Diligentia quam in suis as a Technique for a Contextual Application of the Full Protection and Security Standard: Considering the Level of Development of Host States in International Investment Law

Pages596-611
DOI10.3366/ajicl.2020.0341
Author
Date01 November 2020
Publication Date01 November 2020
INTRODUCTION

Developing countries are major recipients of international investments and are also important players in the ambit of international investment law. Most of the first bilateral investment agreements had developing countries as signatory states. To date, these states continue to be parties to most of the investment agreements. For instance, a survey done by the United Nations Conference on Trade and Development on the investment agreements signed between January 2016 and June 2018 reveals that these states had a dominant participation.1 Traditionally though, such agreements have focused on protecting foreign investors and their investments – which is normal as it is their ratio legis. In their agreements, developing states included very few, if any provisions related to domestic interests. Of course, in their relationship with developed countries, their bargaining power was dwarfed. Still, the agreements they signed later on with other developing states were very often mere reproductions of those they had previously entered into with industrialised states.2 They did not muster any supplementary efforts so as to negotiate their investment agreements in the sense of protecting at least some of their interests. Some more recent agreements are being framed with a different ilk, with due consideration given to some of the host states’ concerns, like the right to regulate3 or the contribution of foreign investments to local development4 or to sustainable development.5 By analogy, just like human rights treaties protect the human being's fundamental rights and dignity, investment agreements are signed to offer maximum protection to investors and their investments. It is therefore expected that future investment agreements will follow the same pattern of generous protection. This does not mean that the existing legal standards of investment protection cannot be construed in the light of the host states’ – namely developing states’ – local context and specific needs.

Indeed, many investment protection standards are coined in a broad and open manner and this sometimes provides a margin of interpretation for their contextual application, even in the most traditional investment agreements. The aim of this article is to discuss how developing countries can construe such standards as an argument of defence when acting as respondent before an arbitral tribunal. For this purpose, the study will focus on one specific standard: the full protection and security standard (FPS hereinafter). The latter is a worthy laboratory to understand how developing states can build up a legal argument when their responsibility is at stake following an investor's claim. As will be further discussed, the full protection and security standard is a convenient means to assess the level of diligence expected from host states while protecting foreign investments on their territory. It subsequently puts in balance the states’ obligation to accord a certain level of protection to investors and its real available means and capacity to do so.

It is a common practice to insert a full protection and security clause in international investment agreements. An example of such a provision can even be found in a Friendship, Navigation and Commerce Treaty signed between the United States and Brunei in 1850.6 For a more recent example, the bilateral investment agreement signed between Morocco and Nigeria states that ‘[e]ach Party shall accord to investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security’,7 and specifies that ‘“full protection and security” requires each Party to provide the level of police protection required under customary international law’.8 The standard therein is not really or clearly defined and the reference to customary international law is not enlightening. A recent investment agreement entered into by Rwanda and the United Arab Emirates highlights that ‘[f]or greater certainty, “full protection and security” refers to the Contracting Party's obligations to protect the physical security of investors and covered investments […]’,9 The Indian Bilateral Investment Agreement model likewise encloses a standard limited to physical protection.10 The case law has also construed the standard as referring to the physical protection of investments11 even if some arbitral tribunals consider that it has a wider application, thereby also covering the legal protection of investments.12 Such protection is due by the host state against private13 or public14 offences affecting the investor and its investment.15 Host states are expected to apply their best efforts in order to guarantee full protection and security to foreign investments. This guarantee is, however, not absolute.16 In other words, host states must act with due diligence. Due diligence is, for this reason, the cornerstone of the full protection and security standard.17 In the Noble Venture case, the arbitral tribunal considered that the standard is not a strict one but ‘one requiring due diligence to be exercised by the State’.18

In turn, the obligation of due diligence can be objective or subjective. In the first case, it applies in abstracto without any consideration of the signatory parties’ particularities. In the second case, it applies in concreto, that is with due consideration of their specificities. When applied in concreto, the local reality of developing states is potentially taken into consideration and given some weight: their level of development thereby potentially determines their level of diligence. Accordingly, the full protection and security standard becomes proportional to the host state's capacity to grant the due protection. There are some methods to classify a state's level of development. The World Bank uses, for instance, a classification method known as ‘ATLAS’ which enables measurement of the gross national product as revised by the fluctuations in the exchange rates. Measuring the level of development only on the basis of economic revenue often leads to an incomplete and unsatisfactory result19 given that other factors such as income redistribution, the state of inequality, quality of life, education, environment or the social infrastructure, among others, are not taken into account.20 In the World Trade Organisation system, it belongs to the very state parties to classify themselves as developed or developing countries.21 Objectively, some criteria are normally used to identify or at least to characterise the states’ level of development. These are, among others: a low national product, an unequal income redistribution, a high rate of illiteracy, a high unemployment rate, a poor health system, a high rate of demographic growth, poor infrastructure, a failing secondary and tertiary sector, and an incipient administrative, banking and financial sector.22 These elements are common to states considered to be developing ones. And they impact on the means which can reasonably be deployed by these states to protect foreign investors on their territory. Therefore the investors’ expectations of protection must necessarily vary as per the level of development of their host states. Hyperbolically speaking, the level of full protection and security expected by an investor in Sweden is conspicuously different from one reasonably expected to be obtained in modern-day Iraq.

For this reason, it is here argued that the full protection and security standard can be construed as a flexible standard, a standard which can be adapted according to the local context. The legal technique which fosters this adaptability is the diligentia quam in suis rule, which is a category of subjective due diligence recognised by international law. The principle enables a sound ear to be leant to the local reality of developing countries when construing their liability in investment arbitration cases, thereby conciliating the full protection and security standard with the host state's level of development (see section II) while rationalising the standard's application to developing nations (see section III).

THE <italic toggle="yes">DILIGENTIA QUAM IN SUIS</italic> RULE AS A CONCILIATING TECHNIQUE BETWEEN THE HOST STATE'S LEVEL OF DEVELOPMENT AND THE FPS STANDARD

When used as a parameter of the full protection and security...

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