OBSCURITY OF SOURCES OF INTERNATIONAL LAW ON FOREIGN INVESTMENT CONCERNING COMPENSATION: ANALYSIS ON THE POTENTIAL EFFECT TO ASIAN HOST COUNTRIES*
A. Introduction Foreign direct investment (FDI) is a concept built on two major factors: a host country’s need of foreign capital to advance development, and a home country’s need to expand its target market and ultimately achieve more profit. It involves the transfer of tangible or intangible assets from one country to another for the purpose of their use in that country to generate wealth under the total or partial control of the owner of the assets.1 In a bird eye view, the concept of foreign direct investment does seem like a win-win solution to satisfy both sides’ needs, however by looking a bit closer, there are several complexities that even the rule of international law has not yet established a clear and uniform stance. To examine one of these problems, it is simply needed to be understood that the interests of the parties in a foreign direct investment are antagonistic. Capital-importing states intend to use the capital exported by the actor of foreign direct investment to support their states’ development while at the same time minimizing their economic loss due to the presence of the foreign company. Conversely, capital-exporting states want to maximize their profit by exploiting the sources of the host state by minimizing their contribution to the host state. These contradicting interests is, in some cases, further made worse by the odd positions of the parties: capital-importing states would argue their superiority in the legal relation because of their sovereignty, while capitalexporting states are politically and economically superior to the capital-importing states, creating a prone potential of dispute. One of the dispute that are frequently surfaces is caused by the taking of foreign property by the host state in the form of nationalization or expropriation, subsequently leading to the question of compensation. This essay will examine the position of international law on compensation on the perspective of ASEAN countries, whereas most them are host states.
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Written by Fauzi Maulana Hakim, member of ALSA LC Universitas Padjadjaran M. Sornarajah, The International Law on Foreign Direct Investment, Cambridge: Cambridge University Press, 2010, p. 8 1
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B. An Overview of the Sources of International Law on Foreign Investment Concerning Compensation The four sources recognized in international law2 until now do not provide an elaborate and certain provision in terms of compensation. The issue of compensation is, therefore, is highly controversial with developed nations holding to a standard of Hull Formula of prompt, adequate, and effective compensation, while developing nations urge a more flexible standard.3 The failure to create a uniformity of opinion in the international world, backed with the fact that international law rests mainly on uniformity (for instance, the creation of a treaty or customary international law depends of this uniformity), is the main reason why the obscurity of the rule concerning compensation exists. To further understand this obscurity, all the sources will be examined. 1. Treaty The cornerstone of a treaty is that it must be agreed upon by states which would like to be bound by it. This consent to be bound can be expressed in many ways as provided by the Vienna Convention of the Law of Treaties,4 but the consent must be given in order for the treaty to bind a state. Until now, host countries and home countries have not yet reached an agreement on a treaty concerning compensation that can apply as a law-making treaty as opposed to treaty contracts. The last effort recorded is conducted on 1998 by OECD, but not surprisingly, the effort failed. 2. Customary International Law A custom can only be considered as customary international law, and hence binds the international society, when it fulfils two elements: state practice and opinio juris.5 While there is no specific requirement as to how many state must adopt a practice, it is generally understood that it must not be a practice that is not accepted universally. The varieties of compensation given by host states in numerous cases cause difficulties in finding the necessary state practice. There have been efforts by developed
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Art. 38 (1) International Court of Justice Statute John H Barter and Bart S Fisher, International Trade and Investment, Regulating International Bussines, Little, Boston: Brown and Company, 1986, p. 313 4 Art. 11 Vienna Convention on the Law of Treaties 5 Libya/Malta case, ICJ Reports,1985, pp. 13,29; 81 ILR, p.239; Malcolm Shaw, International Law, Cambridge: Cambridge University Press, 2008, p. 74 3
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states to establish the famous Hull Formula as a customary international law, but it was rejected in the case of Amoco Finance based on the lack of opinio juris.6 3. General Principles of Law The word “general” written explicitly in the name of this source alone is per se a proof of the futility of trying to find a principle of compensation that applies generally, since, again, the lack of uniformity of opinion concerning how compensation must be made. There are competing claims of norms that are thrown by several states that may be argued is an attempt to establish a general principle of law. The first is the Hull Formula, a formula stating that a “prompt, adequate, and effective” compensation must be paid. This is supported by most home countries for obvious reason that it affords the best protection for the capital which leaves these states as foreign investment.7 This obligates host countries that conduct a taking of foreign property to pay full compensation, consisting of damnum emerges and lucrum cessans. This view of course was denied by host countries. There are at least two competing norms that are made to replace the Hull Formula. Chile in 1974 made a claim that it is permissible to deduct past excess profits from compensation.8 Other claim was made on the dispute of La Brea y Parinas and the nationalization of Gulf Oil in Bolivia, which states that expropriation is simply an act of revindication and thus does not require any compensation. There has been no winner surfacing from the quarrel amongst these competing norms, and hence no general principles of law have been born. 4. Judicial Decisions and Highly Qualified Publicists Unlike the absence of the three sources of international law above, there are, in fact, judicial decisions and highly qualified publicists in the field of compensation. Unfortunately, these sources basically cannot stand alone. It is considered as a weak source of law, therefore while can be used as a legal justification, it does not per se creates a general international law rule. Moreover, as observed above, there is a discrepancy of opinion between developed and developing countries concerning the rule of compensation, and this discrepancy spreads to the writings of the scholars.
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Amoco International Finance Corp. v. Iran, Iran-US Claims Tribunal, 15 IRAN-U.S. C.T.R. Sornarajah, op.cit., p. 414 8 Ibid., p. 443 7
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Consequently, there is no common ground in the teachings of highly qualified publicists that apply universally. Judicial decisions are not free from the problem of obscurity, either. In the ICJ/PCIJ, there is only case that discussed compensation, which is the Chorzow Factory Case. The case only discusses about unlawful expropriation, which, unquestionably, requires full compensation. ICJ has not yet received a question of compensation in the event of lawful expropriation. ICSID and other arbitrations have, however both ICJ and arbitration bodies such as ICSID is not bound by the doctrine of precedence.9 The consequence of which is that there is not yet a uniform decision or award as to how a compensation must be done. C. Consequence of the Obscurity of International Law Concerning Compensation to Asian Countries It is a well-established concept that the countries that serve as host states are developing countries,
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and most of Asian countries fit the profile. This begs an
important question, what would be the effect of the obscurity of rule concerning compensation to Asian Countries as host states? This can be examined in two different perspectives. In one perspective, it can be argued that the obscurity benefits host states, because it, combined with the power of sovereignty bestowed the concept of state itself, give host states more bargaining position in determining the amount of compensation, because as a general rule, expropriation and nationalization is allowed as a consequence of the territorial sovereignty a state has. This argument may be true if we only see the law in its purest form. In practice, however, other kinds of factors take part in negotiations or adjudications. For example, economically, several MNCs are more powerful than developing countries. In 2004, the profit of General Motor, an American company, is US$191.4 billion more compared to the GDP of 184 countries.11 This can be a good bargaining position for MNCs in the event of negotiation, creating a dependency to host countries and hence eliminates their bargaining position. Arbitration, as one of the most system of investment dispute settlement, is not 9
Article 59 ICJ Statute; Article 53 (1) ICSID Convention; Christoph Schreuer, A Doctrine of Precedent? Oxford: Oxford University Press, 2007, p. 1190 10 Nathapornpan Uttama, “Foreign Direct Investment in ASEAN Countries: An Empirical Investigation”, Laboratoire d’économie de Nantes (LEN) – Faculté des sciences économique de gestion, p. 2 11 An An Chandrawulan, Hukum Perusahaan Multinasional, Liberalisasi Hukum Perdagangan Internasional dan Hukum Penanaman Modal, Bandung: PT Alumni, 2014, hlm. 3
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particularly impartial, too, in the context of compensation. Texaco award is the living example.12 The award is heavily criticized in which the arbitrator espoused theories which were totally beneficial to the claimant and bent the law to provide the remedy sought by the claimant.13 This kind of controversy would not have occurred had there been a strict and elaborate system of law that can be followed by the arbitrators, hence closing the possibility of “inventing” theories. This fallacy of adjudication system can be traced to the legal realist movement. This notion states that judges (and arbitrators) actually make decisions on the basis of many factors; including policy preferences, political considerations, a judge’s personality, characteristics of the disputing parties, et cetera.14 Judges do take into account legal rules, but these are only one of the factors considered. If a judge decides on non-legalistic grounds, some legal rules in a convoluted legal system will be used to justify that decision.15 The very fact that host states are usually in a weaker position makes the obscurity of the rule concerning compensation disadvantageous for them. In many cases, for instance in the current dispute between Freeport and Indonesia, a state’s sovereignty does not have that much effect in negotiating a middle win-win solution. D. Conclusion It may be too premature to propose a solution without further research. The objective of this paper is to point out a gaping hole of legal rules that may very well be destructive for host states in Asia. The question of compensation may be dormant now, but it serves as a time bomb. It is only a matter of time before a case arises and international law will once again be faced with its premature and obscure rule concerning compensation.
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Texaco Overseas Petroleum v. Libya, Int’l Arbitral Award, 104 J. Droit Int’l 350 (1977) Sornarajah, op.cit., p. 430 14 Vitalius Tumonis, “Adjudication Fallacies: The Role of International Courts in Interstate Dispute Settlement”, Wisconsin Law Journal, Vol. 31 No. 1, p. 45 15 Ibid. 13
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BIBLIOGRAPHY AND OTHER SOURCES A. BOOKS An An Chandrawulan, Hukum Perusahaan Multinasional, Liberalisasi Hukum Perdagangan Internasional dan Hukum Penanaman Modal. 2014. Bandung: PT Alumni. Christoph Schreuer. 2007. A Doctrine of Precedent? Oxford: Oxford University Press. John H Barter and Bart S Fisher. 1986. International Trade and Investment, Regulating International Bussines, Little. Boston: Brown and Company. M. Sornarajah. 2010. The International Law on Foreign Direct Investment. Cambridge: Cambridge University Press. Malcolm Shaw. 2008. International Law, Cambridge: Cambridge University Press.
B. JOURNALS Vitalius Tumonis, “Adjudication Fallacies: The Role of International Courts in Interstate Dispute Settlement”, Wisconsin Law Journal, Vol. 31 No. 1. Nathapornpan Uttama, “Foreign Direct Investment in ASEAN Countries: An Empirical Investigation”, Laboratoire d’économie de Nantes (LEN) – Faculté des sciences économique de gestion. C. TREATIES Statute of the International Court of Justice Convention on the Settlement of Investment Disputes between States and Nationals of Other States Vienna Convention on the Law of Treaties D. CASES Texaco Overseas Petroleum v. Libya, Int’l Arbitral Award, 104 J. Droit Int’l 350 (1977) Amoco International Finance Corp. v. Iran, Iran-US Claims Tribunal, 15 IRAN-U.S. C.T.R. Libya/Malta case, ICJ Reports,1985, pp. 13,29; 81 ILR.
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