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When is an “Investment” an “Investment”? -

Formalities of Approval and Limitations on Their
Application
Robert Hunter, Partner, Hogan Lovells LLP
’ ’ 0 Author

Robert Hunter

I. Introduction Topics

Many early bilateral investment treaties (BIT) contain a restriction of the Investment Arbitration
treaty's application ratione materiae to specific investments (or sometimes
projects) that have been «approved» by the host country. Such approval Source

clauses — invariably expressed unilaterally in favour of the net-capital

importing party — were included in the overwhelming majority of BITs Robert Hunter, When
is an “Investment” an
concluded by Germany between 1959 and the early 1980s. o796* “Investment”? -
Formalities of
Nowadays requirements for approval have all but disappeared from newer Approval and
Limitations on Their
BITs: of the 49 BITs concluded by Germany in the last 15 years, only two
Application in M. A.
(those with Thailand and Iran) contain an approval clause. A797* Fernändez-Ballesteros
and David Arias
Nonetheless, there is still a substantial heritage of approval requirements (eds), Liber Amicorum
Bernardo Cremades,
that have to be administered by government authorities and interpreted (La Ley 2010) pp. 627
and applied by investment page "627"arbitration tribunals. Moreover, as - 644
the debate over the meaning of «protected investment» continues
unabated after 50 years and pressure increases, particularly in Latin
America, explicitly to include provisions about the development
dimensions of the investment in future agreements, a» approval
mechanisms may enjoy a resurgence or at least provide the base materials
for a reinvention.

This essay looks at the historical context of the introduction of approval

clauses in the early BITs, examines certain issues that have arisen in their
implementation and in their application by arbitral tribunals and
concludes with some observations about the conclusions that can be
drawn from this existing experience should states consider adopting these
or similar measures in future BITs.

II. Historical Context

The intention of the states that entered into the early bilateral investment
treaties was to provide promotion and a reasonable measure of protection
for investments that contributed to the economic development of
developing nations, in particular in the implementation of national
development plans. 799)

This can be clearly seen on the face of the BITs themselves. The Abs-
Shawcross Draft Convention of Investments Abroad of 1959fls°°(which in
many ways acted as a blueprint for the early BITs) contained within its
short preamble the «importance of encouraging commercial relations and
promoting the flow of capital for economic activity and development».
This intention found its way into the preamble of the world's first BIT,
signed between Germany and Pakistan in November 1959, which refers to
an intention «to promote investment, encourage private industrial and
financial enterprise and to increase the prosperity of both the States».
Additionally, in the first article of the treaty, Pakistan limited its
undertaking to endeavour to admit investments by having «due regard to
their published plans and policies», presumably a reference to their
national development plan. While protection of property was a central
feature of these early BITs, it was not an end in itself but rather a means
of encouraging foreign investment.

It is an aspect of sovereignty that, absent any specific assumed obligation,

a state is free to determine what investments to admit into, and beyond
that to promote and protect in, its territory. The state parties to these early
treaties could therefore have approached the question of selecting specific
investments or types of investment for promotion and
protection page "628" in any number of ways. It is instructive to examine
how they approached this task in these early formative days.

The most immediately obvious means of selection would have been to

restrict the primary definition of «investments» to those that would, or
could have been expected to, contribute to the economic development of
the host state.

This most immediate route was not taken. On the contrary, BITs tended
from the very beginning towards an explicitly wide and inclusive
definition of «investment». Whereas the Abs-Shawcross draft relied
principally upon a defined concept of «property», in the 1959 German­
Pakistan BIT that was signed just a few months later the scope of
protection was defined instead by reference to the term «investment».
This term was agreed to comprise

«capital brought into the territory fo r investment in various forms in the

shape o f assets such as foreign exchange, goods, property rights, patents
and technical knowledge, and including «returns derived from and
ploughed back into such investment».
The only requirement of this primary definition was that the capital
constituting the investment must have been brought into the territory from
outside. Further than that it made no attempt within the scope of its
classification per se to differentiate between different types of investment
in terms of their contribution to the host state's economic development.

Just two years later, the first German-Thai treaty of December 1961
already contained the very broad definition of «investment» that is
typically seen in treaties today, i.e. the

«term shall comprise every type o f asset and more particularly though not
exclusively, movable and immovable property ..., shares or other kinds o f
interests in companies, ...»

The specific inclusion within this primary definition of shares in

companies was a necessity in order that investments by way of
shareholdings in local corporations — to which foreign investors were
often driven by local restrictions on corporate holdings — would be
protected despite the principle later clarified by the Barcelona
Traction case that there is no direct protection for shareholders in
customary international law. as»2!This blanket coverage of shareholdings
contained within it the seeds of later controversies relating to portfolio
investments that remain live until this day.

Four years later, the Washington Convention of 1965 famously avoided

any attempt at a definition of «investment», leaving it instead to
contracting states to limit the definition should they wish in the terms of
their individual consents to arbitration. Since then a very broad prima
facie definition of the term «investment» has been established as the
norm.

The means actually chosen in these early treaties to restrict the scope of
protection ratione materiae to those deemed worthy of promotion was a
mechanism of specific approval superimposed upon this primary broad
concept of «investment». The German-Pakistan treaty established
somewhat of a pattern for future treaties by introducing this mechanism
not in the main body of the treaty itself but rather in an Exchange of
Letters page "629" signed on the same day. ^ This annex qualified the
broad definition of «investments» in the body of the treaty itself by the
addition of a much stricter and investment-specific requirement that
references to «investments» wherever used «in respect of Pakistan» mean
only those investments that were «approved by the Government agencies
authorising such investments.» Similarly the German-Thailand BIT two
years later contained a Protocol qualifying the definition of «investment»
as regards Thailand by reference to «investments made in projects
classified in the certificate of admission by the appropriate authority of
the Kingdom of Thailand in accordance with its legislative and
administrative practice as an «approved project'».

As stated already in the introduction to this essay, the use of approval

mechanisms in bilateral investment treaties has substantially fallen off,
probably under pressure from Western nations who have always regarded
them with distrust and dislike. ^

Since over the same period the broad definition of «investments»

established by the early BITs has remained the norm, the result is that
most BITs on their faces typically encourage and protect a virtually
unlimited scope of «investment» with no further explicit qualification
other than — frequently — conformity with local law. We shall consider
in the final section of this essay whether this is a sustainable model, but
first we look at the range of approval mechanisms that have been
expressed and how they have operated in practice.

III. Definition O f Terms: «Approval Clauses» Versus Restrictions On

Admission

To understand the particular issues affecting the drafting, operation and

application of approval mechanisms in treaties, it is necessary to
distinguish these mechanisms from more general requirements of
conformity with local laws and in particular the regulation of foreign
ownership and control of businesses.

This distinction is important as regards the questions of underlying policy.

Whereas compliance with local law provisions present a threshold filter to
exclude investments prohibited first and foremost for the preservation of
local crafts and industries and the safeguarding of cultural or strategic
interests — in other words, for what one might call protectionist or
prohibitory reasons — approval clauses are aimed at the selective
application of the «promotional» objectives of offering BIT protection.
Rather than limiting the scope of the BIT to investments that conform to
domestic laws or have passed the admissions procedure of the host State,
approval clauses continue to reserve to the host State following its
submission to a treaty the authority to undertake positive discrimination
by offering the promotion page "630" and protection of the treaty only to
certain preferred foreign investments by means of a screening process
undertaken on a case-by-case basis independently of and in addition to
any particular investment's compliance with national investment laws. In
practice, such preferred investments will often also qualify for tax and
other incentives in accordance with policies adopted by relevant
ministries or cross-departmental boards of investment under municipal
law and thus available to domestic and foreign investors alike.
The distinction between requirements of conformity on the one hand and
positive approval on the other is prone to confusion both because many of
the prohibitory-type laws and regulations require certification or approval
of conformity as a matter of procedure, and also because some states
provide — either on the face of a BIT or pursuant to later regulatory
declaration — that certification under these prohibitory-type regimes
automatically qualifies an admitted investment for protection under the
applicable BIT. For instance, in some BITs (as for instance in the
following extract from the China-Indonesia BIT), approval for BIT
protection is granted automatically as a consequence of the admission of
the investment into the host state pursuant to its local prohibitory laws:assa

«This Agreement shall apply to investments by investors o f the People's

Republic o f China in the territory o f the Republic o f Indonesia which have
been previously granted admission in accordance with the law n.° 1 o f
1967 on Foreign Capital Investment and any law amending or replacing
it, and to investments by investors o f the Republic o f Indonesia in the
territory o f the People's Republic o f China which have been granted
admission in accordance with the related laws and regulations o f the
People's Republic o f China.»

Other examples are the 1962 German-Cameroon BIT, which equates

approval for protection with approval for admission but without
stipulating any particular regulatory regime, A80®and the 1963 German­
Sudan BIT, which makes satisfactory clearance of any approval
procedures a pre-condition of protection to the extent they are applicable.

Nonetheless, the fact that qualification for admission under a protection of

trading interests legislation might also qualify as an investment for
protection does not alter the fact that the prohibitory type of legislation is
of a different functional character than approval mechanisms that are
founded upon a promotional purpose. This policy distinction is explained
in terms in the following extract of an article by Krit Kraichitti, who later
became a former Director-General of the Department of Treaty and Legal
Affairs at the Thai Ministry of Foreign Affairs:

«There may be a misconception concerning the concept o f «Approval».

Under the law o f most investing states which are our negotiating partners,
approval is required fo r the admission o f foreign investments and fo r the
purpose o f screening the kind o f investment which suits
their page "631"economy best. Those countries are mostly capital-
exporting countries which [... ] not only protection o f foreign
investment but also protection under the Agreement fo r their investment
abroad. In the case o f Thailand, most foreign investments are allowed
entry and are admitted in so fa r as they do not violate our municipal law
without being subject to any screening process as to their contribution to
our economy. Approval is required only fo r those investments seeking
protection under the Agreement — it is granted as a means to encourage
the kind o f investments we need. Our screening process fo r the purpose o f
the Agreement is, therefore, a one-step approval, not a double approval
process as argued by some o f our negotiating partners.

Approval is required fo r all investments seeking protection under the

Agreement noted, either made before or after the entry into force o f the
Agreement. With a view to using Agreements o f this kind as a measure to
encourage foreign investment in the area which is needed fo r the
development o f our economy, the Thai side reserves its right, when
granting approval in respect o f any investment, to lay down any
appropriate conditions. ...» as®

This essay is concerned specifically with the question of approval in this

positive discriminatory sense: that is, with clauses that require specific
«approval» in the form of a certificate or other probative document issued
by a government authority competent to determine whether a given
investment merits protection under the treaty in connection with its
support of a goal of economic development, often in accordance with
national development plans.

Examples of such clauses have already been given from the German­
Pakistan and German-Thai treaties cited above. Another is the 1960
German-Malaysia BIT, which — similarly to the early German-Thai BIT
— requires the classification of the project in which the investment is
made as an «approved project» by the «appropriate Ministry». Many of
the BITs entered into by these states along with other Asian states such as
Singapore and Sri Lanka contain such clauses. One particularly prominent
example of a specific approval requirement is in the ASEAN
Agreement1181-0'of 15 December 1987, which is considered in detail in the
following section.

IV. Issues Arising In Practice

While the rationale for approval regimes is intelligible — whether or not

it is liked or respected as a matter of economics or politics — two
reported arbitral decisions provide empirical evidence of the kinds of
problems that may arise in relation to such mechanisms and in particular
how they are prone in practice to be operated by government
administrations page "632" in a manner that subverts — or at least is
manifestly inconsistent with — their intended aim of promoting economic
development.

1. Yaung Chi Oo Trading v. Myanmarasm

Yaung Chi Oo Trading v. Myanmar was the first reported decision that
concerned the operation of the approval mechanism in the 1987 ASEAN
Agreement.

The dispute arose out of a 45%:55% joint venture beer manufacturing

company between the Claimant, a private Singaporean company, and the
Ministry of Industry and State Industrial Organization of Myanmar. The
joint venture agreement had been concluded in 1993 and, after relevant
approvals and permits had been obtained from the Myanmar Foreign
Investment Commission (FIC), had begun its operations in October 1994.
Myanmar had been admitted to ASEAN in 1997, that is, some years after
the investment. Yaung Chi Oo alleged that during 1997 and 1998 armed
agents of Myanmar had seized its joint venture brewery in Mandalay on
two occasions and that the accounts of its investment, its directors, and its
employees were frozen. In 2000 Yaung Chi Oo commenced arbitration
proceedings under Article X of the 1987 ASEAN Agreement.

Myanmar objected to the Tribunal's jurisdiction on the ground that any

investment made by Yaung Chi Oo had not been specifically approved
and registered in writing for the purposes of the 1987 Agreement after that
Agreement had entered into force for Myanmar in 1997. The relevant part
of the Agreement was Article II, which read as follows:

(1) This Agreement shall apply only to investments brought into, derived
from or directly connected with investments brought into the territory
o f any Contracting Party by nationals or companies o f any other
Contracting Party and which are specifically approved in writing and
registered by the host country and upon such conditions as it deems
fit fo r the purposes o f this Agreement.
(2) This Agreement shall not affect the rights and obligations o f the
Contracting Parties with respect to investments which, under the
provisions ofparagraph 1 o f this Article, do not fa ll within the scope
o f the Agreement.
(3) This Agreement shall also apply to investments made prior to its
entry into force, provided such investments are specifically approved
in writing and registered by the host country and upon such
conditions as it seems fit fo r the purposes o f this Agreement
subsequent to its entry into force.

Yaung Chi Oo argued that its approval in writing by the FIC in 1994 was
sufficient to meet the requirements in Article II(3) of the 1987 Agreement
on the basis that the provision did not specify a special procedure for
registration in accordance with Article II. The Tribunal however was
driven by the unambiguous requirement in Article 2 (3) of a specific ex
post approval to uphold Myanmar's objection to jurisdiction. The Tribunal
held that this express language required:page "633"

«an express subsequent act amounting at least to a written approval and

eventually to registration o f the investment. The mere fact that an
approval and registration earlier given by the host State continued to be
operative after the entry into force o f the 1987 ASEAN Agreement fo r that
State is not sufficient».

The wider importance of the Yaung Chi Oo case, however, lies not in its
actual conclusion on the facts in the light of the specific wording of
ASEAN 1987 but rather in its detailed consideration of and comments on
Myanmar's administration of its approval regime. Myanmar had neither
designated an appropriate authority nor set up an administrative approval
procedure for the purposes of the Agreement. This lack of a transparent
and clear process was criticised in the award:

No doubt a Party to the 1987 ASEAN Agreement could establish a

separate register ofprotected investments fo r the purposes o f that
Agreement, in addition to or in lieu o f approval under its internal law. But
if Myanmar had wished to draw a distinction between approvalfo r the
purposes o f the 1987 ASEAN Agreement and approvalfo r the purposes o f
its internal law, it should have made it clear to potential investors that
both procedures co-exist and, further, how an application fo r treaty
protection could be made. A t least it would be appropriate to notify the
ASEAN Secretariat o f any special procedure. None o f these things was
done. Asm

Moreover, the Tribunal noted that this interpretation of Article II(3) left
open the possibility that the host State had given some subsequent
approval in writing that would have been sufficient for the purposes of
Article II(3). Examples given by the Tribunal were «the renewal of the
Joint Venture Agreement for a further term of five years, or the formal
approval by the FIC of an amendment to the Joint Venture Agreement
under the Foreign Investment Law». The decision was based on a finding
that there was no evidence of any such act in writing with respect to
Yaung Chi Oo's investment:

The tribunal notes that under Article II o f the 1987 ASEAN Agreement,
there is an express requirement o f approval in writing and registration o f
a foreign investment i f it is to be covered by the Agreement. Such a
requirement is not universal in investment protection agreements [...]
Article II goes beyond the general rule that fo r a foreign investment to
enjoy treaty protection it must be lawful under the law o f the host
State. a814

Two principles may be drawn from the reasoning in this award: first, that
internal executive processes of approval may not be opposed to an
investor who had no notice of them at the time; secondly, that unqualified
approval of an investment by the host State under its own laws — e.g. for
the purposes of admission — may be sufficient to amount to an approval
for investment protection even where a treaty states an express
requirement for approval and registration of an investment for the specific
purpose of protection. As will be seen in the concluding section of this
essay, at least the first of these two principles has been acknowledged and
heeded by the drafters of the most recent 2009 ASEAN Comprehensive
Investment Agreement.11815'

page "634"

2. Desert Line v Yemen 116

The second of these principles is further illustrated by the case ofDesert

Line v Yemen.

The dispute in Desert Line was over a series of roadway concession

contracts between an Omani construction company and the Yemeni
Government. These concessions had been awarded after a tender
invitation from the Yemeni President. Article 1(1) of the Yemen-Oman
BIT is yet another variant of a mixed prohibitory— and promotional-type
clause, requiring both conformity to local law («accepted [...] according
to its laws and regulations») and an investment certificate in order to
qualify as an «investment» within the meaning of the treaty. os171The
Yemeni government argued that the claimant's investment project,
although it had been accepted, admitted, and carried out under the
domestic investment laws, did not qualify for protection under the BIT as
the roadway concessions had never been issued investment certificates.

The tribunal's reasoning is particularly relevant to a key question of

approval regimes, namely consistency and good faith:

It would be preposterous in the circumstances to require or expect the

Head o f State or the Prime Minister to issue formalistic qualifications to
their encouragements and approvals, such as explicitly referring to the
BIT [...]; when they welcomed and approved the Claimant's investment,
they did so with all that it entailed. It would offend the most elementary
notions o f good faith, and insulting to the Head o f State, to imagine that
he offered his assurances and acceptance with his fingers crossed, as it
were, making a reservation to the effect «that we welcome you, but will
not extend to you the benefits o f our BIT with your country». os1®

The fact that the highest orders of the executive branch (including the
Prime Minister and the Ministers of Finance, Planning, and Public Works)
directly negotiated and implemented the concession contracts amounted,
in the eyes of the tribunal, to an «effective certification» by which Yemen
waived the requirement of an investment certificate and was estopped
from relying on it to defeat jurisdiction. os191The tribunal reached its
conclusion by reasoning that if the substantive justification for the
investment certificate is to reserve for the host State its ability to exercise
qualitative control over the inflow of investment, then the very nature of
the concession contract would satisfy this requirement.

A second arbitral proceedings in the dispute between M HS v.

Malaysia may well in due course provide additional jurisprudence on the
issue of approval. fl820In the original arbitration, Malaysia raised among
other challenges to jurisdiction an objection that the MHS project had not
been approved by the government and thus not admitted to the protection
of the BIT. This issue was not decided since the award dismissed the
claim on the basis page"635" of that the MHS project lacked the quality of
contribution the host state's development which was considered to be a
jurisdictional requirement of the Washington Convention (as discussed in
the following section). Now that this award has been annulled, it may
be expected that a second tribunal will now have to determine Malaysia's
initial objection on the lack of a governmental approval.

V. The Future

Although the incidence of approval clauses in new BITs —at least by

reference to the German programme— has starkly decreased over recent
years, there are nonetheless a significant number of BITs that contain
them and whose provisions still have to be implemented by government
administrations and applied by tribunals. Sornarajah has written that in
Asia the practice of screening foreign investment is well-entrenched and
that states will continue to assert their freedom to select foreign
investment having regard to their developmental goals. os231The difficulties
raised in the circumstances of theYaung Chi Oo and Desert Line cases are
therefore real ones which still have to be addressed.

Moreover, BITs are entering their second half-century at a moment of

great dynamic change. For one thing, there is a growing consensus
between developed and developing nations alike of the importance in
global trade and investment of sustainable development, human rights,
anti-corruption and higher standards of corporate social
responsibility. At the same time, the rapid rise of foreign direct
investment by nationals of developing and emerging economies is leading
both to a corresponding growth of South-South BITs as well as the search
for a new balance between sovereignty and protection by the governments
of those states who have suffered from the recent legacy of investor-states
proceedings and awards. In this context, there is every reason to expect
that there will be an increasing focus on the characterisation of protected
investment in BITs over the coming years and in particular on the role
economic development should play in its definition. os251

If a state decides as a matter of policy that it wishes to focus its promotion

and protection of investments through international investment
agreements (IIAs) on those investments alone that are considered to
contribute to their economic development, it may follow two methods.

page "636"

The first is to continue to adopt a very broad definition of «investment» in

the operative clauses of the treaty in the hope and expectation that
tribunals will interpret this teleologically with regard to the assumed
purpose of the treaty in question. It may perhaps add some assistance to a
later tribunal when faced with the task of applying such a definition by
including a suitable statements of its objectives in the treaty's preamble.

Two recent decisions suggest that this is likely to be at best an uncertain

and overly optimistic approach.

First, the ICSID annulment committee in MHS v. Malayisa stated

unequivocally that where a BIT or IIA defines the concept of
«investment» in broad and general terms and has no explicit narrowing of
the definition (as is now typically the case) there is nothing in the
Washington Convention to justify a tribunal limiting the scope of its
jurisdiction by applying a test of economic development. The annulment
committee held specifically that the so-called «Salini-test» —which had
gained widespread support prior to this annulment decision— is not an
ICSID jurisdictional requirement.^8261

Secondly, even should a tribunal feel constrained to apply a test of this

nature, its application may still not satisfy the expectations of such a
contracting state. A distinguished tribunal delivering an award at much
the same as the MHS v Malaysia Annulment reasoned that

«the contribution o f an international investment to thedevelopment o f the

host state is impossible to ascertain — the more so as there are highly
diverging views on what constitutes «development». as271

In view of that impossibility, that tribunal replaced the criterion of

contribution to the State's development by adopting a «less ambitious
approach» that

«centered on the contribution o f an international investment to

the economy o f the host State, which is indeed normally inherent in the
mere concept o f investment as shaped by the elements o f
contribution/duration/risk, and should therefore in principle be
presumed.» flsa

The President of that tribunal, Professor Brigitte Stern, has since

elaborated on the kinds of problems that are raised by a tribunal when it
tries to link development and the protection of foreign investments:

«The foremost is certainly that there is no consensus on what development

is all about: is the creation o f a big department store that lowers the
prices fo r local consumers, but destroys the work o f many small sale
shops, an investment that fosters development? Is the development o f a
multimillion open sky gold mining that destroys a rain forest and the
sacred land o f a tribe or endangers the environment, an investment that
fosters development?

The mere asking o f these questions should suffice to show the difficulty to
integrate the development dimension in the definition o f investment by
international arbitrators.

page "637"

... [whether an investment has a link with economic development] again

raises some questions concerning such an analysis based on an
assessment o f an investment's results. These results ... do not depend on
the type o f investment —whether direct, indirect, portfolio— but they
depend on a myriad o f economic, social, politicalfactors. A portfolio
investment can indeed be a very good toolfo r development i f the
economic project in which it is made is a success story, while it is fa r from
excluded that an investment made by a thoughtful investor whose goal is
to participate in the development o f the country might be a disaster. We
all know that «l'enfer est pavé de bonnes intentions.»

Her conclusion is that

« ... it is the compelling duty o f the States to ensure that foreign investors
participate in the development o f the countries in which they invest, it is
not the task o f international arbitrators to impose on States their views o f
development.

Countries, and especially developing countries, should set priorities and

fo r example, it is quite imaginable that they decide to grant the BIT's
protection only to investments made in the sectors they have decided to
develop in priority, or which bring into the country a minimum amount o f
foreign financial contribution.»os30
Explicitly setting such priorities is of course the second path a state may
follow if it chooses to apply a limitation of economic development to the
concept of protected «investment». However, this then raises the question
of how best to define the concept of «investment» to add the criterion of
economic development without restricting the form in which such
investments may be made.

One way is to include restrictions or qualifications within the core

definition of «investment» in the treaty. As mentioned at the beginning of
this article, this is not the model that was developed by the early BIT
negotiators and it still remains rare today, no doubt because the prima
facie definition is concerned more with the form of the investment than
with its objective or economic benefit.

One significant example of a narrowing of the primary definition is

Paragraph 2 of Annex B of the 2004 US Model BIT, which stipulates that
«an action or a series of actions by a Party cannot constitute an
expropriation unless it interferes with a tangible or intangible property
right or property interest in an investment»: this stipulation is understood
to restrict investments to property that is protected by the US Constitution,
thus excluding futures, options and derivatives. Another example of a
restriction to exclude investments of a portfolio character is to be found in
the draft of a possible structure of a multilateral investment agreement
presented by a WTO working group on «Trade and Investment' in 2003 at
the time of the Cancun Conference, in which the predominant opinion
(with the exception of the US) was that only «long-term cross-border
investment' should be protected, with the additional concept of sufficient
influence on the management of foreign subsidiaries that would require —
according to an IMF definition— an interest of at least 10 per cent of the
share capital of a foreign company. This was said to meet the developing
countries' page "638" concerns of negative consequences of protecting
portfolio investment (a concern that has no doubt increased as a result
of the current financial crisis). Nonetheless, both these restrictions are
aimed more at the form of the investment rather than its economic
objective.

A very recent example of an attempt that has been made to address

economic benefit within the primary definition of «investment» in a BIT
is to be found in the revised German-Pakistan treaty, signed on 1
December 2009 but not yet in force. This is particularly interesting since
it will replace a treaty that contained an approval mechanism with one that
has not. No doubt in the light of Pakistan's experience in the dispute SGS
Société Générale de Surveillance S.A., the definition of «investment» in
Article 1 now contains the following qualification after the usual broad
and inclusive list of types of asset:
«Mere construction and service contracts that do not include an
investment component do not fa ll under the definition o f investment under
this Agreement.»

The concept of «investment component» is not further defined. The

qualification ensures that a tribunal will be bound to apply a test of
investment component to construction and services contracts but on the
other hand it offers no guidance whether this should be a post­
Phoenix test of contribution to the host state's economy or a higher
requirement of contribution to the state's economic development. Of
course, it would be possible in future BITs expressly to require that a
tribunal apply a test of «economic development» to the concept of
«investment», but the Phoenix award is warning that this might impose on
a future tribunal a task that it is unqualified, or at least ill-placed and
reluctant, to undertake.

Adopting the approach of imposing a qualification in the primary

definition suffers too from the inherent disadvantage that it is inflexible:
the definitions in a treaty will be fixed by the treaty for the life of that
treaty and indeed beyond it during the 10. to 20-year run-off period
following its termination. If the new German-Pakistan treaty has the same
life as its predecessor, its limitation of construction and service
«investments» will still be in force in 2061 and applicable in a run-off
period beyond that!

A second model is what might be called a negative screening mechanism.

Such mechanisms are already very common in the form of requirements
of conformity with local law such as were the basis for the refusal of
jurisdiction in the Fraport case. As generally phrased in this form
today, it is questionable whether they in fact add any qualification over
and above what would be implied by a tribunal in any event. fl834Such
clauses can of course be increased in scope, for example to include within
their disqualifying scope «dirty investments» that are considered to do
positive harm to the environment of the host state or investments that
might conflict with human rights. However, their function
is page "639"inherently limited: by their nature, such clauses can do no
more than ensure the application of the prohibitory type mechanisms
identified in section 3 of this essay and can never achieve a purpose of
positively selecting beneficial investments specifically for promotion and
protection.

Within this rather limited range of possibilities, positive selection

mechanisms might be seen as an attractive alternative or additional
mechanism by states looking for a means of narrowing the scope of
protected investment in order to provide a new balance to the eternal
conflict between sovereignty and protection. Sornarajah has suggested
that the prevalence of screening legislation in Asia is one reason why
there have been relatively few investor-state arbitrations against Asian
states. The context of that suggestion does not identify a distinction
between the prohibitory and promotional types of selection referred to in
the previous section and unfortunately empirical statistics are unavailable
to this author to know whether and, if so, to what extent approval
mechanisms in particular among other types of screening legislation have
contributed to this phenomenon. Nonetheless, if one assumes that it is
indeed the case that Asian screening requirements —including approval
mechanisms— have led to a lower relative incidence of claims in Asia
than in other regions, they could provide a potentially attractive role
model for those net capital-importing states who have had no such
regimes until now and who may now be considering means to reduce their
own more burdensome claims experience for the future whilst still
providing a reasonable measure of protection for their most important
exporting corporations.

To those states who do choose to follow the course of positive selection

regimes —whether in the form of approval mechanisms as we have seen
them or in some other new form— as well as to those States who have
still to implement the approval mechanisms in existing treaties, empirical
experience demands the observance of three principles.

First, an approval process must be transparent

Dolzer and Stevens have defined «Transparency» as meaning that

«the legalframework for the investor's operations is readily apparent and

that any decisions affecting the investor can be traced to that legal
framework.»

In the context of approval mechanisms, this requires that the host State
must expose its approval requirements with a degree of regulatory
transparency typically greater than has been expressed in or applied in
relation to existing treaties. Contracting parties and their investors should
not only be made aware that they must specifically obtain written
approval by the host State in order to benefit from the protection of a BIT
but should also be readily and precisely informed both how and to whom
to apply for such approval and specifically about the relationship between
such approval and other regimes operated by that State for the admission
and promotion of investments. Transparency should function as a form of
notice: an adequately transparent treaty will make the existence of an
approval requirement apparent in the language of the treaty or
accompanying text so as not to yield page "640" conflicting
interpretations by the contracting partner, the investor, and a tribunal
interpreting the text of the treaty.

It is encouraging to see that, seemingly in direct response to the Yaung Chi

Oo case, the 2009 ASEAN Comprehensive Investment Agreement
(«ACIA»), which updated and expanded the 1987 ASEAN Agreement,
now includes an express transparency requirement specifically targeted at
approval:A837

Approval in Writing

Where specific approval in writing is required fo r covered investments by

a Member State's domestic laws, regulations and national policies, that
Member State shall:

(a) inform all the other Member States through the ASEAN Secretariat o f
the contact details o f its competent authority responsible fo r granting
such approval;
(b) in the case o f an incomplete application, identify and notify the
applicant in writing within 1 month from the date o f receipt o f such
application o f all the additional information that is required;
(c) inform the applicant in writing that the investment has been
specifically approved or denied within 4 months from the date o f
receipt o f complete application by the competent authority; and
(d) in the case an application is denied, inform the applicant in writing o f
the reasons fo r such denial. The applicant shall have the opportunity
o f submitting, at that applicant's discretion, a new application. a®

These transparency obligations go some way to providing a safeguard

against arbitrariness and discrimination in the implementation and
application of such processes but it is questionable whether they go far
enough. In the writer's view, States wishing to operate such mechanisms
must also ensure at least that their investment promotion agencies and all
other state organs dealing with and encouraging foreign investors include
information about such mechanisms as an integral part of their provision
of information to a prospective foreign investor. Too often in practice
sources of information such as published literature or web sites, as well as
specific invitations to invest, contain no reference at all to investment
protection agreements let alone their qualifications and processes of
approval.

Further, a general transparency clause regarding investments may not

adequately oblige a host State to make its approval requirement
transparent. The 2001 Finnish model BIT, for example, incorporates a
general transparency obligation on both parties into the language of the
BIT:

«Each Contracting Party shall promptly publish, or otherwise make

publicly available, its laws, regulations, procedures [...] which may affect
the investments o f investors o f the other Contracting Party in the territory
o f the former Contracting Party.» a839

page "641"

In this case, as in ASEAN 2009, however, the obligation of transparency

does not per se provide an adequate mechanism to deal with the
consequences of its non-observance. Approval is still a prerequisite to
protection under the BIT and without it investment projects may not
qualify as an «investment». Better would be to find a way of
incorporating an obligation of transparency within the concept of approval
itself so as to make it a pre-condition of the application of any such
qualification in the IIA.

Second, approval must be tied to a single concept o f economic

development

Since the philosophical and economic justification for approval processes

lies in the selection of investments that contribute to the nation's economic
development, they should only be tolerated if they form an integrated part
of the State's economic policy.

In concrete terms, it is suggested that this dictates three policy

requirements regarding their administration:

• First, it should be intolerable that different —and certainly any more

demanding or additional criteria— be applied to the selection of
investments for the purposes of positive promotion and approval under
the IIA than are applied to the selection of investments for any other
kind of preferential treatment by the State or any of its agencies. In the
article cited above, Krit Kraichitti suggests that:

«The criteria which have been used in granting approval to the

investment seeking protection under the Agreement are mainly consistent
with those which are required fo r promoted persons under the Investment
Promotion Act» (emphasis added by the author).

It is suggested that, if they are to be applied at all, they should be identical

unless there is plain justification for applying a specific and transparent
departure.

It is important to remember the essential distinction between negative —

or prohibitory/ protective— screening policies and positive promotional
ones. We are talking here about the latter. In the case of centrally-
managed economies, such as several ASEAN Member States a840*, a
rigorous process of approval and registration under domestic legislation
will likely be required for investment admission in the first place. For
example, many foreign investment policies mandate partial or even
majority government or local equity ownership and participation in all
foreign ventures within the territory of the host State. asmThere is no
reason why all admitted investments should be protected and it is
therefore open to a State to decide not to protect all investments whose
entry it merely tolerates (although all such investments would clearly still
fall under the principle of transparency iterated above). But in relation to
investments that have been positively selected, the general principle of
good faith in international law should dictate that a host State that has
deliberately procured an investment from a foreign source to service a
public need may have an overriding duty to grant such investment BIT
protection. The Desert Line award shows how principles of
fairness page "642" and good faith may hold the host State estopped from
later raising a lack of approval as a bar to ratione materiae jurisdiction,
especially when such non-compliance stems from non-observance of what
is accepted in practice as a mere legal formality. This principle applies a
fortiori when the host knowingly overlooked the lack of approval and
endorsed the investment in the knowledge that the investor expected BIT
protection. osa

• Secondly, any such system of approval should be administered by those

ministries which are responsible for economic development, and
preferably by a central, cross-ministerial committee charged with the
coordination and implementation of national economic policy. It should
certainly be avoided that such approval processes be administered as a
stand-alone regime by a department that has no substantial role to play
in defining and promoting the underlying economic policy. A
separation of the processes of approval for promotion and approval for
protection encourages the pursuit of parallel policies as well as
jeopardising transparency and consistency.
• Thirdly, both common sense and transparency dictate that approval for
protection should be granted in the same process and at the same time
as selection for any other process of positive discrimination leading to
admission. This is not only for the benefit of the investor but also for
the self-interest of the state, both in the avoidance of claims (since if
protected an investment would typically be protected from the moment
of admission) and also in nurturing a positive investment environment.

Third, investments in Government projects are approved a priori

Investments in state concessions and other government projects may

properly be said to be in a category sui generis in relation to which
protection will arise not only by function of the application of the doctrine
of good faith in manifestations such as estoppel but even more profoundly
by reason of the essential character of the investment: in other words, as a
determination of substance over form.

This can be seen in the reasoning of the tribunal in Desert Line v

Yemen quoted above. Professor Sompong Sucharitkul has characterised
this in terms of the principle of ratione cessante,as43'reasoning that in the
case of a government project there is no reason for a state to seek any
additional approval from any more authentic authority than the
government and for that reason it is untenable for a government to expect,
much less to insist, that an investor should seek additional approval of a
project proposed, promoted and advanced by the government itself. This
is above all the case when a government solicits foreign direct investment
explicitly to participate in the implementation of a national development
plan. The decisive test here is one of attributability: government projects
are clearly attributable to the state and to no other entity, independent of
any niceties in the domestic legislation or in the variable local or
administrative practices of any given bureaucracy. In page "643" such
cases, a government may make no further insistence on an alleged
requirement of extraneous additional approval of investments.

VI. Conclusion

Approval mechanisms in IIAs were popular at the dawn of BITs but have
fallen into less frequent use. Nonetheless, they continue to exist in a large
heritage of BITs and remain popular in particular among some Asian
states. In the light of the current dynamic in Latin American and other
South-South investment relationships towards examining ways of finding
new ways to balance questions of sovereignty (and in particular freedom
to regulate) with the goal of encouraging foreign investment and also
protecting increasing outflows of investment, it is possible that they or
similar methods of selection may attract new interest.

The purpose of this article is neither to encourage nor to disapprove the

use of such clauses. It is rather to warn that, whenever approval
mechanisms are used, they contain the potential for abuse, particularly if
questions of approval become divorced from the economic development
prerogatives of the host state concerned. Above all, they must be applied
transparently and in good faith. That means that they must be
implemented even-handedly and with an eye toward encouraging the
inflow of those types of investments they were intended to promote, and
they must not be allowed to be invoked arbitrarily and above all ex post
facto to enable a state to evade its international law obligations with
respect to those very foreign investments that it has solicited and
encouraged for the purpose of achieving its declared economic objectives.

page "644"

^ See Germany-DR Congo BIT 1969, BGBl. II 1970, p. 509; Germany-

Egypt 1974, BGBl. II 1977, p. 1145; Germany-Jordan BIT 1974. BGBl. II
1975, p. 1254; Germany-Madagascar 1962, BGBl. II 1965, p. 369;
Germany-Malaya BGBl. II 1961, p. 1064; Germany-Mali BIT 1977,
BGBl. II 1979, p. 77; Germany-Pakistan BIT 1959, BGBl. II 1961, p. 793,
Germany-Senegal BIT 1964, BGBl. II 1965, p. 1391; Germany-Singapore
BIT 1973, BGBl. 1975, p. 49, Germany-Syria BIT 1977, BGBl. II 1979,
p. 422; Germany-Tanzania BIT 1965, BGBl. II 1966, p. 873 Germany-
Uganda BIT 1966, BGBl. 1968, p. 449.
- Thailand-Germany BIT, BGBl. II 2004, p. 48; Iran-Germany BIT,
BGBl. II 2004, p. 55.
See e.g. Omar García-Bolívar, ‘Sovereignty v Investment Protection:
Back to Calvo?», to be published in the papers of the ‘50 Years of BITs
Conference», Frankfurt, December 2009 in ICSID Review, vol. 24, no. 2
(Fall 2009).
799 See e.g. Professor Sompong Sucharitkul, ‘Fifty Years of Bilateral
Investment Treaties with Germany: A Personal experience from
Thailand's Perspective», to be published in the papers of the ‘50 Years of
BITs Conference», Frankfurt, December 2009 in ICSID Review, vol. 24,
no. 2 (Fall 2009)
^ Published in the Journal of Public Law, vol. 1, Spring 1960, pp. 115­
118.
See Keynote speeches of Hans-Joachim Otto and Cornel Wisskirchen,
«50 Years of BITs Conference», Frankfurt, December 2009: proceedings
to be published in ICSID Review, vol. 24, no. 2 (Fall 2009).
i802-Barcelona Traction, Light and Power Company Limited, Second Phase,
Judgment, ICJ Reports 1970, pp. 3-357.
^ See for instance the 3rd German BIT with Greece (1961), BGBl. II
1963, p.216; the 4th German BIT with Morocco (1961), BGBl. II 1967 p.
1641; the 5th German BIT with Liberia (1961), BGBl. II 1967 p.1537.
ísm- Their gradual disappearance is foreshadowed even in the 1959
German-Pakistan treaty, whose annexed exchange of letters introducing
the approval mechanism refers to the possibility that «if at any time later
free investment is allowed in Pakistan the term «investment» will cover
all investments made in the territory».
Article 3 of the China-Indonesia BIT 1994 MOFCOM,Collection o f
International Investment Treaties (Jingguan Jiaoyu Press 1998) 966-978;
Cf. in this context Mytilineos Holdings SA v Serbia and Montenegro et
al., Partial Award on Jurisdiction and Dissenting Opinionof 8 September
2006, Ad hoc-UNCITRAL Arbitration Rules; IIC 345 (2006), in which
the Tribunal held, by majority, that the failure to observe an approval
process prescribed under local law (not under the BIT) did not make the
investment “illegal”, with the consequence that it was still protected under
the BIT.
Germany-Sudan BIT (1961), BGBl. II 1966, p, 889.
Word missing in original
Krit Kraichitti, Investment Protection Treaties and Foreign
Investments in Thailand, 1 Thailand Yrbk of Int'l and Comp Law 76
(1986), 78-79; see also Sornarajah, The International Law on Foreign
Investment, Cambridge University Press, 2nd Ed., p. 266: approval
clauses «ensure that only investments that are regarded as particularly
beneficial to the state are given approval for the purposes of protection.»
1809 Germany-Malaysia BIT (1960), BGBl. II1962, p.1064.
The Association of Southeast Asian Nations. The Agreement was
originally signed between the Government of Brunei Darussalam, the
Republic of Indonesia, Malaysia, the Republic of the Philippines, the
Republic of Singapore and the Kingdom of Thailand. This association has
currently been expanded to a total of 10 states by the later adherence of
Cambodia, Laos, Myanmar, and Vietnam.
isu- Yaung Chi Oo Trading Pte Ltd v. Government of the Union of
Myanmar (ASEAN ID Case n.° ARB/01/1), Award of 31 March, 2003,
ICSID Reports Volume 8, p. 463.
1812- Yaung Chi, para. 58.
1813- Id. para. 59.
1814- Yaung Chi, para. 58.
ASEAN Comprehensive Investment Agreement, available
at:http://www.aseansec.org/documents/FINAL-SIGNED-ACI... (last
visited on 17/05/2010).
^ Desert Line Projects LLC v. Republic of Yemen (ICSID Case n.°
ARB/05/17), Award of February 6, 2008.
^ Id. para 93
1818-Desert Line para. 119.
1819-Desert Line para. 117.
^ Malaysian Historical Salvors, SDN, BHD v. Malaysia (ICSID Case n.°
ARB/05/10).
isa- Malaysian Historical Salvors, SDN, BHD v. Malaysia (ICSID Case n.°
ARB/05/10), Award rendered on May 17, 2007, para. 41.2.
is22-Malaysian Historical Salvors, SDN, BHD v. Malaysia (ICSID Case n.°
ARB/05/10), Decision of the ad hoc Committee on the Application for
Annulment issued on April 16, 2009.
^ ‘The Clash of Globalisations and the International Law of Foreign
Investment», The Simon Reisman Lecture on International Trade Policy,
12 September 2002, Centre for Trade Policy and Law, Ottawa, p. 27
1824 See e.g. the 2005 IISD Model International Agreement on Investment
for Sustainable Development (online accessible
at:http://www.iisd.org/pdf/2005/investment model int ...) (last visited:
17/05/2010); Economic Partnership Agreement between the
CARIFORUM States, of the one part, and the European Community and
its Member States, of the other part, OJ L289/1/3 of October 2008; World
Duty Free Company Limited v. Republic o f Kenya(ICSID Case n.°
ARB/00/7), Award rendered on October 4, 2006; US Alien Tort Statute,
28 U.S.C. § 1350.
^ See e.g. García-Bolívar, n.° 3.
1826MHS v. Malayisa, see note 23.
Phoenix Action, Ltd. v The Czech Republic, ICSID Case n.° ARB/06/5.
Award dated 15 April 2009, para. 85.
is2s_Ibid.
1829 Brigitte Stern, ‘The contours of the notion of protection investment», to
be published in the papers of the ‘50 Years of BITs Conference»,
Frankfurt, December 2009 in ICSID Review, vol. 24, no. 2 (Fall 2009)
1830 op. cit.
isa- See Tillmann Rudolf Braun, “Investment Protection under WTO Law -
New Developments in the Aftermath of Cancun”, in ‘International
Investment Protection and Arbitration - Theoretical and Practical
Perspectives», ed. Christian Tietje, BWV Berliner Wissenschafts-Verlag,
2008
^ SGS Société Générale de Surveillance S.A. v. Islamic Republic o f
Pakistan, ICSID Case n.° ARB/01/13, Decision on Objections to
Jurisdiction of August 6, 2003, 18 ICSID Rev.-FILJ 301.
Fraport AG Frankfurt Airport Services Worldwide v. Republic o f the
Philippines (ICSID Case n.° ARB/03/25). Award of August 16, 2007.
1834 See e.g. Phoenix, para. 101 et seq.
^ Presentation, ‘From FDI to Portfolio Investment - a Step too Far?’ at
‘Fifty Years of BITs Conference, [to be published in the papers of the ‘50
Years of BITs Conference», Frankfurt, December 2009 in ICSID Review,
vol. 24, no. 2 (Fall 2009) - TBC]
Dolzer/Stevens, Bilateral Investment Treaties, p. 134.
1837-ACIA, Art. 4(a).
1838- ACIA Annex 1
Art 15 Finland Model BIT
^ Yaung Chi at para 58; probably a good idea to get some citations and
specific references to State investment policies, e.g. Myanmar, Vietnam,
Indonesia (is referenced above). Good starting point for Vietnam might
behttp://www.unctad.org/en/docs/iteipc200710 en.pdf.
^ See, e.g., example of Chinese foreign investment law (and Myanmar
FIL?) that requires all foreign investment projects to be at least 51/49 JVs
with Chinese State entity.
is42- See Desert Line at 120, citing Fraport at 346.
^ In an unpublished work. The term ratione cessante is derived from the
Latin maxim, Cessante ratione legis, cessat ipsa lex. Lord Coke CJ,
2 Institutes o f the Lawes o f England 96 (1642); see alsothe United States
Supreme Court case Rogers v. Tennessee, 532 U.S. 451 (2001) (Scalia, J.,
dissenting) (tracing the legal history of the term ratione cessante and
defining it as a change in circumstances that renders a given rule no
longer applicable to the case at hand).