statements on persistent objector were merely theoretical, since they had no impact whatsoever on the outcome of the cases and did not prevent the United States from being held responsible for its breach of an international treaty.
To recap: to the best of our knowledge, no tribunal has ever ruled that the status of persistent objector can effectively prevent the application of a norm of customary law to the objecting state. In other words, no judicial body ever went so far as to conclude that it can simply not apply a rule of customary law to a state on the basis of its timely and persistent dissent from that rule.
2.2.2. The concept is not supported by state practice
There is consensus in doctrine (even among its supporters) that there is very limited actual state practice supporting the concept of persistent objector.Footnote 63 In fact, the concept is rarely used by states in their international relations. This is because its use would show a state's isolation from the rest of the international community.Footnote 64 Instead, states usually claim that a rule has simply not yet crystallized to become custom.
Moreover, an analysis of the very few instances of actual state practice involving the concept show that other states do not recognize the objector status of a dissenting state.Footnote 65 According to Charney, ‘the evidence shows that no recognition is accorded to objecting States’ and that they are ‘treated as if they were in fact lawbreakers’.Footnote 66 For him, ‘if the persistent objector really were the beneficiary of a legal right acceptable to the rest of the world, other States could be expected to give some recognition to that right’.Footnote 67 Other states will continuously exert political pressure on the objector so that it conforms to the new standards shared by the overwhelming majority of states. Ultimately, the dissenting state will not persevere in maintaining its initial opposition and will eventually accept the view of the majority.Footnote 68
It is submitted that the complete lack of state practice supporting the actual and concrete usefulness of the status of persistent objector clearly undermines adherence to the concept. The ultimate aim of a state claiming the status of persistent objector is to prevent and stop the application of a specific rule of law. It is not merely to offer an opinion on the perceived negative development of a new rule of law. The present author has found no example of state practice where a state's opposition to a customary rule was recognized by other states and where the claimed special status was effective in preventing the application of that rule to the dissenting state. In short, there is little practical value in a legal concept that does not help states to resist new developments in international law and does not immunize them from the general will of the international community.Footnote 69 Dupuy is right in describing the concept of persistent objector as simply a ‘myth’.Footnote 70 It is, in fact, ‘more a tool of the scholar than that of the diplomat’.Footnote 71
2.2.3. The concept is logically incoherent and its application inconsistent
The concept of persistent objector is mainly supported by writers adhering to the ‘voluntarist’ theory of international law. The concept has, indeed, been described as ‘the clearest, most firmly established expression of volontarist conception of obligation in the accepted doctrines of sources’.Footnote 72 Another supporter of the concept has even stated that ‘it is this opportunity for each individual State to opt out of a customary rule that constitutes the acid test of custom's voluntarist nature’.Footnote 73 The voluntarist theory is based on the assumption that the sovereign state's will is at the foundation of international law, and that a state is bound only by the law to which it has itself consented.
The vast majority of scholars believe that the actual and specific consent of a state in the formation and development of a general customary norm is irrelevant.Footnote 74 However, the situation is clearly different in the context of regional custom, where consent does, indeed, matter.Footnote 75 Voluntarist writers have also put forward the concept of a state's ‘tacit’ or ‘implied’ consent to explain the development of customary rules. This interpretation has also been refuted in doctrine.Footnote 76 It has been convincingly argued that ‘the obligation to conform to rules of international law is not derived from the voluntary decision of a State to accept or reject the binding force of a rule of law’; it is instead ‘the societal context which motivates States to have an international law and obligates them to conform to its norms’.Footnote 77
Since the consent of a state in the creation of a norm of (general) customary law does not actually matter, it should therefore logically follow that there is simply no place for the concept of persistent objector in international law. Charney has rightly pointed to the irreconcilable position adopted by many writers who claim, on the one hand, that the consent of a state is not a necessary element in the formation of a customary rule, but nevertheless believe, on the other hand, that a state can (at least conceptually) successfully object to being bound by that same rule by simply not consenting to it.Footnote 78
One clear illustration of the logical inconsistency of the concept of persistent objector is its peculiar application to the specific case of new states. A great number of scholars who support the concept in general nevertheless argue that new states are automatically bound by rules of customary international law and that they should consequently never be permitted to claim the status of persistent objector, at least with respect to rules already in existence at the time of a new state's accession to independence.Footnote 79 They argue that to allow new states simply to reject rules which enjoy broad community support would be to ‘deny the existence of a general international legal order’Footnote 80 and would ‘create unacceptable disorder’.Footnote 81
This position is not legally coherent. There is no logic in refusing new states the right to claim the status of persistent objector if one considers a state's consent to be essential for it to be bound by customary law.Footnote 82 Why should consent be so important for one group of states (existing states) and not for the other (new states)? Either one accepts the legitimacy of a state claiming the status of persistent objector or one does not.Footnote 83 It is not entirely clear why allowing new states to claim such status would deny the existence of the international legal order and create disorder, while allowing the exact same thing for existing states should instead be viewed as a legitimate expression of state sovereignty. The dissension of ‘new’ states is not more disruptive than that of ‘old’ (or rather existing) states.
Some supporters of the concept of persistent objector have responded to these apparent logical inconsistencies by pointing out that ‘logical consistency . . . may not be the most important value at stake here’.Footnote 84 Their support for the concept is based on ideological and political convenience rather than on legal reasoning. It should be recalled that the concept was embraced by Western states, and more specifically the United States, in the 1980s, at a time when they saw their influence on the development of international law being diminished by the new majority of developing states and socialist states and the changing nature of custom, which became increasingly driven by rapidly emerging rules developed in the context of multilateral fora (negotiation of multilateral treaties, international conferences, international organizations, etc.).Footnote 85 It is in this context that the American Law Institute published in 1987 the third edition of its Restatement of the Law, The Foreign Relations Law of the United States, which introduced for the first time the concept of persistent objector.Footnote 86
In the light of the profound changes in the international legal order, the concept of persistent objector became necessary because it ‘serves in part to prevent the tyranny of the majority in the multilateral forum’ and the imposition of a system of majority voting in international law.Footnote 87 One author even goes so far as to suggest that the United States ‘should find in the persistent objector principle a doctrinal basis for freeing themselves from the results of multilateral processes that are seen as subject to the domination of a hostile majority’.Footnote 88 Claiming the status of persistent objector would, indeed, allow a state to ‘unilaterally . . . opt out of a rule that it cannot tolerate, whether on grounds of principle or expediency, without preventing the general application of the rule’.Footnote 89 It has even been suggested that ‘this unilateralism may very well be the most important virtue’ of the concept of persistent objector.Footnote 90 Clearly, the concept of persistent objector is based on political convenience rather than legal reasoning.Footnote 91
3. The application of the concept of persistent objector in the context of international investment law
This section examines the potential use of the persistent objector argument in the specific context of international investment law. BITs are not a self-contained regime operating in isolation from general public international law.Footnote 92 Thus the Annulment Committee in MTD v. Chile explained that a tribunal should ‘apply international law as a whole to [a] claim, and not the provisions of the BIT in isolation’.Footnote 93 There is therefore no doubt that the international law concept of persistent objector can be raised as an argument by one party (most likely by a state) in the context of investor–state arbitration proceedings. The other question is whether such a defence has any likely chance of success. This question will be examined below (section 3.2). First, we shall briefly examine two recent investor–state arbitration cases where the argument of persistent objector was for the first time raised (section 3.1). It should be noted, however, that in these two cases the argument was not raised to dissent from a customary rule specific to international investment law.
3.1. Arbitration cases where the argument was raised
3.1.1. The case of BG Group v. Argentina
To the best of our knowledge, the persistent objector argument was for the first time raised in arbitration proceedings in the case of BG Group v. Argentina.Footnote 94 BG Group Plc (BG), a UK company that was an indirect shareholder in the Argentine gas distributor MetroGAS S.A., commenced arbitration proceedings alleging that measures taken by Argentina in the context of the financial crisis of 1999–2002, including derogation from a previously agreed tariff, were contrary to the UK–Argentina BIT.
In defence, Argentina invoked the state of necessity doctrine to exclude its international responsibility under both the BIT and customary international law as codified in Article 25 of the Articles on State Responsibility of the International Law Commission (ILC).Footnote 95 The claimant objected to this argument on the ground that the ILC Articles were a ‘non-binding codification of customary international law’ and that its Article 25 had no application in bilateral relations involving the United Kingdom and Argentina.Footnote 96 The claimant also argued that the United Kingdom had been ‘formally opposed to the inclusion by the ILC of a provision on “necessity”’ and was therefore a ‘persistent objector’ to any such alleged principle of necessity under custom.Footnote 97 This is therefore a case where the argument of persistent objector was raised by an investor, and not by the respondent state.
The arbitral tribunal held that Argentina could not invoke the doctrine of necessity under customary international law to excuse its liability under the UK–Argentina BIT because the treaty contains no express provision on the matter. It also stated that even if it were to apply Article 25 of the ILC Articles, Argentina would not have met the restrictive conditions for its application. The Tribunal simply noted in a footnote that it was ‘dismissing BG's allegation that the UK has always been a persistent objector’.Footnote 98 The Tribunal did not further discuss the concept, and ultimately held that Argentina had breached the fair and equitable treatment requirement under Article 2.2 of the Treaty and ordered it to pay in compensation more than US$185 million plus interest.Footnote 99
3.1.2. The case of Grand River Enterprises Six Nations Ltd et al. v. United States
The defence of persistent objector was also raised by the United States in the context of the NAFTA Chapter 11 arbitration case of Grand River Enterprises Six Nations Ltd et al. v. United States.Footnote 100 The claimants, three individual members of Native American tribes and their Canadian company, are seeking compensation in a dispute related to the regulation of tobacco products in the United States. The claimants argue, inter alia, that the US government failed to treat them in accordance with NAFTA Article 1105, establishing the minimum standard of treatment of aliens under customary international law. Specifically, the claimants make reference to international human rights law obligations applicable to indigenous peoples allegedly breached by the United States. They contend that there is an ‘emerging’ customary international law norm which requires states to ‘pro-actively consult’ with ‘First Nations investors’ before taking regulatory action that will substantially affect their interests.Footnote 101 The United States flatly denies the existence of any such customary norm.Footnote 102 In any event, the United States also argues that it could not be bound by such a ‘rule’, based on its persistent objection to it:
Even if Claimants had established the existence of such an ‘emerging’ norm, the United States clearly and consistently has articulated its view that the UN Indigenous Declaration and its provision requiring consultation prior to the adoption of legislation does not reflect customary international law. Given that ‘in principle, a [S]tate that indicates its dissent from a practice while the law is still in the process of development is not bound by that rule even after it matures,’ the United States cannot be bound by any consultation requirements contained in the UN Indigenous Declaration.Footnote 103
The United States further explained that the principle of persistent objector is one ‘which States and scholars regard as central to the legitimacy of an international legal order governed by rules of customary international law’.Footnote 104 The case is still pending.
3.2. Reasons for rejecting the application of the concept in arbitration proceedings
Quite apart from the above-mentioned shortcomings of the concept of persistent objector, there are other fundamental reasons specific to international investment law why such an argument should be rejected by an arbitral tribunal. The starting point of the analysis is the ‘test’ adopted by Professor Schachter to determine when the status of persistent objector may be permissible:
It would be germane to consider a variety of factors including the circumstances of adoption of the new principles, the reasons for its importance to the generality of States, the grounds for dissent, and the relevant position of the dissenting States. The degree to which new customary rules may be imposed on recalcitrant States will depend, and should depend, on the whole set of relevant circumstances.Footnote 105
These three criteria will be now briefly examined.
3.2.1. The circumstances of the adoption of customary rules
The first criterion to be examined is the circumstances of the adoption of rules of customary international law in the field of investment law. It is argued by some writers that the so-called ‘rules’ of customary law have been imposed on developing states which have always rejected them. For instance, Professor Sornarajah argues that
The formation of customary principles has been associated with power. The role of power in this area is evident. Powerful States sought to construct rules of investment protection largely aimed at developing States by espousing them in their practice and passing them off as customary principles. They were always resisted . . . Nevertheless, the norms that were supported by the developed states were maintained on the basis that they were accepted as custom though that was never the case. The significance of the General Assembly resolutions associated with the New International Economic Order is that they demonstrated that there were a large number, indeed a majority, of states of the world, which did not subscribe to the norms maintained by the developed world. After that, it was no longer credible to maintain that there was in fact an international law on foreign investment, though the claim continues to be made simply because of the need to conserve the gains made for investment protection by developed States.Footnote 106
In a previous paper Professor Sornarajah also argued that ‘The historical proposition that foreign investment arbitration was prejudiced in favour of the developed States is uncontested.’Footnote 107 He wonders whether ‘the systems of dispute settlement that have replaced the more naked exercise of power are merely cleverly dressed up subterfuges for results that are based ultimately on solutions preferred by power’.Footnote 108 His paper also addresses the argument that ‘the power that existed at the time of gun-boat diplomacy is the pervasive element in the creation of the system of foreign investment arbitration’.Footnote 109 Professor Sornarajah's pessimistic conclusion is that ‘The vestiges of an old order based on power continue to dictate the course of developments in international foreign investment arbitration’ and that such arbitration is not ‘neutral’ since ‘Arbitrators have shown a keenness to develop rules which favour foreign investment protection and have discarded rules which may permit a more balanced assessment of the issues presented in a dispute.’Footnote 110
One eminent arbitrator, Jan Paulsson, admits that ‘it may be true that in the beginning of this century, and until the 1950s, arbitrations conducted by various international tribunals or commissions evidenced bias against developing countries’.Footnote 111 And it cannot be denied that, even today, the ‘apparent equality as stated in the BIT can be overshadowed by parties’ actual bargaining power, which is inherently unequal’.Footnote 112 There is, indeed, an asymmetry in BITs entered into between developing and developed states.Footnote 113 Moreover, developing countries will sometimes lack expertise in international investment law and may have to conduct treaty negotiations on the basis of the existing model agreements of their negotiating partners.Footnote 114
This situation does not mean, however, that the types of legal protection existing for foreign investors under customary international law are necessarily biased against developing states. These rules may be ‘Western’ in origin, but it can no longer be argued that they are strictly ‘Western’ in nature. These rules of customary international law are universal. As explained by Schreuer and Dolzer, as a result of the new climate of international economic relations of the 1990s, ‘the fight of previous decades against customary rules protecting foreign investment had abruptly become anachronistic and obsolete’.Footnote 115 Thus by the 1990s ‘the tide had turned’ and developing states were no longer opposed to the application of custom, but instead granted ‘more protection to foreign investment than traditional customary law did, now on the basis of treaties negotiated to attract additional foreign investment’.Footnote 116
For instance, developing states have long rejected the ‘Hull formula’, which was supported by developed states and which affirmed that the host state must pay ‘prompt, adequate and effective’ compensation in the event of an expropriation. As mentioned above, this standard of compensation is now part of customary international law. In recent years, developing states have signed hundreds of BITs containing provisions similar to the Hull formula.Footnote 117 For Guzman, these states sign BITs to have ‘an advantage in the competition for foreign investment’.Footnote 118 The fact that developing states are now signing BITs which typically contain the type of provisions they have historically rejected is significant on many accounts. At the very least, it undermines the claim that contemporary customary rules applicable in international investment law have been imposed upon them.
In any event, one would normally expect that customary rules on expropriation and on the minimum standard of treatment, which are allegedly being imposed by the West, would not find their way into recent BITs entered into between developing states themselves. Developing states are thus increasingly concluding treaties with each other. For instance, of the 44 new BITs signed in 2007, 13 were between developing countries. These ‘South–South’ BITs now represent 26 per cent of the total number of BITs.Footnote 119 The figure of almost 700 ‘South–South’ BITs is impressive, considering that only 47 such treaties existed in 1990.Footnote 120 Recent empirical studies show that the content of these ‘South–South’ BITs is not significantly different from those other treaties entered into by developing states with developed states.Footnote 121 One recent UNCTAD study concluded that, ‘[t]o a large part, South–South IIAs [international investment agreements] are similar to North–South IIAs’.Footnote 122 For the report, ‘[t]o a certain extent, this is not surprising’ since ‘increasingly, developing countries are becoming capital exporting countries’ and such a treaty ‘could protect investment of a developing country in the territory of another developing country’.Footnote 123 The report does note some differences from North–South BITs in some minor aspects.Footnote 124 It also explains that these BITs typically contain provisions aimed at strengthening the development dimension.Footnote 125 Most importantly, the report does not mention any differences concerning the core sets of legal protection existing under customary international law (such as the minimum standard of treatment and the prohibition against expropriation).Footnote 126
In sum, the circumstances of the adoption of the few customary rules existing in international investment law do not show any inherent bias against developing states. Since these rules represent universally recognized values, there is no reason why any state should be allowed to opt out unilaterally from them.
3.2.2. The reasons for the importance of the customary rules
The second criterion to be examined is the reasons for the importance to states of these customary rules. As already examined, there are only few rules applicable in investor–state arbitration which can be said to have crystallized to achieve the rank of customary law. The practical importance of these rules should not be underestimated.Footnote 127 Custom is the residual applicable legal regime between a foreign investor and the host state in the absence of any BIT. Thus, however numerous BITs may be, they certainly do not cover the whole spectrum of possible bilateral treaty relationships between states. According to one writer, BITs in fact cover only some 13 per cent of the total bilateral relationships between states in the world.Footnote 128 Since a BIT is only binding on the parties to the treaty and not on third parties,Footnote 129 the limited worldwide geographical scope of BITs necessarily results in gaps in the legal protection to foreign investments.Footnote 130 Thus a foreign investor originating from a state which has no BIT with the state where the investment is made will not be given the legal protection typically offered under such a treaty.Footnote 131 Custom, however, applies to all states, including those which have not entered into any BITs. Rules of customary international law can therefore be invoked by any foreign investor irrespective of whether its state of origin has entered into a BIT with the country where it makes its investment.
This is why the few existing customary rules are so important. They will often be the last bastion of international legal protection against unlawful conduct by states. These protections represent the lowest common denominator among states. To allow a state the benefit of the status of persistent objector would mean, in practical terms, that there would simply be no minimum standard existing for the protection of foreign investors in that country. The coherence of the system of international investment law requires that a set of basic legal protections be applicable to any foreign investors at all times. This strongly militates against allowing any state the status of persistent objector able to opt out from such basic requirements that must be binding on all states.
3.2.3. The grounds for dissent
The third criterion to be examined is the grounds for dissent of the state seeking the status of persistent objector.
It has been argued that ‘when a rule is developed in response to certain States’ behaviour, their claim to persistent objection is weakened’ since ‘the application of the doctrine in this way does not benefit the ‘international community’ and is thus difficult to justify’.Footnote 132 There is, indeed, quite a significant difference between one state's objection (such as that of the United Kingdom) to the extension of the territorial sea from 3 to 12 nautical miles and another state's objection to provide proper compensation to a foreign investor for its expropriated property. In the former case, a state adopts the less favourable regime of fishing rights, within only 3 nautical miles from its coast, while all other states extend their fishing rights to 12 nautical miles. In other words, this is a situation where a less favourable regime is self-imposed. In the later case of expropriation, however, the host state's dissenting position is solely for its own benefit and to the detriment of foreign nationals of other states which adopted more stringent rules. In one situation (fishing rights) the objecting state suffers from all the disadvantages of upholding its dissenting position without any of the advantages enjoyed by all other states, while in the other situation (expropriation) the objecting state is the only one benefiting from its dissenting actions. In this example the dissenting action of the expropriator state is clearly more damaging to the general interests of the international community than that of another state's self-imposed restriction on its own fishing rights. It is, indeed, one thing to limit your own right and quite another to restrict those of others.
It is submitted that a dissenting state would have to advance compelling reasons to convince an arbitral tribunal not to apply such a basic principle as the requirement for the host state to provide foreign investors with the minimum standard of treatment under international law. Also, one can hardly think of any reasons persuasive enough to prevent the application of such essential legal protection as the prohibition of expropriation without any appropriate compensation in return.
There is simply no reason why an arbitral tribunal should reward a ‘free rider’ on the entire international legal order. The objector could refrain from providing certain basic legal protections to foreign investors while expecting that its own nationals and companies doing business abroad be given the exact same standard of protection by all other states. This is, indeed, the very nature of the persistent objector: ‘[It] offers a way to oppose the application of a customary rule while conceding the existence of the rule.’Footnote 133 What does that mean in the context of international investment law? On the one hand, the dissenting state will ‘concede’ the existence of the rule – that is, that all states will offer proper legal protections to any foreign investors, including its own nationals doing business abroad. On the other hand, however, the same dissenting state will not apply similar protection to foreign investors of other states. In other words, the dissenting state unilaterally decides to give less protection while knowing that in any event its own investor will be given better protection. This is a clear example of a free-rider state unjustified at international law.
4. Conclusion
According to Mendelson, the question whether the persistent objector rule ‘exists’ is a matter of ‘induction from State practice and, to a subsidiary degree, from judicial and arbitral decisions’.Footnote 134 He believes that ‘the existence of the persistent objector rule is well established in state practice, case-law and the literature, and justifiable as a matter of policy’.Footnote 135 The present paper has demonstrated that this is clearly not the case.Footnote 136
There are only very few international courts and tribunals that have explicitly endorsed the concept of persistent objector. Some of these statements do not represent the strongest of authorities because they are merely obiter dicta or found in a limited number of judges’ separate or dissenting opinions. In fact, no tribunal has ever ruled that the status of persistent objector can effectively prevent the application of a norm of customary law to the objecting state. In other words, no judicial body ever went so far as to conclude that it can simply not apply a rule of customary law to a state on the basis of the latter's timely and persistent dissent from that rule. The concept of persistent objector is also not supported by actual state practice. Thus it is rarely used by states and whenever it is invoked it ultimately fails. No example of state practice was found where a state's opposition to a customary rule was recognized by other states and where such claimed special status was actually effective in preventing the application of such a rule to that dissenting state.
The theory of persistent objector also suffers from a measure of incoherence. The application of the theory to new states shows that it is ultimately based on political convenience rather than on legal reasoning. In our view, allowing a state not to be bound by a rule of law on the ground that such a rule is contrary to its own interests clearly undermines the very existence of custom as a source of law.Footnote 137 The concept of persistent objector is ‘contraire à l'idée même d'un droit international général et commun à tous les États’.Footnote 138
This paper has also shown that the concept of persistent objector should not be used to prevent the application of a rule of customary law by an arbitral tribunal sitting in an investor–state dispute. There are only few customary rules existing in international investment law. One such rule is the obligation for the host state of an investment to provide foreign investors with the ‘minimum standard of treatment’. Another rule prevents the host state from expropriating a foreign investor's investment unless four conditions are met: the taking must be for a public purpose, as provided by law, conducted in a non-discriminatory manner, and with compensation in return. The circumstances of the adoption of these rules show that they represent universally recognized values and that there is no inherent bias against developing states. The importance of these few customary rules is also clear from the fact that they apply between foreign investors and host states in the absence of any BIT. In such circumstances, these customary rules should be considered as the last bastion of international legal protection against unlawful conduct by states. The coherence of the system of international investment law requires that a set of basic legal protections be applicable to all foreign investors at all times. These reasons strongly militate against allowing any state simply to opt out unilaterally from the application of these fundamental rules. It is submitted that to allow a state to claim the status of persistent objector would not be beneficial to the international community and to the further development of international investment law.
