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The Colonial International Investment Law Framework and its Influence on Asian States

Updated: Dec 4, 2020

Written by: Melvin Cheung and Amon Kundagrami

Introduction and History

A colonizer is someone who aims to profit from the resources of colonised countries[1] and does not plan his future in terms of the colony, as he is only there to benefit himself.[2] This was a common model that was followed by western European countries between the 17th century and 20th century. Anghie argues that international law doctrines were forged out of an attempt to create a legal system that could accommodate for interactions between European and non-European worlds.[3] One of these doctrines is international investment law (IIL), which made foreign investment and trade protection key methods of colonialism and oppression. Companies such as the East-India Trading companies shaped IIL to favour their needs.[4] Others such as the doctrine of the protection of foreign capital, was developed during the colonial era, on the assumption that it was not sufficiently protected under the domestic law of the colonised country.[5] This doctrine is still considered to be customary law, even though this base assumption no longer holds true. This article will explore the current IIL framework in Asian States and their safeguards against it, and argue, through recent cases, that the framework is incapable of protecting developing Asian countries.

International Investment Law in Asian States

The postcolonial era was initially seen to be a time of hope as post-colonial states revelled in their autonomy.[6] Unfortunately, their newfound independence was still poisoned by imperialistic roots.

In the 1980s, there was a move towards signing bilateral investment treaties (BIT) in hopes of economic liberalisation. Institutions such as the World Bank and the International Monetary Fund implemented funding policies to “promote trade and investment liberalisation within developing states.”[7] Developing countries adopted the “sign BITs to get foreign direct investment (FDI)” mindset and believed that this could boost their economies.[8] However, the current investment regime favours foreign investors when it comes to BITs involving Asian countries.[9] The investor-state dispute settlement regime removes disputes from the domestic level to the battlegrounds of IIL,[10] insofar that investment arbitration can be described as a “substitute” for local decision making.[11] In some states, substantive protections go beyond the pre-establishment phase, as they also include allowing home state investors to bring proceedings directly against host states.[12] This low threshold coupled with IIL’s favouritism of foreign investors causes serious problems of fairness such as in Amco (Asia) Corp v Republic of Indonesia,[13] a case that will be further discussed below. It can be argued that this low threshold is especially unfavourable for host states which, in most cases, are developing Asian countries. Meanwhile, the investors who benefit from the current framework of IIL are frequently Western states.

The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration institution created to hear cases of legal dispute resolution between international investors. However, the ICSID has been criticised for not being sufficiently accommodating towards Asian states.[14] In the UN’s 2019 report on possible reform of Investor-State dispute settlement (ISDS), it was revealed that there was an undeniable underrepresentation of Asian states in ISDS tribunals.[15] Having Asian representatives in ISDS tribunals is important to providing more holistic and less Western-centric perceptions of international issues.

There is also significant protection for investors in cases of tortious liability, as seen in the Bhopal gas tragedy, which will be expanded upon below.[16]

It is clear that the current framework of IIL does not provide sufficient safeguards for poor or developing countries, but instead perpetuates inequality as a relic passed down from a time of colonialism and imperialism. The following section will focus on Asian safeguards against the current IIL framework.

Asian Safeguards against Imperialist IIL

Asian investment laws do show a certain amount of variation, and most countries have their own domestic investment laws, which foreign investors have to comply with. For example, Singapore has been most successful in attracting FDI and has no law on foreign investment; instead, investments are governed by laws of general application and sector specific legislation.[17] However, most other Asian developing countries have their own domestic investment laws as discussed below.

Despite this, Asian States have come up with certain measures to minimise or curtail the disadvantageous position of the host State under IIL. At the regional level, the ASEAN Comprehensive Investment Agreement (ACIA) aims to create a free and open investment regime through liberalisation, protection facilitation and promotion.[18] This is exemplified by the presence of both most favoured nation (MFN) and national treatment clauses,[19] according to which foreign capital has to be treated in the same manner as domestic capital. On the other hand, IIL seeks to promote the enforcement of international minimum standards rather than national treatment, since the latter may not provide sufficient protection for foreign investors.[20] If the national treatment provisions are enforced in BITs, it would ease the obligations on developing host States. Nonetheless, these laws are always subject to the terms of the BIT between the State and the investor.

Similarly, Asian countries have also taken certain measures to shield themselves from the provisions of IIL. In Indonesia, foreign investments are governed by the Indonesian investment law (2007). One key feature of Indonesian investment law is that it requires that any foreign investments be made through a limited liability company (LLC) that is incorporated in Indonesia.[21] This would imply that the LLC, being registered in Indonesia, automatically falls under the jurisdiction of Indonesian courts, and may be a way of avoiding the imperialist influence that is present in international arbitration. It also means that the company would be subject to other Indonesian laws, placing it on the same footing as domestic companies. However, as we will see in the next section while analysing the Amco (Asia) arbitration.[22] these policies have not been successful in application. As a result, the impact of imperialistic origins of IIL is still significant in Asian countries, despite all the measures taken both at domestic and regional level.

Failure of Asian Safeguards

The previous section discusses both regional and domestic safeguards that exist, in order to protect states from the colonial influence that exists in IIL. However, as this section proceeds, it will become fairly obvious that these safeguards have not been very successful in doing so, largely due to the dispute settlement mechanisms that exist in IIL.

The failure of these mechanisms can be seen from the Amco (Asia) v Republic of Indonesia arbitration. The Indonesian Foreign Investment Act 1967 (FIA) requires that capitalisation of the share of the joint venture by foreign investors would take place with funds brought from outside the state.[23] A large amount of shares of Wisma, the Indonesian company in the joint venture, was held by a large army pension fund. When a dispute between the parties of the venture broke out in the 1980s, the ICSID Tribunal, contrary to Art 25(1) of the Convention, held that it had jurisdiction even though one of the companies in the joint venture was an Indonesian company. This should have allowed for domestic jurisdiction as a result of the Act. During its analysis of the FIA and the relevant BIT, the tribunal also held that international law would take precedence over domestic law, effectively invalidating the Foreign Investment Act 1967.[24]This decision would apply to the new Indonesian investment law, as well as other domestic laws, effectively invalidating most domestic safeguards taken by Asian states. This also proves that ICSID tribunals take an expansive approach to protect foreign investment, reinforcing colonialist methods.

Another problem that commonly comes in the way of MNCs being held liable under IIL for their actions is the allocation of resources and legal responsibilities so as to minimise risk, even if it in fact operates as a single commercial unit.[25] This is evidenced by the Bhopal Gas Tragedy case, where a mishap by the Indian subsidiary of Union Carbide killed 8000 citizens in the city of Bhopal. The New York court held that according to the principle of forum non convenies, the US parent company was not responsible for the actions of its Indian subsidiary.[26] The settlement that was agreed to by the Indian subsidiary was largely undervalued due to the lack of resources. Cassels comments that it is indeed ironic to see a MNC, whose policy is to maintain centralised integrated corporate strategic planning, to argue that it had no responsibility for the actions of its subsidiary; The American company was the majority stakeholder, it appointed to the board of directors, controlled management of the company and designed the facility.[27] This has an adverse impact on developing host countries since legally breaking up such commercial entities effectively caps the amount of compensation that can be received in cases where international law is breached, as in the above case.

Another example of the flawed IIL framework can be seen in the judgments of SGS v Pakistan[28] and SGS v Philippines. [29] Both cases were centred on the interpretation of what constituted an investment under an umbrella clause, a clause in investment treaties in which states undertake to uphold all or any obligations owed to investors. Both of these cases had similar facts which came to different conclusions when discussing whether or not an umbrella clause can elevate a contractual claim into a treaty claim. Classifying a claim as a treaty claim would make the claim triable under the ICSID tribunal.

The ICSID tribunal in SGS v Pakistan held that the presence of an umbrella clause would not place the state’s contractual and domestic law obligations under the treaty arbitration mechanism. In other words, the tribunal set a narrow scope for what constitutes an investment in an umbrella clause, making it harder for investors to bring claims against host states. While this decision set a trend for protecting host states, the effects of the judgment were quickly nullified in SGS v Philippines.

In SGS v Philippines, SGS began ICSID arbitration proceedings after it accused the Philippines of violating several articles of the BIT and breaching the umbrella clause. The Philippines tried to argue that there was no investment as required by the BIT and that the dispute mainly concerned contractual issues. This argument was rejected by the ICSID tribunal, which employed a broad interpretation of “investment.” The tribunal claimed that even if the investment was not in the host state itself, it can still be covered under the BIT if the activity abroad is connected to some activities in the host state’s territory. This approach employed a broader interpretation of what an “investment” was and interpreted “disputes with respect to investments” as covering both treaty and contractual claims. This meant that umbrella clauses were able to transform purely contractual claims into treaty claims.

The decisions in these cases underscore the ambiguity in determining when an investment is made. SGS v Pakistan set a narrower interpretation of what an “investment” is and set a protective threshold for host states, which are mostly developing Asian states. Meanwhile, the decision in SGS v Philippines re-introduced confusion and legal uncertainty by deciding that an investment could be any kind of asset and can be subjected to flexible interpretation. The tribunal’s reasoning in SGS v Philippines perpetuates the antiquated imperialistic traditions of IIL and facilitates an investor’s ability to bring claims with relative ease.


International investment law, like other fields of international law, has been influenced to a great degree by the rich colonial history of the world. This results in the doctrines of IIL heavily favouring international investors, who mostly originate from the global north, over the host State. The essay discussed the certain domestic safeguards that Asian states have implemented to shield themselves from the imperialist influence on IIL. However, as we see in the Amco (Asia) arbitration, the SGS arbitrations, and the Bhopal gas tragedy, these safeguards have been largely ineffective due to the flaws in the current arbitration system. Therefore, these problems in the IIL framework can only be solved by amending the existing framework. Mere domestic safeguards, as exemplified by the cases above, are likely to be ineffective.

Disclaimer: The opinions expressed in this post are those of the authors, and do not reflect the views or opinions of the Durham Asian Law Journal.

[1] David Schneidermen, ‘The Coloniality of Investment Law’ (2019) University of Toronto 6 [2] Albert Memmi, ‘The Colonizer and the Colonized’ (1991) Beacon Press 71 [3] Antony Anghie, ‘Imperialism, Sovereignty and the Making of International Law’ (2004) Cambridge Studies in International and Comparative Law 3 [4] Kate Miles, 'International Investment Law: Origins, Imperialism and Conceptualising the Environment' (2010) 21 Colo J Int'l Envtl L & Pol'y 1Â 3 [5] S W Schill, C Tams & R Hoffman, ‘International Investment Law and Development: Friends or Foes?’ in S W Schill, C Tams & R Hoffman’s, International Investment Law and Development: Bridging the Gap, (Cheltennam Edward Elgar Publishing 2015). [6] Above (n.4) [7] Above (n.4) 7 [8] Above (n.1) 9 [9] Luke Nottage and J. Romesh Weeramantry ‘Investment Arbitration In Asia: Five Perspectives on Law and Practice’ (2012) Arbitration International 22 [10] Above (n.1) 12 [11] Tom Ginsburg, ‘International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance’(2005) International Review of Law and Economics 121 [12] Above (n.9) 22 [13] Amco (Asia) Corp v Republic of Indonesia ICSID Case No. ARB/81/1 [14] Above (n.9) 37 [15] Kingdom of Bahrain, ‘Possible reform of investor-State dispute settlement (ISDS): comments by the Kingdom of Bahrain’ (2019) UNCITRAL [16] Union Carbide Corporations v Union of India Etc. 1990 AIR 273 [17] J Bonnaticha, ‘Investment Laws of ASEAN Countries: A Comparative Review’, (2017) IISD reports. [18] ACIA (2012), Art 1. [19] R Ekanayake & N Perera, ‘Stimulating Intra-Regional Investment in SAARC: Is Regional Investment Agreement the Way Forward?’, (2015) SAEJ 16(2S) 75S–101S, p 93S. [20] Above (n.4) [21] Indonesian Investment Law (2007), Art 5(2). [22] Above (n.13) [23] Foreign Investment Act 1976 (Indonesia), ch IX. [24] M Sornarajah, 'ICSID Involvement in Asian Foreign Investment Disputes: The Amco and AAPL Cases' (1994) 4 Asian YB Int'l L 69. [25] S Joseph ‘Liability of Multinational Corporations’ in M. Langford (ed.), Social Rights Jurisprudence: Emerging Trends in International and Comparative Law. New York. CUP, 613 (2008). [26] Above (n.15) [27] Jamie Cassels, ‘Outlaws: Multinational Corporations and Catastrophic Law’ (2000), 31 CUMB. L. REv. 311. [28] SGS Société Générale de Surveilance S.A. v Islamic Republic of Pakistan ICSID Case No. ARB/01/13 [29] SGS Société Générale de Surveilance S.A v Republic of the Philippines, ICSID Case No. ARB/02/6

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