Jean Monnet Center at NYU School of Law

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Before BITs were conceived of, foreign investment was protected by customary international law. Because BITs arose, in part, due to of the demise of the old customary law, a discussion of the role of BITs must begin with a review of the regime that preceded these treaties.

Early in this century, there was a broad consensus among the world's principal nations regarding the appropriate level of protection for foreign investment. These countries believed that investors were entitled to have their property protected by international law and that the taking of an alien's property by a host nation required compensation that was "prompt and adequate." [15] This view should not surprise us. The nations forming this rule were, by and large, wealthy, European countries, whose nationals were engaged in investment abroad but which faced relatively little inward foreign direct investment. Nevertheless, customary international law does not consider the intentions behind countries' behavior, merely the practice and sense of legal obligation. Regardless of the motivation of these countries, therefore, it is fair to say that the prompt and adequate standard was customary international law at the time.

One version of this standard is presented in The Chorzow Factory Case,[16] decided by the Permanent Count of International Justice (P.C.I.J.). The case has its roots in the Treaty of Versailles, signed in 1919. The treaty contained a requirement that certain territories be transferred from German to Polish control and that the status of certain other lands be determined by plebiscite. The Geneva Convention -- adopted to implement the Treaty of Versailles -- and the plebiscites that followed ceded the region of Chorzow, located in Upper Silesia, to Poland. Under the Geneva Convention, countries that took over German territory had the right to seize land owned by the government of Germany and credit the value of that land to Germany's reparation obligations. Any disputes that arose under the Convention were to be referred to the P.C.I.J.

Shortly after Poland took over Chorzow, a Polish court decreed that land belonging to the German company, Oberschlesische Stickstoffwerrke A.G., be turned over to Poland. Litigation ensued on the question of whether the land was "property" of Germany or if it was privately owned by Oberschlesische Stickstoffwerrke A.G. The dispute eventually reached the P.C.I.J.. The Permanent Court concluded that the land was privately owned, and that Poland had seized private property. The Court stated that "there can be no doubt that the expropriation . . . is a derogation from the rules generally applied in regard to the treatment of foreigners and the principle of respect for vested rights."[17] The Court also spoke to the question of appropriate compensation, stating that "reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed."[18] Thus, the Permanent Court enunciated the then existing international law -- expropriations were not permitted and if they occurred, full compensation must be paid.

The requirement of full compensation for expropriation was most clearly articulated in the 1930s when it was challenged by the government of Mexico. Mexico confiscated various properties between 1915 and 1940.19 The United States, whose nationals suffered from these acts of expropriation, sought compensation for its affected citizens. In response to the takings by Mexico, the American Secretary of State, Cordell Hull, put forth what has become the leading formulation of the full compensation standard:

The Government of the United States merely adverts to a self-evident fact when it notes that the applicable precedents and recognized authorities on international law support its declaration that, under every rule of law and equity, no government is entitled to expropriate private property, for whatever purpose, without provision for prompt, adequate, and effective payment therefor.20

The requirement of "prompt, adequate, and effective" compensation has become known as the "Hull Rule," in reference to this statement by Secretary of State Hull.

The protection of foreign investment is typically considered a matter of international law, but domestic law makers have from time to time sought to influence the treatment of investors abroad through domestic legislation. In the early 1960s, for example, the United States Congress passed what would become known as the "First Hickenlooper Amendment." 21 This law requires that the President terminate aid to any country that has seized American-controlled property,[22] has repudiated or nullified contracts with Americans,[23] or has "imposed or enforced discriminatory taxes or other exactions, or restrictive maintenance or operational conditions,"[24] and that has failed to "discharge its obligation under international law . . . including speedy compensation for such property in convertible foreign exchange, equivalent to the full value thereof . . . ."[25] The statute represents an attempt on the part of the United States to provide an enforcement mechanism, through domestic law, that could carry out the American interpretation of international law. Since its adoption, however, the First Hickenlooper Amendment has been applied only twice, once against Ceylon in 1963 and once against Ethiopia in 1979. [26]

A few years later, Congress passed the "Second Hickenlooper Amendment,"[27] which was a reaction to the United States Supreme Court decision in Banco National de Cuba v. Sabbatino. [28] In the early 1960s, the United States reduced the import quota for Cuban sugar. In response, Cuba nationalized various companies in which American citizens held interests, including C.A.V.. A commodities broker named Farr, Whitlock that had contracted to purchase Cuban sugar from C.A.V. found that its seller had been nationalized. Farr, Whitlock entered into a new agreement to purchase the sugar from the Cuban government, agreeing to make payment to Banco National de Cuba. Instead of making payment to Banco National, however, Farr, Whitlock made payment to C.A.V.. Banco National then sued for recovery of the proceeds. The Supreme Court, after reviewing the case, held that:

[T]he Judicial branch will not examine the validity of a taking of property within its own territory by a foreign sovereign government . . . in the absence of a treaty or other unambiguous agreement regarding controlling legal principles, even if the complaint alleges that the taking violates customary international law.[29]

The Permanent Court relied on the act of state doctrine in ruling that it would not examine the legality, under international law, of the actions of Cuba's government in expropriating property.

This Supreme Court ruling provoked a strong reaction from the business community and from the legislative branch. Congress very quickly passed the Second Hickenlooper Amendment which effectively overruled the holding in Sabbatino.

[N]o court in the United States shall decline on the ground of federal act of state doctrine to make a determination on the merits giving effect to the principles of international law in a case in which a claim of title or other right to property is asserted be any party . . . based upon . . . a confiscation or other taking. 30

Although the Hull Rule could, at one time, lay claim to the status of customary international law, it can no longer be said to represent a binding international legal norm. This change in status is the result of disagreement between developed and developing countries as to the validity of the Hull Rule. The set of countries that are, and that have been, net importers of investment capital in this century includes a majority of the developing countries (LDCs) of the world. This is true both at the individual country level -- most developing countries import capital -- and at the collective level -- LDCs, taken as a group, are very clearly net importers of investment. On the other hand, most of the outward foreign investment is made from developed countries.

[15] STEINER, VAGTS, & KOH, supra note 12, at 446.

[16] The Chorzow Factory Case, 1928 P.C.I.J., Ser. A, Nos. 7, 9, 17, 19, reprinted in STEINER, VAGTS, & KOH, supra note 12, at 451-54.

[17] Id. at 452.

[18] Id. at 453. Other international cases supporting this view include the Norwegian Shipowners Case, 1 R. INT'L ARB. AWARDS 332 (1922), and the Spanish-Moroccan Claims arbitration, 2 R. Int'l Arb. Awards 615 (1925).

19 For a description of the Mexican expropriations and the reaction of the United States, see STEINER, VAGTS, & KOH, supra note 12 at 455-565; 3 HACKWORTH, DIGEST OF INTERNATIONAL LAW 655-61 (1942).

20 Reproduced in 3 G. HACKWORTH, DIGEST OF INTERNATIONAL LAW 658-59 (1942).

21 Foreign Assistance Act of 1961, Pub. L. No. 87-195, 77 Stat. 386 (1963) (codified as amended at 22 U.S.C. § 2370(e)(1)(1994)).

[22] 22 U.S.C. § 2370(e)(1)(A) (1982).

[23] Id. at § 2370(e)(1)(B).

[24] Id. at § 2370(e)(1)(C).

[25] Id. at § 2370(e)(1).

[26]See Patricia M. Robin, The BIT Won't Bite: The American Bilateral Investment Treaty Program, 33 AM. U. L. REV. 931, 938-39 (1984).

[27] Pub. L. No.89-171, 79 Stat. 653 (1964), codified at 22 U.S.C. § 2370(e)(2) (1994).

[28] 376 U.S. 398 (1964). Sabbatino deals primarily with the act of state doctrine, a topic that is beyond the scope of this paper. For a discussion of the topic, see LOUIS HENKIN, RICHARD C. PUGH, OSCAR SCHACHTER, & HAND SMIT, INTERNATIONAL LAW: CASES AND MATERIALS 891-941 (2d ed. 1987); STEINER, VAGTS, & KOH, supra note 12, at 753-819.

[29] Sabbatino, 376 U.S. at 428.

30 22 U.S.C. § 2370(e)(2) (1994).

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