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Investment LAW Module Highlighted
Jurisprudence and Legal Theories (University of Lusaka)
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International Investment Law involves a broad array of issues that

encompass the meaning of the term ‘investment’ including the efforts
carried out by countries to attract it. The course provides a general
introduction to international investment law, the nature, theories, and
ideology. It focusses on the historical development of the subject and how
it has evolved. It also critically assesses the main topics pertaining to this
branch of international economic law and covers key topics such as:
conflicting economic theories on foreign investment, host State
sovereignty and the international law rules on foreign investment;
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responsibility of States and of Multinational corporations; problems

relating to the definition of foreign investment ratione materiae and
ratione personae; expropriation and compensation; settlement of
investment disputes; and fostering local investment in small and medium
enterprises.
The main objective of the course is to equip students with a critical

understanding of the fundamental concepts of international investment
law and how these have influenced the local concept of investment law.
At the end of the course, students should be able to:
 Understand the nature and function of the various legal instruments,

mechanisms and processes constituting international investment
law.
 Discuss the main issues which are the object of arbitral awards
concerning direct or de facto expropriation.
 Possess a basic knowledge of the international law rules on the

protection of foreign investments and their regulation and of the
remedies for dispute resolution in the specific field of investments;
 Develop an in-depth understanding of key issues of the substantive

law and policy of foreign investment protection, as well as a critical
perspective on the function of the law and its future development.
UNIT 1 INTRODUCTION TO FOREIGN

INVESTMENT ........................................................................ 5
1.0 Introduction ................................................................................................
................................................. 5

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1.1 Defining
investment .................................................................................................
.................................. 5
1.1.1 Foreign Direct
Investment ...............................................................................................
....................... 5
1.1.2 Portfolio
investment ...............................................................................................
................................. 6
1.2 Economic theories on foreign
investment ............................................................................................... 6
1.2.1 Classical
theory ........................................................................................................
................................ 7
1.2.2 Dependency
theory ........................................................................................................
......................... 7
1.2.3 Middle path
theory ........................................................................................................
......................... 7
1.3 Benefits of foreign
investment..................................................................................................
............... 7
1.4 Factors that can potentially deter FDI
inflow ..................................................................................... 10
1.5 Exercises ....................................................................................................
............................................... 10
UNIT 2 LEGAL FRAMEWORK ON
INVESTMENT .............................................................................. 11
2.0 Introduction ................................................................................................
.............................................. 11
2.1 Legislative
framework ..................................................................................................
......................... 11 2.2 Institutional
framework ..................................................................................................
........................ 11
2.3 Permitted sectors for
investment .................................................................................................
......... 12
2.4 Investment
incentives ...................................................................................................
........................... 12
2.4.1 Types of
incentives ..................................................................................................
............................. 13
2.4.2 Legal regime for
incentives ..................................................................................................
.............. 13
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2.5 Grant of Certificate of

Registration ................................................................................................
... 14
2.6 Exercises ....................................................................................................
............................................... 15
UNIT 3 MULTIFACILITY ECONOMIC
ZONES ................................................................................... 16
3.1 Introduction ................................................................................................
.............................................. 16
3.2 Multifacility Economic
Zone ...........................................................................................................
....... 16
3.3 Developing a Multifacility Economic
Zone ......................................................................................... 17
3.4 Existing Multifacility Economic
Zones .................................................................................................. 17
3.5 Criteria for Operating in a Multifacility Economic
Zone ................................................................ 18 3.6 Significance of a
Multifacility Economic
Zone................................................................................... 18
3.7 Prospects and Challenges faced by the Multifacility Economic
Zones ........................................ 19
3.7
Exercises ..........................................................................................................
......................................... 19
UNIT 4 SMALL AND MEDIUM
ENTERPRISES ................................................................................... 21
4.0
Introduction ......................................................................................................
........................................ 21 4.1 What are Micro, Small and Medium
Enterprises? ........................................................................... 21
4.2 Historical Background of the SMEs Sector in
Zambia ..................................................................... 21
4.3 Significance of SMEs in
Zambia .......................................................................................................
... 24
4.4 Promotion of Micro, Small and Medium
Enterprises ........................................................................ 24
4.5 Trade and Industrial Development
Fund ........................................................................................... 24
4.6 Exercises ....................................................................................................
............................................... 25
UNIT 5 BILATERAL INVESTMENT
TREATIES .................................................................................... 26
5.1 What are Bilateral Investment
Treaties? ........................................................................................... 26
5.2 History of Bilateral Investment
Treaties ............................................................................................. 26
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5.3 Structure of a
Treaty .........................................................................................................
.................... 28
5.4 Emerging Issues in Bilateral Investment
Treaties .............................................................................. 36
5.4.1 Human
Rights ...................................................................................................
............................... 36
5.4.2 Economic
Development ........................................................................................
......................... 36
5.4.3 Environment
Concerns ..............................................................................................
..................... 37
5.5 SADC Model
BIT ..............................................................................................................
......................... 37
5.6 Exercises ....................................................................................................
............................................... 38
UNIT 6 POLITICAL RISK IN FOREIGN
INVESTMENT ........................................................................ 39
6.2 Investor Motivation for
Investment ......................................................................................................
39
6.2.1 Market
Seeking ................................................................................................
............................. 39
6.2.2 Resource
Seeking ................................................................................................
.......................... 39
6.2.3 Efficiency
Seeking ................................................................................................
......................... 39
6.2.4 Strategic asset-
seeking..................................................................................................
............... 39
6.3 Political Risks in foreign
investment .....................................................................................................
40
6.3.1 Nationalization .....................................................................................
......................................... 41
6.3.2 Expropriation ........................................................................................
................................................. 41
6.4 Legality of
Expropriation ....................................................................................................
................. 45
6.4.1 Measure must serve a Public
Purpose ....................................................................................... 45
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6.4.2 Measure must not be Arbitrary and

Discriminatory ............................................................... 46
6.4.3 Procedure must follow the Due
Process .................................................................................... 46
6.4.4 Prompt, Adequate and Effective
Compensation ..................................................................... 46
6.5
Exercises ..........................................................................................................
......................................... 48
UNIT 7 SETTLEMENT OF FOREIGN INVESTMENT
DISPUTES ............................................................ 49
7.0 Introduction ................................................................................................
.............................................. 49
7.1 International Centre for Settlement of Investment
Disputes ........................................................... 49
7.1.1 Purpose of the ICSID
Convention ...........................................................................................
.... 50
7.1.2 Jurisdiction of
ICSID ....................................................................................................
.................. 51
7.2 Southern Africa Development Community
Tribunal ......................................................................... 63
7.2.1 Jurisdiction of the
Tribunal ................................................................................................
........... 63
7.2.2 Enforcement of
Rights ...................................................................................................
................ 64
7.2.3 Mike Campbell v Republic of
Zimbabwe ................................................................................. 65
7.2.4 Status of the SADC
Tribunal ................................................................................................
........ 65
7.3 Common Market for Eastern and Southern Africa Court of
Justice .............................................. 65
7.3.1 Court of
Justice .............................................................................................................................. 66
7.4
Exercises ..........................................................................................................
......................................... 67
UNIT 1
INTRODUCTION TO FOREIGN INVESTMENT

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1.0 Introduction
This Unit introduces student to principles, theories, ideologies, and

historical development of the concept of foreign investment.
1.1 Defining investment
The Zambia Development Agency (ZDA) Act defines ‘investment’ as

contribution of capital, in cash or in kind, by an investor to a new business
enterprise, to the expansion or rehabilitation of an existing business
enterprise or to the purchase of an existing business enterprise from the
State’.1
1.1.1 Foreign Direct Investment
The term ‘Foreign Direct Investment’ has defied a singular definition but
many of the definitions share common characteristics. The International
Monetary Fund Balance of Payments Manual which defines it as an
investment made to acquire lasting interest in enterprises operating
outside of the economy of the investor.
The World Trade Organisation (WTO) defines it as what occurs when an

investor based in one country (the home country) acquires an asset in
another country (the host country) with the intent to manage that asset.
The ZDA Act states that it is investment brought in by an investor from

outside Zambia.2
Types of foreign direct investment
There are four (4) major types of FDI. These are:
1. Greenfield Investments
Greenfield investment means the expansion of existing facilities or a

direct investment in new facilities (in an area where no previous facilities
exist).3 They are the primary objective of a host nation’s promotional
efforts, due to: creation of new production capacity and jobs, transfer
technology and know-how, and can lead to linkages to the global
marketplace. Section 12(e) of ZDA Act provides that as part of the
1 Section 3
2 Section 3
3 http://www.investmentsandincome.com/investments/foreign-direct-investments.html (accessed 25 June 2012)
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Agency’s duties is to promote Greenfield investments through joint

ventures and partnerships between local and foreign investors.
2. Brownfield Investments
This is the purchasing of an existing production or business facility by

companies or governmental agencies for the purpose of starting new
product or service production activity. 4 It is term related “Greenfield
Investment” which is where a site in advance used for “un-clean” business
purpose, such as a steel mill or oil refinery, is cleaned up and used for a
less polluting purpose, such as commercial office space or a residential
area. The term “brownfields” came into use in 1992 year, at a U.S.
congressional field hearing hosted by the Northeast Midwest
Congressional Coalition.5
3. Mergers and Acquisitions
An acquisition normally involves the purchase of another firm’s assets and

liabilities, with the acquired firm continuing to exist as a legally owned
subsidiary of the acquirer. A merger is a combination of two firms where a
new corporate entity is created by exchanging the shares of both
companies for shares in the new company. Put simply, it is a general term
used to refer to the consolidation of companies.
4. Joint ventures
This means an enterprise that is a business undertaking between two or

more persons for mutual benefit e.g. China-Zambia Mulungushi Textiles.
1.1.2 Portfolio investment
Portfolio investment refers to investment in securities that is intended for

financial gain only and does not create a lasting interest in or effective
management control over an enterprise.6 In contrast to foreign direct
investment, which is the acquisition of controlling interest in foreign firms
and businesses, portfolio investment is foreign investment into the stock
markets.7 Portfolio investment does not allow the foreign investor to
participate in the management or control of the entities where he owns
shares. There are two main reasons why investment in shares is not
included in the WTO definition. The first reason is that it may cause
4 http://www.investorwords.com/11918/brownfield_investment.html#ixzz1xYm6HRVb (accessed 25 June 2012)

6 http://www.businessdictionary.com/definition/portfolio-investment.html#ixzz1xYlbxPjw (accessed 25 June 2012)
7 http://glossary.econguru.com/economic-term/portfolio+investment (accessed 25 June 2012)
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instability and the second is that the risks in portfolio investments are
manageable whereas asset management is not. The factors that affect
international portfolio investment are: (i) tax rates on interest or dividends
(investors will normally prefer countries where the tax rates are relatively
low); and (ii) interest rates (money tends to flow to countries with high
interest rates).
1.2 Economic theories on foreign investment
There are three (3) main theories of foreign investment. These are:
1.2.1 Classical theory
This theory takes the view that FDI benefits the host economy fully.
According to the theory, the fact that foreign capital is brought in by the
MNC that capital may be used for a number of developmental projects.
The investor also brings with him into the host economy technology that is
absent in the host country which ultimately leads to the diffusion of that
technology within the economy. Furthermore, there is employment
created with the added advantage of acquisition of new skills that are
associated with the foreign investor’s technology. A number of other
benefits flow from the foreign investors entry and these include
infrastructure and upgrading of transport, health or education sectors.
Accordingly, all restrictions on FDI should be eliminated so as to increase
global wealth with regard to the comparative advantage theory. A number
of other benefits flow from the foreign investors entry and these include
infrastructure and upgrading of transport, health or education sectors.
1.2.2 Dependency theory
This traces its roots from the Marxist theory and economic theory. It
basically considers FDI to as a tool for imperialist domination that should
he completely forbidden since it entails no advantages for host countries.
It therefore, views these multinational corporations as tools for exploiting
host countries to the exclusive benefit of their capitalist imperialist home
countries.
This theory does not accept the possibility of any sort of development in
the periphery but only the development of underdevelopment. This theory
affirms that what is decisive is that the economic development of under
developed states is inimical to the interests of the advanced capitalist
countries. In ensuring that development does not trickle down to the
developing nations, the more advanced developed states form alliances

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with the pre capitalist domestic elites with the intention of inhibiting any
such form of transformation.
By acting in such a manner, the advanced nation states will continuously

have ease of access to all domestic resources thereby maintaining their
traditional models of surplus extraction. As a result of this, any prospects
of development for dependant countries is severely restricted because the
entire surplus they generate would be expropriated in large part by
foreign capital. This situation would not only reduce the resources that are
destined for investment but even the internal multiplying effect because
capital goods would have to be purchased abroad. As a result of this,
there would definitely be economic stagnation ensuring the
underdevelopment of the dependant peripherals.
1.2.3 Middle path theory
This presents a shift away from ideological tendencies towards FIs. While
supporting the view that FI through MNCs could have harmful results in
certain circumstances, properly harnessed MNCs could be engines that
fuel the growth of the developing world.
1.3 Benefits of foreign investment
The host countries view foreign investment in terms of its costs and its
benefits, its risks and its rewards. In other, words host countries perceive
FI largely in terms of benefits such jobs that the foreign investment will
bring to their countries. Host country governments believe that the
establishment of foreign investment projects within their territories offers
them numerous benefits. Under proper conditions, investors expect it to
bring to the host countries a combination of resources, skills, and
activities that will result in a surplus of output and real income beyond
that which goes directly to the investor as profit. The opportunities that
host countries look for from fi include the following:
1. Capital formation
Foreign Direct Investment is seen as an important source of capital

formation. Capital inflow is seen as a way of creating a surplus in the
capital account of the balance of payments or to make up for the deficit
on the current account.8 It is especially important for developing countries
like Zambia as they can easily be able to increase the economies capital
without the need to accrue any further debt.
8 Section 5(3)(a)
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2. Transfer of Technologies
It is more important that technology is diffused with spill-over into the

local production process, and that technology be adopted and adapted by
local enterprises.9
3. Employment creation
Foreign Direct Investment is not always accompanied by substantial

employment creation and in most cases lead to job losses when public
companies are privatised.10
4. Transfer of management skills
This takes place when investors set up new plants, acquire companies or
outsource to local subcontractors.
5. Increased export competitiveness
There is an increased anticipation of export competitiveness given the

move towards export oriented growth in most emerging countries.
6. Spill overs effects
Spillovers are broadly defined as the transfer of managerial practices,

technology transfer, market techniques or any knowledge embodied in a
product or service. It is argued that when MNCs invest in a particular
country, the theoretical benefits of technological advantages allow the
MNCs to compete successfully with local firms. As a consequence of this,
the host country firms have the potential to learn from the foreign
affiliates. It is a common practice that parent companies support their
foreign subsidiaries by ensuring adequate human resources and
infrastructure are in place. With particular regard to Greenfield
investments into new business sectors, there may indeed be a stimulation
of new infrastructure development and technologies to host economies.
Furthermore, MNCs have been said to improve labour skills through

mechanisms such as on-thejob training, seminars, and formal education.
The pool of knowledge of getting things done in the domestic industry is
expanded and enhanced. Thus this leads to a diffusion of skills from an
MNC to a local industry. The major contribution by MNCs generally is the
9 Section 69(e)
10 Section 69(b); 5(3)(f)
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provision of technical assistance, training and other information to raise

the quality of the suppliers’ products. In this way, many local suppliers are
assisted in purchasing raw materials and intermediate goods and in
modernizing or upgrading production facilities.
7. Linkages
Foreign Direct Investment should be able to create linkages between the

host state and other regions or countries. According to the ZDA Act, in the
exercise of its functions, the Agency shall have regard to the need to
promote regional development, cooperation and integration. 11
8. Competition
The entry by MNCs into local markets may reduce the concentration of
firms in a market with the result that there is an increase in competition.
The ultimate benefit of this to consumers is lower prices, perhaps a wider
choice of goods and reduction in organizational inefficiencies.
9. Stimulation of national economy
National economies are set to benefit from FDI in that it contributes to

Gross Domestic product (GDP), Gross Fixed Capital Formation (total
investment in a host economy) and balance of payments. Subsidiaries of
MNCs, which bring the vast portion of FDI, are estimated to produce
around a third of total global exports. However, the impact of FDI will
largely depend on the conditions of the host economy, such as the level of
domestic investment or savings, the mode of entry and the sector
involved, as well as a country’s ability to regulate foreign investment.
10. Social development
Foreign Direct Investment has the effect, where it generates and expands
businesses, of stimulating employment, raise wages and replace declining
market sectors. These investments may be helpful in assisting the host
countries to set up mass educational programs which in the long run may
help them educate the disadvantaged sections of the society.
1.4 Factors that can potentially deter FDI inflow
There are certain factors that can deter the inflow of FDI to a country e.g.
inadequate infrastructure, inadequate number of trained human
11 Section 5(3)(g)
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resources, underdeveloped human capacity, high cost of energy, and high

levels of corruption. Further, there are other factors i.e. economic factors,
social-cultural factors - tribalism, crime, conflicting cultures, and illiteracy;
and (3) technological factors i.e. poor advancement of technology. 12
1.5 Exercises
1. Discuss why governments in developing countries seek for

foreign direct investment and what can the law do in order to
attract it?
2. Foreign investment raises a number of concerns to the host

country’s nationals. Explain at least three of those concerns
and how they can be addressed.
3. “International investment plays a vital role in development

and poverty reduction. Investment can improve livelihoods
and bring jobs, services, and infrastructure, when it is
managed responsibly within the context of an effective
regulatory framework.” Critically discuss
4. The cynics say that there is little or no difference between

foreign direct investment and portfolio direct investment.
Critically discuss.
5. Foreign direct investments always have benefits that

surpass any negative consequence thereof. Critically
discuss.
UNIT 2
LEGAL FRAMEWORK ON INVESTMENT
2.0 Introduction
The aim of this Unit is to demonstrate the development of the legal

framework for investment in Zambia and highlight salient provisions of
the ZDA and their attainability.
2.1 Legislative framework
12 Kenneth Mwenda Legal Aspects of Foreign Direct Investment (1999) (Vol. 6 No. 4)
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The principle legislation on investment in Zambia is the Zambia

Development Agency Act No. 11 of 2006. According to section 1(2), the
Act applies to an investor, who may invest in all regions of the Republic
and in all sectors and industries other than the industries specified in the
First Schedule. The ZDA Act has repealed and replaced: Investment Act;
Privatisation Act; Small Enterprises Development Act; Export Processing
Zones Act; and Export Development Act.
Some of the stated objectives are to: (a) foster economic growth and
development by promoting trade and investment in Zambia through an
efficient, effective and coordinated private sector led economic
development strategy; (b) attract and facilitate inward and after care
investment; (c) promote Greenfield investments through joint ventures
and partnerships between local and foreign investors. 13
2.2 Institutional framework
The Zambia Development Agency (ZDA) is the body that deals with
investments. It main function as stated in section 5(1) is to further the
economic development of Zambia by promoting efficiency, investment
and competitiveness in business and promoting exports from Zambia. The
specific functions are inter alia to: (a) give advice to the Minister; (b) study
market access; (c) formulate investment promotion strategies; (d)
promote and coordinate Government policies on investment; (e)
undertake economic and sector studies and market surveys so as to
identify investment opportunities; (f) control the privatisation of State
Owned Enterprises; (g) develop or facilitate the development of multi-
facility economic zones by investors; and (h) encourage and promote the
transfer of appropriate technology.14
In promoting investment, the ZDA shall have regard to the need to: (a)
improve the overall economic performance of the economy; (b) reduce
regulation of industry where this is consistent with the social and
economic goals of the Government; (c) encourage the development and
growth of Zambian industries; (d) facilitate adjustment to structural
changes in the economy; (e) protect the interests of industries,
employees, consumers and the community; (f) increase employment in
Zambia; (g) promote regional development, cooperation and integration;
(h) monitor the progress made by Zambia’s trading partners in reducing
both tariff and non-tariff barriers; (i) ensure that industry develops in a
way that is ecologically sustainable; (j) ensure that Zambia meets its
international obligations and commitments; and (k) maintain regular,
13 The Preamble
14 Section 5 (2)
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productive and effective dialogue and cooperation with the public and
private sector and encourage public-public dialogue, private-private
dialogue and private-public dialogue.15
The ZDA is run by a Board which consists of sixteen members. 16 Besides

the running of ZDA, the Board is also mandated to appoint Director
General17; promote private investments18; micro and small industries.19
2.3 Permitted sectors for investment
Investment laws will normally seek to define the kind of investment

projects which foreigners will be permitted or encouraged to undertake.
Despite proclaimed “open-door policies” probably there may be no
country which allows foreign nationals to invest in any and all types of
economic activity. At the very minimum, considerations of national
security and defence dictate that particular sensitive industries, such as
armaments, be firmly controlled by the nationals of the host country, if
not by the state itself. Such prohibition may extend far beyond the
defence industries, especially when the government wants to prevent
foreign domination of important sectors of the economy.
The areas in which foreign investment is not permitted are provided for in
section 2(1)(2) of the First Schedule. These are: (i) an industry
manufacturing arms and ammunition, explosives, military vehicles and
equipment, aircraft and any other military hardware; (ii) an industry
manufacturing poisons, narcotics, dangerous drugs and toxic, hazardous
and carcinogenic materials; and (iii) an industry producing currency, coins
and security documents.
2.4 Investment incentives
There is no uniform definition of what constitutes an “investment

incentive”. The only major international instrument that contains a partial
definition is the SCM Agreement. By definition, incentives are:
Measures designed to influence the size, location or industry of a

FDI investment project by affecting its relative cost or by altering
the risks attached to it through inducements that are not available
to comparable domestic investors.20
15 Section 5(3)
16 Section 6 (1)
17 Section 10
18 Section 17
19 Section 22
20 OECD Assessing Incentive Policies: Checklist for Foreign Direct Investment Incentive Policies (2003) 21
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Incentives can be used for attracting new FDI to a particular host country
or for making foreign affiliates in a country undertake functions regarded
as desirable such as training, local sourcing, research and development or
exporting.
2.4.1 Types of incentives
There are four major types of investment incentives. These are:
1. Regulatory
These are exemptions from national or sub-national rules or regulations

e.g. easing of environmental, social, and/or labour related requirements.
2. Financial
These are used in typically one of three sets of circumstances: (a) to

overcome the perception of a potential host area as being disadvantaged
compared to comparable sites; (b) to overcome relocation costs
(relocation and expatriation support, administrative assistance; (c) to
correct market imperfections and overcome transaction costs (loan or
interest subsidies).
3. Fiscal
These would include: a corporate tax of 0% for an initial period of 5 years

from the first year that profits are made. For years 6 to 8 corporate tax
will be paid on 50% of profits and in year 9 to 10 on 75% of the profits;
Dividends exemption from tax for 5 years from the year of first
declaration; Capital Expenditure on improvement or for the upgrading of
infrastructure qualify for improvement allowance of 100% of such
expenditure; Suspended Customs Duty to 0% for 5 years on machinery
and equipment.21
4. Non-fiscal
These are investment guarantees and protection against state

nationalization; free facilitation for application of immigration permits,
secondary licences, land acquisition and utilities; investor ownership of
land in the company’s name; investors, who invest at least US $ 250,000,
are entitled to a self-employment permit.22
21 ZDA Why Invest in Zambia? (2012) 4
22 Section 65
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5. Indirect incentives
These are designed to enhance the profitability of a FDI in various indirect

ways e.g. the government may provide land and designated infrastructure
at less-than-commercial prices.
2.4.2 Legal regime for incentives
The regime on investment incentives is governed by the ZDA Act, Income

Tax or Customs and
Excise Act, Regulation by Minister of Finance, and Mines and Mineral
Development Act. Under the ZDA Act, the Minister responsible for finance,
in consultation with the Minister, can make regulations in respect of
incentives offered under the Act.23
An incentive offered under the ZDA Act is valid for a period of five years
from the grant of the licence, permit or certificate. 24 In order to qualify, an
investor investing not less than $500,000 or the equivalent in convertible
currency is entitled to incentives as specified by or under the Income Tax
Act or Customs and Excise Act.25
An incentive can be conditioned upon an undertaking to employ a certain
number of persons.26An investor is only entitled to an incentive unless the
investor holds a licence, permit or certificate of registration. 27 Relief or
exemption from any tax or duty to which an investor is eligible can only
be effected by the Commissioner-General upon the Board certifying that
the investor has complied fully with the ZDA Act and any condition
prescribed.28
Where a double taxation agreement exists between Zambia and another

country, foreign tax payable by an investor to the other country in respect
of any foreign income shall be as determined under that agreement. 29
23 Section 54
24 Section 55
25 Section 56
26 Section 17(2), and 69(2)
27 Section 59
28 Section 60
29 Section 61. Double taxation occurs when the same transaction or income source is subject to two or more
taxing authorities. This can occur within a single country, when independent governmental units have the power
to tax a single transaction or source of income, or may result when different sovereign states impose separate
taxes, in which case it is called international double taxation. The consequence of double taxation is to tax
certain activities at a higher rate than similar activity that is located solely within a taxing jurisdiction. This leads to
unnecessary relocation of economic activity in order to lower the incidence of taxation, or other, more
objectionable forms of tax avoidance- available:
http://legal-dictionary.thefreedictionary.com/Double+Taxation+Agreements (accessed 26 June 2012) 30 Section
69
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2.5 Grant of Certificate of Registration
In order for a licence to be granted, an application to ZDA must be made.

According to section 68(1), a person who wishes to: (a) develop premises
as a multi-facility economic zone; (b) export prescribed goods and
services; (c) invest in any business enterprise; (d) register a micro or
small business enterprise, education enterprise, skills training enterprise
or rural business enterprise for purposes of this Act; or (e) operate a
business enterprise in a multi-facility economic zone shall submit an
application to the Board in a prescribed form.
In considering an application for a certificate of registration the Board

shall have regard to: (a) the need to promote economic development and
growth; (b) the extent to which the proposed investment will lead to the
creation of employment opportunities and the development of human
resources; (c) the degree to which the project is export oriented; (d) the
impact the proposed investment is likely to have on the environment in
accordance with the Zambia Environmental Management Act; (e) the
possibility of the transfer of technology; and (f) any other considerations
that the Board considers appropriate.30
The certificate of registration once granted shall be valid for a period of

ten years from the date of issue, during which period the investor shall
implement the proposed investment30, which may be renewed upon
application.31 The Board is mandated to maintain a register of investors
and the particulars of the investors, the conditions attached, any
amendments, suspensions or revocations, any renewal. 32
Where an investor is unable to implement the investment, he shall notify

the Agency within thirty days. 33 An investor is not permitted to assign,
code or otherwise transfer the investor’s certificate of registration to any
other person without the prior approval of the Board. 34 The Board may,
upon conducting due investigation, where the investor has been given an
opportunity to exculpate oneself, suspend or revoke a certificate of
registration if the investor obtained it on the basis of fraud, negligent
misrepresentation or any false or misleading statement. 35
30 Section 71
31 Section 72
32 Section 73
33 Section 74
34 Section 75
35 Section 77
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2.6 Exercises
1. Describe the historical development of the legislation that

governs investment in Zambia and state how this has been
influenced by international law.
2. The ZDA Act contains certain iniquitous provisions skewed in

favour of investors. Discuss.
3. To what extent do you agree with the criticism by some

scholars that the nature of incentives given under the ZDA
Act are skewed in favour of foreign investors?
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UNIT 3
MULTIFACILITY ECONOMIC ZONES
3.1 Introduction
This Unit introduces students to the concept of Multifacility Economic

Zones (MFEZ) and how they have been mainstreamed in Zambia. It also
assists students appreciate how MFEZ program is being used as a tool to
foster investment in line with vision 2030.
3.2 Multifacility Economic Zone
The idea of MFEZ came into Zambia in 2001 following the enactment of
the Export Processing Zone Act No. 7 of 2001. This Act established the
Zambia Export Processing Zone Authority (ZEPZA) as the body mandated
to address promotion of investment in EPZ. However, by 2004, ZEPZA had
not become operational.
Following a number of policy changes, which also led to repeal of the EPZ
Act and replacing with the ZDA Act in 2006, the government came up with
Multifacility Economic Zone (MFEZ) program. The MFEZ program falls
under the auspices of the Triangle of Hope (ToH) initiative which is aimed
at creating the platform for Zambia to achieve economic development by
attracting significant domestic and foreign direct investment (FDI) through
a strengthened policy and legislative environment. 36 The implementation
of MFEZs is designed to make Zambia competitive through increased
activity in the trade and manufacturing sectors, which have numerous
positive spill over effects in other sectors such as utilities, transport,
agriculture and services. The MFEZs are for both export-oriented and
domestic-oriented industries and blend the best features of the free trade
zones (FTZs), export processing zones (EPZs) and the industrial
parks/zones concept and create the administrative infrastructure, rules,
regulations etc. that benchmark among the best dynamic economies. 37
The blending of physical infrastructure with an efficient and effective
36 The Triangle of Hope (ToH) was introduced to Zambia in 2005 by the Japanese Government through Japan
International Corporation Agency (JICA). It emphasises on political will and integrity, private sector dynamism
and integrity and civil service efficiency and integrity as key forces that enable the economy to attain accelerated
economic development.
37 Free trade zones (FTZs) are fenced-in, duty-free areas, offering warehousing, storage, and
distribution facilities for trade, transhipment, and re-export operations. Export Processing
Zones are industrial estates aimed primarily at foreign markets. Hybrid EPZs are typically sub-
divided into a general zone open to all industries and a separate EPZ area reserved for export-
oriented, EPZ-registered enterprises.
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administrative infrastructure will create the ideal investment environment

for attracting major world class investors.38
The key priority sectors for MFEZ are: Information and Communication
Technology (ICT); Health; Education and skills training; Manufacturing;
Tourism; and Processing of products.
The principle legislation governing the MFEZs is mainstreamed in the

Zambia Development Agency (ZDA) Act No. 11 of 2006. In addition, the
regulations and guidelines governing the declaration and establishment of
MFEZs were put in place through a Statutory Instrument No. 65 of 2007.
3.3 Developing a Multifacility Economic Zone
The creation of a MFEZ is regulated by Act No. 11 of 2006 and the Zambia
Development Agency (ZDA) is responsible for this. Section 5 (2) of the
ZDA Act provides that, the role of ZDA, inter alia, are: (i) develop multi-
facility economic zones or facilitate the development of multifacility
economic zones by investors; (ii) administer, control and regulate MFEZs;
(iii) monitor and evaluate the activities, performance and development of
enterprises operating in MFEZs; and (iv) promote and market multi-facility
economic zones among investors.
In accordance with section 18 (1) of the ZDA Act, the Minister can declare
an area, premises or building to be a multi-facility economic zone and also
prescribe the terms and conditions under which such goods produced and
services provided in a multi-facility economic zone may be sold, exported
or disposed of. Section 18 (2) enables the minister to prescribe the: (a)
limits of the area, premises or building declared as a multi-facility
economic zone; (b) facilities to be provided and maintained within a multi-
facility economic zone; (c) terms and conditions under which such goods
produced and services provided in a multi-facility economic zone may be
sold, exported or otherwise disposed of; (d) activities which are prohibited
within a multi-facility economic zone; (e) conditions under which goods
may be removed from a multi-facility economic zone; (f) the powers and
obligations of an investor in a multi-facility economic zone; and (g) such
other matters that are necessary for the effective and efficient operations
of multi-facility economic zones.
A person who wishes to develop premises as a multi-facility economic

zone or operate a business enterprise in a multi-facility economic zone
38 http://www.mcti.gov.zm/index.php/investing-in-zambia/multifacility-economic-zones/85-multi-facility-economic-
zones (accessed 5 June 2012)
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shall submit an application to the Board. 39 In considering an application for

a licence, permit or certificate of registration the Board shall have regard
to the degree to which the project is export oriented. 40
3.4 Existing Multifacility Economic Zones
Currently there are mainly three MFEZs in Zambia:
a) The Lusaka South Multi Economic Zone (LS-MFEZ)
The LS-MFEZ is a public sector led commercial project through which the
government is providing hard and soft infrastructures to support the
development of the private sector. It is planned and established with a
strong public sector participation involving ZESCO Limited, Zamtel, Lusaka
Water and Sewerage Company (LWSC), Road Development Agency (RDA)
and Industrial
Development Corporation (IDC). The LS-MFEZ is the SPV established in
June 2012 by the Ministry of Finance to manage, operate and develop the
zone. As of August 2015, IDC has taken over the shareholding in LSMFEZ
Ltd on behalf of the Ministry.
b) Zambia-China Economic & Trade Cooperation Zone (ZCCZ)

(Lusaka East MFEZ)
ZCCZ is the first MFEZ declared by Government in 2007 according to

section 18 of ZDA Act. It is also the first Chinese overseas economic &
trade cooperation zone established in Africa. The zone is a multi-use
facility and open for both foreign and Zambian firms. The intended sectors
include agriculture (circular and tourism agricultures), agro-processing,
brewery, pharmaceuticals, building materials, logistics (storage),
international commerce, etc.
c) Chambishi Multi facility Economic Zone (CMFEZ)
The Chambishi MFEZ is a sub-zone of ZCCZ with the same developer –

CNMC, which was opened in 2007. Located in Chambishi, the MFEZ is also
a multi-functional zone and open for both foreign and domestic investors.
The priority sectors include mining, engineering equipment assembly,
construction materials, fertilizers, agriculture, and service sectors such as
banking and hospitals, etc.
39 Section 68 (1) (a) (e)

40 Section 69 (c)
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3.5 Criteria for Operating in a Multifacility Economic Zone
According to Reg. 8 of S.I no. 65 of 2007, in order to qualify to operate in a

MFEZ, an investor must demonstrate that the investment will provide: (1)
the attraction of local and foreign indirect investment; (2) the amount and
quality of local employment creation; (3) the extent of skills development
and transfer to local entrepreneurs and communities; (4) the extent to
which the project will lead to expansion of local production; (5) the level of
utilization of local raw materials and intermediate goods; (6) the
introduction and transfer of technology; (7) the production of new
products; (8) the impact proposed investment is likely to have on the
environment; (9) the extent to which the project will lead to the
diversification of the economy; (10) the extent to which the project leads
to increased foreign exchange earnings; (11) the degree to which the
project is export oriented; (12) the extent to which the project leads to
import substitution; (13) the extent to which the project leads to
utilisation of PTAs; (14) the extent to which the project leads to social
development; and (15) promotion of economic development and growth. 41
The key priority sectors for MFEZ are: Information and Communication
Technology (ICT); Health; Education and skills training; Manufacturing;
Tourism; and Processing of products.
3.6 Significance of a Multifacility Economic Zone
The significance of the MFEZ lies in its ability to promote more export and
thereby enhancing the inflow of foreign currency. Its efficacy largely
depends on the ability and the will of a government to distribute the
proceeds of growth from these areas outwards. To a great extent, the fate
of zone initiatives has been determined from the outset, by choices made
in the establishment of policy frameworks, incentive packages, and
various other provisions and bureaucratic procedures. As Yue-man Yeung
et al opined “…the combination of favorable policies and the right mix of
production factors in the SEZs resulted in high rates of economic growth
unprecedented in China.”42
3.7 Prospects and Challenges faced by the Multifacility Economic Zones
The following are the main challenges in implementing the zone

programs.
41 Section 69 (a)
42 Yue-man Yeung, Joanna Lee and Gordon Kee “China’s Special Economic Zones at 30” Eurasian Geography
and Economics (2009) (Vol. 50 No. 2) pp. 222–240 at 224
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1. The weak institutional capacity and inefficient services of the

public sector
The ZDA is the main government entity responsible for the MFEZ program.
Given the lack of expertise and experience of most officials in the agency
in terms of SEZ development, they are not able to provide the right
incentives and efficient services that are demanded by the private sector.
2. Inadequate infrastructures
The government has not undertaken to provide for infrastructure required

by private zone developers e.g. electricity and water.
3. Weak linkages between the zones and local firms
Many firms in the zones show interests in sourcing locally, especially those
in agribusiness, which will help them to reduce the logistics and
transaction costs. However, they also feel most local SMEs cannot meet
their requirements in terms of stable volume, quality and standards, etc.
This involves many local products, such as barley, cassava, mushroom,
fruits and livestock, etc. If local firms’ productivity, quality and standards
can be improved, it will greatly help with the zonelocal firm linkages. In
addition, some investors in the zones also feel it’s difficult to find suitable
labors from the local market.
The following are the possible Interventions that could be taken to support
the growth of MFEZs: (1) Institutional and capacity building; (2)
Infrastructure support e.g. power shortage; and (3) Support for the SEZ –
local economy linkages.
3.7 Exercises
1. What benefit do the MFEZ pose on the Zambian economy

and how can the country latch on such benefits in order to
avert the potential challenges?
2. What other intervention can government put in place to

avoid the MFEZ from becoming a ‘white elephant’?
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UNIT 4
SMALL AND MEDIUM ENTERPRISES
4.0 Introduction
The Unit introduces students to the concept of small and medium

enterprises (SME) and how it relates with investment. It also examines
how SMEs could be used to foster investment.
4.1 What are Micro, Small and Medium Enterprises?
There is no universally accepted definition of Micro, Small and Medium

Enterprises (SMEs). Each country defines SMEs in a different way
according its economic position, among others. Consequently, a number
of SMEs do not access legislative provisions for SMEs such as finance and
other facilities because they may not fall in the bracket of the national
definition though in the actual fact they may qualify to be called SMEs. On
the other hand, other enterprises may be mature enough and may not
require direct government intervention hence the right definition ensures
that only those enterprises which genuinely require support are targeted
by public schemes.
The SED Act defined an enterprise as an “undertaking engaged in the

manufacture or provisions of services or any undertaking carrying out
business in the field of manufacturing, construction and trading services
but does not include mining or recovery of minerals.” Under the SED Act,
a distinction between ‘micro’ and ‘small’ enterprise were distinguishable.
A “micro enterprise” being ‘any business enterprise: (a) whose amount of
total investment, excluding land and buildings, does not exceed ten
million kwacha; (b) whose annual turnover does not exceed twenty million
kwacha; and (c) employing up to ten persons.’ The Act also defined “small
enterprise” as any business enterprise- (a) whose amount of total
investment, excluding land and building, does not exceed- (i) in the case
of manufacturing and processing enterprises, fifty million kwacha in plant
and machinery; and (ii) in the case of trading and service providing
enterprises, ten million kwacha; (b) whose annual turnover does not
exceed eighty million kwacha; and (c) employing up to thirty persons.’ 43
The ZDA Act has defined both as ‘any business enterprise whose total
investment, excluding land and buildings, and annual turnover and the
number of persons employed by the enterprise does not exceed the
43 Section 2, SED Act

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numerical value or number prescribed.’ 44 However, there is no definition

of medium enterprise either under the SED or ZDA Act.
4.2 Historical Background of the SMEs Sector in Zambia
After attaining independence in 1964, Zambia had no policy on the private

sector development in particular the SMEs. It had no special legal
framework promoting the SMEs since the economy was enjoying the high
prices of copper hence ignoring SME sector. The country depended much
on mining copper and only the public sector was visible by then.
Unfortunately, the copper prices collapsed in 1975 and at the same time
the oil prices soared. With decreasing profitability in the copper business,
the Zambian government had to find alternative ways of sustaining its
economy therefore, after 1981, it begun to initiate policies targeted at
promoting SMEs. This was spurred by a realisation of the importance of
the SMEs sector and its contributions to the urban and rural economy. The
government recognised the challenges that the sector was facing and
promulgated the Small Industries Development Organisation (SIDO) Act of
1981. The SIDO Act was an attempt to enhance the contribution of the
sector to the national economy by addressing the inherent sector
challenges.
In the mid-1980s, there were further attempts for policy support to the
sector. This was made in the Fourth National Development Plan (1988 to
1993) whose objectives were:
1. Identify and promote SMEs that have potential for output expansion
and employment generation in a manner that structurally integrates
such activities to complement the largescale enterprises sector;
2. Upgrade production, managerial, organizational and marketing

capabilities of entrepreneurs
particularly among the youth;
3. Identify training schemes for youth in engaged in SMEs that have

potential for production expansion, income and employment
generation;
4. Provide the necessary infrastructure for the operation of SMEs;
5. Promote, where possible, accessible credit facilities for SMEs that

have potential for growth in output, incomes and employment; and
44 Section 3
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6. Improve and expand production of the SMEs, particularly that of

subsistence farmers and self-employed workers, in order to increase
their levels of incomes.
During the implementation of the Plan, emphasis was placed on collective

enterprise rather than individual ownership. Private enterprises were not
encouraged. The resources that the Government allocated to the small
enterprises sector were reported to be inadequate and the role of public
institutions such as the Small Industries Development Organization
(SIDO), the Development Bank of Zambia and the Village Industries
Services (VIS)), which were the primary source of small enterprises
support was not defined, except in the broadest terms. Moreover, these
organizations faced serious financial and organizational constraints even
at that time.
After 1991, the environment became more business friendly, particularly

towards small enterprises. This is demonstrated by the establishment of
the Industrial, Commercial and Trade Policy in December 1994 with
pronouncements that:
1. Government considers the development of small-scale enterprises

as an important component of its Industrial, and Commercial policy.
Its aim is to devise a strategy, with
the participation of the private sector, to encourage the growth of
small-scale enterprises;
2. Government will encourage local governments to review their

infrastructure services and licensing regulations so as to support
small enterprises;
3. Government will provide legislation and incentives that promote the

rapid growth of the sector;
4. Government will decentralize business registration to enable the

sector to operate efficiently and have access to incentives; and
5. Government will set out to review and harmonize all existing laws
and regulations with a view to identifying and removing
impediments to the operations of the sector.
The development of the Industrial, Commercial and Trade Policy in 1994

was subsequently followed by the enactment of the Small Enterprises
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Development (SED) Act of 1996 as successor to the Small Industries

Development Act of 1981. The salient features of the incentives in the Act
included:
1. Exemption from payment of tax on income for the first three to five
years;
2. Operating a manufacturing enterprise for the first five years without

a manufacturing licence required for such an enterprise under any
law;
3. Exemption from the payment of licensing fees required for such an

enterprise under any law;
4. Exemption from Trading Licence for an enterprise registered under

the SED Act;
5. Exemption from payment of tax on income received from rentals on

buildings or premises for use by micro and small enterprises;
6. Exemption from the payment of rates on factory premises;
7. Exemption from payment of tax on income or interest payable by

any financial institution providing loan, or other financial relief or
facilities to registered micro and small enterprises carrying on
manufacturing activities;
8. Such institutions shall be allowed to maintain concessionary core

liquid assets ratios and reserve requirements.
In 2006, there were further reforms which resulted into the repeal of the
SED Act, which was replaced by the ZDA Act of 2006.
4.3 Significance of SMEs in Zambia
Micro, Small and Medium Enterprises are the engine of every nation’s
economy as they occupy a prominent position in the development of
many countries in the world. Contributions of SMEs can be well noted in a
number of aspects including labour absorption, creation of entrepreneurial
spirit and innovation, promotion of linkages and complementary role to
large companies, wealth creation, among others. The SMEs have a greater
flexibility and ability to change and respond quickly to changing market
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demand and supply situations. In Zambia, SMEs constitute 95 percent of

all firms.
4.4 Promotion of Micro, Small and Medium Enterprises
Promotion of MSMEs is provided for under Part V of the ZDA Act. Section
22 mandates the Board to promote and facilitate the development of
MSMEs by —
(a) creating a conducive environment for the attainment of that

purpose;
(b)formulating, coordinating and implementing policies and

programmes for promoting and developing MSMEs;
(c) providing marketing support services to MSMEs;
(d)registering, collecting, researching and disseminating information

relating to MSMEs;
(e) registering, monitoring and coordinating activities and programmes

to promotional agencies engaged in MSMEs development;
(f) assisting in the development and upgrading of appropriate

productive technologies for micro and small business enterprises;
and
(g)Locating and developing commercial estates and common facilities

for use by MSMEs.
The Board, in consultation with relevant State institutions and on such

terms and conditions as may be agreed upon with those institutions, is
required to assist MSMEs, with the provision of buildings or premises
where those enterprises may undertake business activities. 45 In doing so,
the Board may designate industrial estates for the location of MSMEs
engaged in manufacturing; and commercial estates for the location of
MSMEs engaged in the retail of goods and services. 46
4.5 Trade and Industrial Development Fund
45 Section 23(1)
46 Section 23(2)
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There is established the Trade and Industrial Development Fund (TIDF) to

support economic growth and development by promoting trade and
investment.47 The TIDF, managed and administered by the Board, is used
to support MSME and other business enterprises, as may be determined
by the Board.48 The Fund consist of — (a) such moneys as may be
appropriated by Parliament; (b) moneys received by way of grants or
donations; and (c) interest accrued from loans and any other investments
made by the Board.49 The Board shall, in order to facilitate the flow of
financial resources to business enterprises so as to promote trade and
investment — (a) identify MSMEs which require financial assistance; (b)
provide information on sources of finance and promote investments for
MSMEs; (c) render assistance to MSMEs so as to enable them access
financial resources; (d) monitor, establish and design standards for loan
administration, effective use of loan funds and repayment mechanisms by
the business enterprises so as to curb misuse of financial resources and
attain their objectives; and (e) establish or source venture capital funds to
promote investments in business enterprises. 50 In a situation where the
Board proves that any MSME is engaged in fronting, that business
enterprise shall be barred from accessing any moneys from DITF. 51
4.6 Exercises
1. What is the importance of SME in the growth of the economy?
2. How can SME leverage their advantages in light of the current

challenges they face?
47 Section 48(1)
48 Section 48(2), and 49
49 Section 48(3)
50 Section 48(4)
51 Section 48(5). “Fronting” includes holding out as being the de facto director, shareholder or partner of a business
enterprise in order to hide the true identity of the director, shareholder or partner of that business.
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UNIT 5
BILATERAL INVESTMENT TREATIES
6.0 Introduction
This Unit describes the historical development, nature, and features of

Bilateral Investment Treaties. It also examines the adequacy of the BITs
that Zambia has signed with other countries and whether these are in
tandem with current issues.
5.1 What are Bilateral Investment Treaties?
The definition of investment has always been a moot issue and countries
have debated whether the definition of investment should be broad or
narrow. These differences imply that there is no common definition of
investment and every BIT may have different definitions depending on
many factors. For instance, one of the contentious points in the definition
of investment is whether the definition of investment should be limited to
foreign direct investment (FDI) or should be broad to include other types
of investments, such as portfolio investment, as well. 52
UNCTAD defines BITs as “…agreements between two countries for the

reciprocal encouragement, promotion and protection of investments in
each other's territories by companies based in either country.” 53
The Financial Dictionary defines BITs as “An agreement between two

countries establishing the rules under which individuals and companies in
one country may provide foreign direct investment in the other.” 54
5.2 History of Bilateral Investment Treaties
There is no comprehensive history of the treatment of foreigners and their

property under international law. However, historical records attest to the
fact that early political communities routinely denied legal capacity and
rights to those who originated from outside their community. These
‘outsiders’, often known as aliens were frequently treated as enemies,
barbarians or outcasts. The treatment and the legal status of the alien has
markedly improved from ancient times through the Middle Ages to the
modern era.
52 Prabhash Ranjan “Definition of Investment in Bilateral Investment Treaties of South Asian countries and
Regulatory Discretion” Journal of International Arbitration (2009) (Vol. 26 No. 2) 219-243 at 219
53 http://www.unctadxi.org/templates/Page1006.aspx (accessed 23 January 2012)
54 http://financial-dictionary.thefreedictionary.com/Bilateral+investment+treaties (accessed 23 January.2012)
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By the commencement of the modern era, international legal scholars

considered that international law protected the rights of aliens to travel
and trade. Francisco de Vitoria argued that under international law
foreigners had the right to travel, live and trade in foreign lands. Hugo
Grotius treated the status of foreigners under the category ‘Of Things That
Belong To Men In Common’ and asserted a norm of non-discrimination in
the treatment of foreigners. However, Emmerich de Vattel who was the
first modern scholar to address the status of foreigners in detail, argued
that a state has the right to control and set conditions on the entry of
foreigners. Once admitted, foreigners are subject to local laws and the
state is under a duty to protect foreigners in the same manner as its own
subjects. At the same time, however, foreigners retained their
membership in their own state and were not ‘obliged to submit, like the
subjects, to all the commands of the sovereign. Thus, a state’s
mistreatment of foreigners or their property was an injury to the
foreigners’ home state. This view eventually coalesced into the
international legal principle of diplomatic protection.
The expansion of trade and investment in the nineteenth and early

twentieth centuries directed increased attention to the legal status of
foreign nationals abroad and to the protection of their economic interests.
By the early 1900s, there was general agreement amongst international
lawyers in Europe and the US that there existed a minimum standard of
justice in the treatment of foreigners. In response to this, some states,
particularly those in Latin America, endorsed a national treatment or
equality of treatment standard. This position is most commonly associated
with the Argentine jurist Carlos Calvo, who argued as early as 1868
against the exercise of diplomatic protection and the existence of a
minimum standard of treatment. In Calvo’s view, state equality required
that there be no intervention, diplomatic or otherwise, in the internal
affairs of other states, and that foreigners were not entitled to better
treatment than host state nationals. The Calvo Doctrine has three distinct
elements: (1) foreign nationals are entitled to no better treatment than
host state nationals; (2) the rights of foreign nationals are governed by
host state law; and (3) host state courts have exclusive jurisdiction over
disputes involving foreign nationals. However, the Calvo Doctrine never
attained the status of a principle of customary international law.
In the early twentieth century, capital exporting states maintained the

view that international law requires a minimum standard of treatment.
Capital importing states, however, continued to challenge the minimum
standard of treatment, particularly with respect to compensation for
expropriation. This led to the development of the Hull Rule in 1938. The
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Rule advocated for payment of compensation on ‘prompt, adequate, and

effective’ basis. After the Second World War, there were efforts to
establish a multilateral legal framework for investment. The first attempt
arose during the negotiations for the proposed International Trade
Organization (ITO), an institution intended as the third pillar of the new
international financial system alongside the International Monetary Fund
(IMF) and the International Bank for Reconstruction and Development (the
Word Bank). The initial US proposal for the ITO contained no investment
provisions. This reflected the US preference for bilateral commercial
treaties with high standards of protection, rather than a multilateral
agreement that reflected the ‘lowest common denominator of protection.’
During the ITO negotiations, articles on investment protection with
provisions for national treatment, most-favoured-nation (MFN) treatment
and just compensation for expropriation were introduced. States,
however, were unable to agree on the standards. As a result, the final
draft of the Havana Charter for the International Trade Organization only
briefly addressed the issue of investment protection by providing a
prohibition on ‘unreasonable or unjustifiable action’ and permitting the
ITO to make recommendations for bilateral or multilateral investment
agreements. The Havana Charter never came into force and the ITO was
never established and this led countries to sign agreements of friendship,
or commerce to help regulate their relationship with the first one between
Germany and Pakistan in 1959. Currently, the number of bilateral
investment treaties has grown from about 500 in 1980 to 2,923 in
2014.55
5.3 Structure of a Treaty
There is no prescribed standard of what elements should be constituted in

a BIT. However, there are certain common features that are found in most
BITs such as:
1. Title of the Treaty
Every BIT begins with a title which gives an indication of the nature of the
treaty. An example can be drawn from the Finland – Zambia BIT which
states:
An Agreement between the Government of the Republic of Finland

and the Government of the Republic of Zambia on the Promotion
and Protection of Investments.
55 https://www.wits.ac.za/news/latest-news/in-their-own-words/2016/2016-03/why-developingcountries-are-
dumping-investment-treaties.html#sthash.yzkx6VU9.dpuf (accessed 8 August 2016)
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The Netherlands – Zambia BIT reads:
Agreement on encouragement and reciprocal protection of

investments Between the Government of the Republic of Zambia
and the Government of the Kingdom of the Netherlands.
2. Definitions
All treaties define some of the terms that are used in the treaty (e.g.
investments, limitation on the definition of investments, portfolio
investments, corporate nationality and protection of shareholders). They
also indicate the understanding that the states have on issues such as
corporate nationality.
3. Preamble
The preamble is an introductory statement made by the Contracting

Parties which appears at the beginning of the treaty. Its purpose is to
express, in generic terms, the object and purpose of the treaty and its
underlying philosophy, without establishing legally binding rights and
obligations. The preamble is part of the treaty context under which the
treaty will be interpreted pursuant to the Vienna Convention on the Law of
Treaties. The common elements are: (a) Intensifying economic
cooperation; (b) Creating favourable conditions for investment; (c)
Ensuring that broader economic and development goals are recognized;
and (d) Ensuring that other, noneconomic values and principles are
respected.
4. Promotion of Investments
The treaty’ objective is to promote investments. A party is required to

accept investment from the other contracting party. Article 2(1) of the
Belgo-Luxembourg – Zambia BIT states:
Each Contracting Party shall promote investments in its territory by

investors of the other Contracting Party and shall accept such investments
in accordance with its legislation.
In particular, each Contracting Party is required to authorize the

conclusion and the fulfilment of licence contracts and commercial,
administrative or technical assistance agreements, as far as these
activities are in connection with such investments. 56
56 Article 2(2)
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5. Standards of Treatment and Protection
International law requires that foreign investors are accorded a particular

standard of treatment during the time they invest in another country. This
treatment consists of three elements - national treatment, most favoured
nation, and fair and equitable treatment.
a. National Treatment
A National Treatment ("NT") obligation requires States to grant covered

investors and/or their investments treatment which is no less favourable
than that it accords, in like circumstances, to domestic investors and/or
their investments. Article 3(1) of Finland – Zambia BIT states:
Each Contracting Party shall accord to investors of the other Contracting

Party and to their investments, a treatment no less favourable than the
treatment it accords to its own investors and their investments with
respect to the acquisition, expansion, operation, management,
maintenance, use, enjoyment and sale or other disposal of investments.
The objective of this provision is to ensure a degree of competitive

equality between foreign and domestic investors by preventing
discrimination on the basis of the investor’s nationality.
b. Most-Favoured-Nation Treatment
Most-Favored-Nation Treatment ("MFN") is an obligation of the host State

to accord to foreign investors and/or their investments treatment which is
no less favourable than that it accords, in like circumstances, to
investors/investments of any third State. Article 3(2) of the Finland –
Zambia BIT provides:
Each Contracting Party shall accord to investors of the other Contracting

Party and to their investments, a treatment no less favourable than the
treatment it accords to investors of the most favoured nation and to their
investments with respect to the establishment, acquisition, expansion,
operation, management, maintenance, use, enjoyment, and sale or other
disposal of investments.
The objective of this provision is to ensure competitive equality between

foreign investors by preventing discrimination on the basis of the
investor’s nationality.
c. Fair and Equitable Treatment
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Fair and Equitable Treatment ("FET") is an extremely common treaty

obligation, and one that is broad and general nature. Investors have
claimed its violation in almost every investment dispute to date, and it
has served as the most frequent basis for finding a treaty breach. Article 3
of Netherlands – Zambia BIT states:
1) Each Contracting Party shall ensure fair and equitable treatment of the
investments of nationals of the other Contracting Party and shall not
impair, by unreasonable or discriminatory measures, the operation,
management, maintenance, use, enjoyment or disposal thereof by those
nationals. Each Contracting Party shall accord to such investments, full
physical security and protection.
2) More particularly, each Contracting Party shall accord to such investments

treatment which in any case shall not be less favourable than that
accorded either to investments of its own nationals or to investments of
nationals of any third State, whichever is more favourable to the national
concerned.57
FET is an absolute, not relative, standard of treatment. Its objective is to

guarantee a certain minimum standard of treatment that does not require
comparison with the treatment which the host State accords to its own
investors or to any other foreign investors. In TECMED v Mexico58 the
renewal of the license for the operation of a hazardous waste landfill by a
Spanish investor in Mexico was refused on different grounds, following a
period of strong local protests and political changes on the municipal
level. The conduct of various Mexican public officials was held to be
inconsistent and insufficiently transparent and thus contrary to the
principle of fair and equitable treatment of foreign investors. In MTD v
Chile59, it was stated that: “…fair and equitable treatment should be
understood to be treatment in an even-handed and just manner,
conducive to fostering the promotion of foreign investment.” The content
of this obligation varies and depends on the formulation adopted when
concluding the treaty.
6. Full Protection and Security
The obligation requires the host State to exercise due diligence in

protecting foreign investments from adverse acts of private parties and of
State organs, including law enforcement agencies and the armed forces.
The standard is an absolute one and does not require comparisons with
treatment granted to domestic or other foreign investors. Traditional
57 See also Article 2(2), Finland – Zambia BIT

58 43 I.L.M. 133
59 Award, 25 May 2004 ICSID
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understanding of the obligation is that it requires providing a certain level

of police protection and physical security. Broader interpretations,
adopted by some arbitral tribunals, have additionally included legal,
economic and regulatory protection and security.
7. Expropriation
The expropriation provision does not deprive States of their right to

expropriate property but regulates the manner in which the said right
must be exercised. Article 7 of Netherlands – Zambia BIT:
Neither Contracting Party shall take any measures depriving, directly or

indirectly, nationals of the other Contracting Party of their investments unless
the following conditions are complied with:
a) the measures are taken in the public interest and under due process of
law;
b) the measures are not discriminatory or contrary to any undertaking which

the Contracting Party which takes such measures may have given;
c) the measures are taken against just compensation. Such compensation

shall represent the genuine value of the investments affected, shall
include interest at a normal commercial rate until the date of payment and
shall, in order to be effective for the claimants, be paid and made
transferable, without delay, to the country designated by the claimants
concerned and in the currency of the country of which the claimants are
nationals or in any freely convertible currency accepted by the claimants.
Protection against uncompensated expropriation is an essential guarantee

for investors. Thus, many of the relevant conditions and requirements find
their roots in customary international law.
8. Compensation for Losses Due to Armed Conflict or Civil Strife
This provision deals with compensation for losses incurred by investors as

a result of extraordinary situations such as war, armed conflict,
insurrections and civil disturbances. Article 8 of Netherlands – Zambia BIT:
Nationals of the one Contracting Party who suffer losses in respect of their
investments in the territory of the other Contracting Party owing to war or
other armed conflict, revolution, a state of national emergency, revolt,
insurrection or riot shall be accorded by the latter Contracting Party
treatment, as regards restitution, indemnification, compensation or other
settlement, no less favourable than that which that Contracting Party
accords to its own nationals or to nationals of any third State who are in
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the same circumstances, whichever is more favourable to the nationals

concerned.
Customary international law is generally understood as not requiring

compensation in these circumstances, unless the State has failed to act in
a duly diligent way.
9. Free Transfer
This an obligation of the host State to allow a foreign investor to transfer

capital and funds relating to its investment in and out of the host State.
Article 6 of the Netherlands – Zambia BIT provides:
The Contracting Parties shall guarantee that payments relating to an

investment may be transferred. The transfers shall be made in a freely
convertible currency, without restriction or delay. Such transfers include in
particular though not exclusively:
a) profits, interests, dividends and other current income;
b) funds necessary for the acquisition of raw or auxiliary materials, semi-

fabricated or finished products, or to replace capital assets in order to
safeguard the continuity of an investment;
c) additional funds necessary for the development of an investment;
d) funds in repayment of loans;
e) royalties or fees;
f) earnings of natural persons;
g) the proceeds of sale or liquidation of the investment;
h) payments arising under the Articles 7 and 8. 60
The objective of this provision is to ensure that a foreign investor can

make free use of invested capital, returns on its investment and other
payments related to the establishment, operation or disposal of an
investment. It is particularly important to foreign investors as they see the
timely transfer of funds and profits as a key condition for the proper
operation of their investment. At the same time, in an increasingly
interdependent international economy, host countries may seek the
ability to pre-empt potentially destabilizing capital inflows and outflows. In
60 Article 7 is on Expropriation and 8 on Compensation for Losses.

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this context, the inclusion of exceptions affirming host country flexibility

to properly administer monetary and financial policies becomes prudent.
10. Transparency
This provision has historically been drafted to enable the investor and its
home State to become acquainted with the host State’s regulatory
framework and the process of domestic rulemaking affecting investments.
Article 15 of Finland – Zambia BIT provides:
1. Each Contracting Party shall promptly publish, or otherwise make publicly

available, its laws, regulations, procedures and administrative rulings and
judicial decisions of general application as well as international
agreements which may affect the investments of investors of the other
Contracting Party in the territory of the former Contracting Party.
2. Nothing in this Agreement shall require a Contracting Party to furnish or

allow access to any confidential or proprietary information, including
information concerning particular investors or investments, the disclosure
of which would impede law enforcement or be contrary to its laws
protecting confidentiality or prejudice legitimate commercial interests of
particular investors.
The traditional objective of this provision is to create for investors a more

predictable institutional framework within the overall investment climate.
11. Performance Requirements
Performance requirements are conditions imposed by host countries on

investors in pursuance of certain economic policy goals, e.g. generation of
local employment, increase in the demand for local supplies, boosting of
exports or increase in foreign exchange earnings. Performance
requirements limit investors’ economic choices and managerial discretion
and may negatively affect the businesses efficiency. The objective is to
discipline their use by host States in order to allow investors to operate
their investments in the most economically efficient manner.
12. Umbrella Clause
An umbrella clause, also called mirror clause, parallel effect clause or

pacta sunt servanda, is a treaty provision that requires the observance of
all investment (contractual) obligations and commitments entered into by
the contracting states with investors from the other contracting state. This
serves to bring independent contracts entered into by a state with private
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(foreign) investors under the ‘umbrella of protection’ of the treaty. It

creates interstate obligation to observe investment commitments,
allowing the investor the right to resolve breaches of state contracts
under international law by an international arbitration. The foreign
investor is accorded this right by reason of his nationality i.e. that his
state has a BIT with the host state. Article 3(3) of Netherlands – Zambia
BIT:
Each Contracting Party shall observe any obligation it may have entered
into with regard to investments of nationals of the other Contracting Party.
This clause brings to the fore two controversial issues: (a) whether an
investment treaty-based international arbitral tribunal can exercise
jurisdiction over claims of breach of state contract between an FI and a
state; and (b) whether an umbrella clause in a BIT transforms all foreign
investment (contractual) breaches into treaty breaches.
On the issue of jurisdiction, the arbitral tribunals in the celebrated cases of

Société Générale de Surveillance S.A v Islamic Republic of
Pakistan61 and Société Générale de Surveillance S.A v Philippines 62
have asserted the jurisdiction of a treaty-based international arbitration
tribunal over disputes arising from breaches of state contracts where such
investments are covered under a BIT’s umbrella clause. The reasoning is
that investment disputes in a BIT should naturally include disputes arising
from breaches of state contracts which are in themselves investments.
The major point of divergence is whether a breach of the investment
contract automatically transforms such a contractual breach to a breach
of treaty.
The tribunal in SGS v Philippines was of the opinion that once an

umbrella clause exists in a treaty, it transforms a state contract to a
treaty and a breach of that contract to a breach of that treaty. Conversely,
the tribunal in SGS v Pakistan held that an umbrella clause does not
internationalise an investment contract by transforming it into treaty and
turning questions of contract law into questions of treaty law. The tribunal
in SGS v Philippines however admitted that an umbrella clause
addresses the performance of ascertained commitments entered into, not
the scope of such commitment. This means that a contractual breach will
be determined on the basis of the applicable domestic law and where
ascertained the state would be held internationally responsible to observe
its contractual commitments in accordance with its treaty obligations.
61 ARB 01/13, decision of 6 August 2003

62 ICSID No. ARB/02/6, 29 January 2004
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Depending on its interpretation, some clauses may offer protection to

investors beyond the rules and standards of treatment specifically set
forth in the treaty. Specifically, it can be read as bringing contractual and
other individual commitments undertaken by the host State towards
investors under the “umbrella” of the treaty, thus making them potentially
enforceable through investor-State dispute settlement.
13. Subrogation
This is an insurance programs that has been put in place by states to

protect investments of their investors abroad against certain non-
commercial risks such as expropriation, non-convertibility of currency,
losses incurred due to war or civil disturbance, political violence or
terrorism. Article 8 of the Finland – Zambia BIT states:
If a Contracting Party or its designated agency makes a payment under an

indemnity, guarantee or contract of insurance against non-commercial risk
given in respect of an investment of an investor in the territory of the
other Contracting Party under a system established by law, governmental
regulation or contract, the latter Contracting Party shall recognise the
assignment of any right or claim of such an investor to the former
Contracting Party or its designated agency, and the right of the former
Contracting Party or its designated agency to exercise by virtue of
subrogation any such right and claim to the same extent as its
predecessor in title.
The mechanism of subrogation supports the effective functioning of

insurance schemes. By virtue of this provision, the host State recognizes
the transfer of all rights and claims in favour of the insurer upon payment
of an insurance contract or guarantee. The insurer shall not be entitled to
exercise any rights other than the rights which the investor would have
been entitled to exercise.
14. General Exceptions
General exceptions enable States to adopt measures aimed at specified

policy objectives (e.g. protection of the environment, public health and
safety, cultural heritage etc.) that could otherwise be in breach of the
treaty and could require payment of compensation to affected investors.
The exceptions are one mechanism for achieving a balanced agreement
that meets the needs of different stakeholders, including the general
public. Absence of such provisions may create uncertainty as to whether
legitimate policy interests other than investment protection will be duly
considered by arbitrators in case a dispute arises, where treaty obligation
themselves do not make this clear.
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15. General Derogations
The treaty permits parties to derogate from their obligations where doing
so in the security interest of the party in times of war or armed conflict.
Such measures should not be discriminatory and should be adopted to
protect public order, health and safety, and environment. Article 14 of
Finland – Zambia BIT says:
1. Nothing in this Agreement shall be construed as preventing a Contracting

Party from taking any action necessary for the protection of its essential
security interests in time of war or armed conflict, or other emergency in
international relations.
2. Provided that such measures are not applied in a discriminatory or

arbitrary manner, or do not constitute a disguised restriction on foreign
investment, nothing in this Agreement shall be construed to prevent a
Contracting Party from adopting measures to maintain public order, or to
protect public health and safety, including environmental measures
necessary to protect human, animal or plant life.
Where there is war, armed conflict, or an emergency in international

relations, a Party may be allowed to derogate from its obligations by
taken measures that are necessary to protect public order, health and
safety, environment so as to protect human life. The applicability of this
provision is with exception.63
16. Dispute Settlement
This is in two forms: Investor-State; and State-Sate. Investor-State Dispute

Settlement mechanism offers investors recourse to international
arbitration to settle investment disputes with the host State. It serves as a
main means of enforcement of substantive treaty protections and allows
depoliticization of disputes. Article 9(1) of Finland – Zambia BIT provides:
Any dispute arising directly from an investment between one Contracting

Party and an investor of the other Contracting Party should be settled
amicably between the two parties to the dispute.
There are two broad approaches: (1) the “minimalist” (and more
traditional) approach which is characterized by few procedural
specifications, leaving most procedural matters to the applicable
arbitration rules and arbitrators’ discretion; and (2) the “detailed”
approach which features much more sophisticated procedural regulation
63 See Article 14(3)
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that adds to or modifies the applicable arbitration rules with a view to

enhancing the efficiency, predictability, legitimacy and costeffectiveness
of the process.
State-State disputes can be resolved where the issue concerns ‘the

interpretation and application of the Agreement’ which shall be settled
through diplomatic channels.64
17. Entry, Duration and Termination
This denotes the day when the treaty would come into effect, its duration,
and the requirements for its termination. Article 17(2)(3) of the Finland –
Zambia BIT states:
2. This Agreement shall remain in force for a period of twenty (20) years and
shall thereafter remain in force on the same terms until either Contracting
Party notifies the other in writing of its intention to terminate the
Agreement in twelve (12) months.
3. In respect of investments made prior to the date of termination of this

Agreement, the provisions of Articles 1 to 16 shall remain in force for a
further period of twenty (20) years from the date of termination of this
Agreement.
This treaty requires in sub article 3 that, in the event of termination, the
obligations undertaken would continue for a further period of 20 years.
Other treaties, such as the Belgo-Luxembourg, and Egypt - Zambia BITs,
are for a period less than 20 years – 10 years. The Germany – Zambia BIT
was for a period of 5 years and thereafter in perpetuity unless denounced
by either party.65
5.4 Emerging Issues in Bilateral Investment Treaties
There are issues that have either been omitted from BITs or have been
inadequately addressed. These are called “emerging issues”. They are
numerous, but some of them are:
5.4.1 Human Rights
Human rights are per essence focused on individual human beings. While
investors can be individuals, international investments law deals mostly
with investors envisaged as legal persons, not individuals, the investor
64 Article 10, Finland – Zambia BIT

65 Article 14(2)
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being in most cases a private corporation. Moreover, some human rights

instruments consider investors essentially as third parties the activities of
which shall not be allowed to impinge on the human rights of individuals.
This explains in part why human rights are still rarely invoked in
international arbitrations dealing with international investments, be it by
the investor or by the State hosting the investment. It is also stated that
human rights has no relationship with investment. In Siemens v
Argentina, the tribunal concluded that the reference made by Argentina
to international human rights law ranking at the level of the Constitution
after the 1994 constitutional reform and implying that property rights
claimed in this arbitration, if upheld, would constitute a breach of
international human rights law [ … ] has not been developed by
Argentina. The Tribunal considered that, ‘without the benefit of further
elaboration and substantiation by the parties, it is not an argument that,
prima facie, bears any relationship to the merits of this case.’
5.4.2 Economic Development
Economic development is a concerted effort on the part of the responsible

governing body in a city or county to influence the direction of private
sector investment toward opportunities that can lead to sustained
economic growth. Sustained economic growth can provide sufficient
incomes for the local labour force, profitable business opportunities for
employers and tax revenues for maintaining an infrastructure to support
this continued growth. On the part of developing countries, there are
concerns on whether or economic development should be embraced in a
BITs, and if so, to what extent? This stems from the fact that the whole
essence of concluding BITs is to promote trade and investment to
countries party to the BIT. The preamble of the Netherland – Zambia BIT
states:
Desiring to strengthen their traditional ties of friendship and to extend and

intensify the economic relations between them, particularly with respect
to investments by the nationals of one Contracting Party in the territory of
the other Contracting Party.
Recognising that agreement upon the treatment to be accorded to such

investments will stimulate the flow of capital and technology and the
economic development of the Contracting Parties and that fair and
equitable treatment of investment is desirable.
The essence is not to support economic growth but merely to strengthen

economic ties. While there is reference to stimulation of economic
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development, there appears no mechanism of how this is to be achieved

under the BITs substantive provisions. Thus, a BIT should be understood
from an angle of its core objective – investment facilitation and promotion
and thus, it is not diametrically related to economic development e.g.
Brazil has no single BIT with any country and yet, it is growing
economically.
5.4.3 Environment Concerns
The relationship between foreign investment and environmental

protection cannot be down played. With the increase in investment,
especially in resource exploration, the concern is the manner in which
these resources are explored. This is because these activities have the
potential, and do in fact, harm the environment through pollution which
endanger the lives of human beings. Environmental considerations are an
important aspect in BITs e.g. in International Bank of Washington v
OPIC66, the blanket measures changing the laws were held to justify the
breach of a foreign investment agreement. In S.D Myers v Canada67,
the Canadian defence was that the waste should be disposed of in line
with the obligations under the Basle Convention on the Trans-boundary
Movement of Hazardous Waste. This argument was rejected on the
ground that the NAFTA provision on national treatment was violated.
The question is how BITs have interpreted environmental concerns? While

other BITs have made provision in their substantive clauses, other have
done so through the preamble. The BITs that Zambia has signed have
made such provisions in the preamble e.g. Finland Zambia BIT which
states: “AGREEING that these objectives can be achieved without
relaxing health, safety and environmental measures of general
application….” This is merely an aspiration and of no legal efficacy.
5.5 SADC Model BIT
The SADC Model BIT, completed in June 2012, has been developed due to
the recognition of the important contribution investment can make to the
sustainable development of the State Parties, including the reduction of
poverty, increase of productive capacity, economic growth, the transfer of
technology, and the furtherance of human rights and human
development.68 The Model BIT is intended as a guide for Member States’
66 (1972) 11 ILM 1216

67 (2002) 121 IRL 1
68 The Preamble, SADC Model Treaty
70
Article 13
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future investment treaty negotiations and operates as a template that has

embraced a “new generation” of investment policies.
The Model BIT encompasses clauses that are excluded in BITs that Zambia
has concluded – issues of environmental and social impact assessment 70 ,
environmental management and improvement 69, minimum standards for
human rights70, right to regulate71, and the right to pursue development
goals.72
5.6 Exercises
1. What is the rationale for the conclusion of BITs? To what

extent do BITs foster foreign investment into the territory of
the host state?
2. Discuss to what extent Zambia’ BIT has made provision in

her current BITs for the issues that have recently emerged –
public health.
3. What would be the benefit of adopting the SADC Model BIT in

Zambia’ BIT negotiation with other countries?
UNIT 6
POLITICAL RISK IN FOREIGN INVESTMENT
7.1 Introduction
The Unit examine the concept of political risk in foreign investment and
the nature thereof. It also underscores the interpretation of political risk
from international tribunal’s view point.
6.2 Investor Motivation for Investment
Foreign investment presents a number challenges to the investor in terms

both the opportunities and risks. Thus, planning a foreign investment
transaction requires a careful analysis of both its anticipated rewards and
69 Article 14
70 Article 15
71 Article 20
72 Article 21
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its risks to the investor. The decision to invest abroad depends essentially
on the business strategy of the firm in question. The basic aim of
undertaking any investment is to increase or at least preserve the
profitability of the firm. Put simply, the purpose of making investment is to
make a profit on that investment.
Foreign investors are motivated or influenced to undertake foreign

investment by any of the following factors:
6.2.1 Market Seeking
These are investments which target at either penetrating new markets or

maintaining existing ones. It is also employed as defensive strategy; it is
argued that businesses are more likely to be pushed towards this kind of
investment out of fear of losing a market rather than discovering a new
one.
6.2.2 Resource Seeking
These are investments which seek to acquire factors of production that

are more efficient than those obtainable in the home economy of the firm.
In some cases, these resources may not be available in the home
economy at all (e.g. natural resources, fertile land, or cheap labour).
6.2.3 Efficiency Seeking
These are investments which firms hope will increase their efficiency by
exploiting the benefits of economies of scale and scope, and also those of
common ownership. It is suggested that this kind of FDI comes after either
resource or market seeking investments have been realized, with the
expectation that it further increases the profitability of the firm. 73
6.2.4 Strategic asset-seeking
This occurs when companies undertake investments, acquisitions or

alliances to promote their longterm strategic objectives e.g. a MNC may
form a strategic alliance with a company based in another country to
jointly undertake mutually beneficial Research and Development.
6.3 Political Risks in foreign investment

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Political risk broadly defined is the probability of disruption of the

operations of companies by political forces and events, whether they
occur in host countries or result from changes in the international
environment. In host countries, political risk is largely determined by
uncertainty over the actions not only of governments and political
institutions, but also of minority groups and separatist movements. 74
FI faces political risks because the foreign investor must submit its assets
and property rights to the sovereign jurisdiction of a foreign state, thereby
creating the possibility that the foreign sovereign may exercise its political
power so as to interfere with the investor’s use of those assets and
property rights.
For the purposes of the MIGA Political Risk Survey, the definition of
political risk includes the following:
1. Transfer and convertibility restrictions
This is the risk of losses arising from an investor’s inability to convert local
currency into foreign exchange for transfer outside the host country.
2. Expropriation
The loss of investment as a result of discriminatory acts by any branch of

the government that may reduce or eliminate ownership, control, or rights
to the investment either as a result of a single action or through an
accumulation of acts by the government.
3. Breach of contract
The risk of losses arising from the host government’s breach or

repudiation of a contractual agreement with the investor, including non-
honouring of arbitral awards.
4. Non-honouring of sovereign financial obligations
Risk of losses due to non-compliance of government guarantees securing

full and timely repayment of a debt that is being used to finance the
development of a new project or the enhancement of an existing project.
5. Politically motivated acts
74 World Investment Political Risk (WIPR) Report (2011) 21

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These are risk of losses due to politically motivated acts of violence by

non-state groups e.g.
terrorism, war, and civil disturbances.
6.3.1 Nationalization
This term has a distinct connotation. It usually refers to massive or large-

scale takings of private property in all economic sectors or on an industry
or sector-specific basis. Outright nationalizations in all economic sectors
are generally motivated by policy considerations; the measures are
intended to achieve complete State control of the economy and involve
the takeover of all privately-owned means of production. Many former
colonies regarded nationalizations as an integral part of their
decolonization process in the period following the end of the World War II.
Nationalizations on an industry-wide basis take place when a government
seeks to reorganize a particular industry by taking over the private
enterprises in the industry and creating a State monopoly. In these cases,
the assets taken become publicly owned.
6.3.2 Expropriation
The concept of expropriation is defined as the formal withdrawal of

property rights for the benefit of the State or for private persons
designated by the State. This definition covers two forms of expropriation:
(1) direct expropriation or formal expropriation; and (2) indirect
expropriation or a “measure tantamount to expropriation.”
6.3.2.1 Direct Expropriation
This entails “any legislative or administrative action or omission

attributable to the host government which has the effect of depriving the
holder of a guarantee of his ownership or control of, or a substantial
benefit from, his investment, with the exception of non-discriminatory
measures of general application which government normally take for the
purpose of regulating economic activity in their territories.”75
6.3.2.2 Indirect Expropriation
These are cases where, by means of administrative or legislative

procedures, the State provokes a unilateral change in contract conditions
such that the investor is unable to recover the expected quasi rents of the
business under the original contractual framework. Indirect expropriation
is not clearly defined in treaties, but can be understood as the negative
75 The Convention Establishing the Multilateral Investment Guarantee Agency (1985)
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effect of government measures on the investor’s property rights, which

does not involve a transfer of property but a deprivation of the enjoyment
of the property. 76 The measures taken by a state must have the effect of
depriving the investor of the use and benefit of his investment even
though he may retain nominal ownership of the respective rights. 79 In
effect, such taking does not involve an overt taking but effectively
neutralizes the enjoyment of property. 77 In order for a claim of indirect
expropriation to be successful it would be required that “the investor no
longer be in control of its business operation, or that the value of the
business has been virtually annihilated”78
A different approach is that taken in the COMESA Common Investment

Agreement (COMESA CCIA). Article 20(8) reads:
Consistent with the right of states to regulate and the customary

international law principles on police powers, bona fide regulatory
measures taken by a Member State that are designed and applied
to protect or enhance legitimate public welfare objectives, such as
public health, safety and the environment, shall not constitute an
indirect expropriation under this Article.
The same applies to Annex 2, Paragraph 4 of the Association of Southeast

Asian Nations (ASEAN) Comprehensive Investment Agreement of 2009,
which states that:
Non-discriminatory measures of a Member State that are

designated and applied to protect legitimate public welfare
objectives, such as public health, safety and the environment, do
not constitute an expropriation of the type referred to in sub-
paragraph 2(b) [indirect expropriation].
Deciphering these provisions would entail that measures taken by a State

with a legitimate objective, in good faith and without discrimination
cannot be construed as acts of indirect expropriation. In other words,
arbitration tribunals cannot conclude that indirect expropriation has
occurred if the regulation concerned is designed to meet a legitimate
public interest, except where the measure is discriminatory and has been
adopted or applied in bad faith. The term “legitimate objective” can cover
a wide range of governmental aims, including those relating to public
health, security and the environment. Article 20(8) of the COMESA CCIA
76 Parkerings-Compagniet AS v Republic of Lithuania (2007) ICSID Case
No. ARB/05/8 79 Middle Eastern Shipping and Handling Co. v Egypt
(2002) ICSID Case No. ARB/99/6
77 Lauder v. Czech Republic
78 Sempra Energy International v. Argentine Republic(2007) ICSID Case No. ARB/02/16 (Argentina-United States BIT)
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explicitly refers to the customary international law principles on police

powers to aid in the interpretation of this provision.
6.3.2.3 Creeping Expropriation
Creeping expropriation, which is a form of indirect expropriation, involves

the gradual removal of property rights from a foreign entity. A creeping
expropriation may be defined as:
…the slow and incremental encroachment on one or more of the

ownership rights of a foreign investor that diminishes the value of
its investment. The legal title to the property remains vested in the
foreign investor but the investor’s rights of use of the property are
diminished as a result of the interference by the state.79
This could take many forms: gradual increases in tax rates on profits
which eventually make a business unprofitable to operate; instituting
ever‐increasing barriers to removing profits or dividends from the country;
gradually increasing property tax rates for foreign companies; changing
the percentage of ownership which must be held locally; as well as many
other actions.
6.3.2.4 Measures tantamount to Expropriation
The State may adopt certain measures in order to regulate. This is what is
known as ‘police powers’ or ‘power of imminent domain’. It stems from
the realization that, generally, under international law, a State can adopt
certain measures and these should not constitute indirect expropriation or
be seen as ‘tantamount to expropriations’. The use of the term
‘‘tantamount to expropriations’ has often been narrowly construed to
avoid expanding the definition of expropriation; rather, it is simply meant
to include expropriations that occur in substance but not in form. In fact,
some arbitral tribunals have treated “measures tantamount to
expropriation” as the functional equivalent of expropriation.
The arbitral decision in S.D. Meyers v Canada80 provides a clear analysis

of the definition of “measures tantamount to expropriation.” In this case,
the American claimant operated a PCB hazardous waste treatment and
disposal business in Canada. After Canada passed a law banning the
79 Peter Leon ‘Creeping Expropriation of Mining Investments: an African Perspective’ Journal of Energy &
Natural Resources Law (2009) (Vol. 27 No. 4) pp. 597-644 at 598; August Reinisch, ‘Expropriation’, in Peter
Muchlinski, Federico Ortino and Christoph Schreuer (eds.) The Oxford Handbook of International Investment
Law (2008) 427
80 S.D. Myers, Inc. v. Government of Canada, UNCITRAL/NAFTA, First Partial Award, paragraph 285 (Nov.
13, 2000), 40 I.L.M. 1408 84 Pope & Talbot v. Canada, Interim Award, 26 June 2000, para. 102
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exportation of PCB waste, the claimant alleged that this constituted a

measure tantamount to expropriation since the claimant’s business
transported PCB waste from Canada to its Ohio facilities for treatment and
disposal. In its expropriation analysis, the tribunal stated that “[t]he
primary meaning of the word ‘tantamount’ given by the Oxford English
Dictionary is ‘equivalent.’ Both words require a Tribunal to look at the
substance of what has occurred and not only at form. . . . [S]omething
that is ‘equivalent’ to something else cannot logically encompass more. . .
. [T]he drafters of the NAFTA [did not intend to] expand the internationally
accepted scope of the term expropriation.” Ultimately, the S.D. Meyers did
not find that indirect expropriation occurred.
6.3.2.5 Criteria determining whether Indirect Expropriation has

occurred
Although there are some “inconsistencies” in the way some arbitral

tribunals have distinguished legitimate non-compensable regulations
having an effect on the economic value of foreign investments and
indirect expropriation requiring compensation, a careful examination
reveals that, in broad terms, they have identified the following criteria:
1. Decrease in value
Destruction of the economic value of the investment must be total or

close to total. In Pope and Talbot v Canada84, the test used by the
arbitral tribunal to establish indirect expropriation was whether the
interference is sufficiently restrictive to support a conclusion that the
property has been taken from the owner. This approach has been followed
in other cases. In Vivendi v Argentina II81, the tribunal observed that
the weight of authority appears to draw a distinction between only a
partial deprivation of value (not an expropriation) and a complete or near
complete deprivation of value (expropriation). The LG&E v Argentina
tribunal recalled that in many arbitral decisions, compensation has been
denied when it [the State’s measure] has not affected all or almost all the
investment’s economic value.82 In Sempra v Argentina, the tribunal
explained that the value of the business had to be “virtually
annihilated”.83 In CMS v Argentina, the tribunal opined that the relevant
test was “whether the enjoyment of the property has been effectively
neutralized”.84
81 Vivendi v. Argentina II, Award, 20 August 2007, para. 7.5.11

82 LG&E v. Argentina, Decision on Liability, 3 October 2006, para. 191
83 Sempra Energy v. Argentina, Award, 28 September 2007, para. 285
84 CMS v. Argentina, Award, 12 May 2005, para. 262
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In Glamis Gold v United States, the tribunal dismissed the

expropriation claim, having concluded that “the first factor in any
expropriation analysis is not met: The complained measures did not cause
a sufficient economic impact to the Imperial Project to effect an
expropriation of the Claimant’s investment”.85 Similarly, in Toto v
Argentina, the tribunal rejected the expropriation claim on the ground
that the claimant “has not shown that the negative economic … impact of
the Measures has been such as to deprive its investment of all or
substantially all its value”.86
2. Loss of control over the investment
An investor may lose control of the investment by losing rights of

ownership or management, even if the legal title is not affected. Loss of
control is thus a factor that is alternative to destruction of value. It is
particularly relevant in situations where the investment is a company or a
shareholding in a company. The tribunal noted in Sempra v Argentina
that “a finding of indirect expropriation would require … that the investor
no longer be in control of its business operation, or that the value of the
business has been virtually annihilated”. 87 A valuable investment would
be useless to the owner if he cannot use, enjoy or dispose of such an
investment.
In the practice of the Iran-United States Claims Tribunal, there were a

number of cases where the usurpation of management by a State, or the
substitution by a State of the foreign investor’s management with its own,
were analysed as an expropriation. In Sedco v National Iranian Oil
Co.88, the tribunal found that an expropriation of the claimant’s
investment occurred when Iran appointed temporary directors to control
and manage the claimant’s company and prevented the claimant from
accessing the company’s funds or participating in its control or
management. In ITT Industries v Iran and Starrett Housing89 the
tribunal held that the assumption of control over the claimant’s assets by
government appointed managers, which rendered the claimant’s rights of
ownership meaningless, amounted to an effective expropriation.
3. Duration of the measure
In order to constitute an expropriation, the measure should be definitive

and permanent. A measure that leads to a temporary diminution in value
85 Glamis Gold, Ltd. v. USA, Award, 8 June 2009, para. 536
86 Toto v. Argentina, Decision on Liability, 27 December 2010, para.196
87 Sempra Energy v. Argentina, Award, 28 September 2007, para. 285
88 Sedco, Inc. v. National Iranian Oil Company, Interlocutory Award, 28 October 1985
89 ITT Industries, Inc. v. Iran et al., Award, 26 May 1983, 2 Iran-United States Claims Tribunal Reports 348, pp. 351–352
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or loss of control would normally not be viewed as expropriatory. As

stated by the Tecmed v Mexico tribunal, “it is understood that the
measures adopted by a State, whether regulatory or not, are an indirect
de facto expropriation if they are irreversible and permanent …” 90 In SD
Myers v. Canada, the investor claimed that a ban on the export of a
chemical substance (polychlorinated biphenyls, PCB) from Canadian
territory constituted an indirect expropriation. Dismissing the
expropriation claim, the tribunal stated: “In this case, the Interim Order
and the Final Order were designed to, and did, curb SDMI’s initiative, but
only for a time. … An opportunity was delayed. The Tribunal concludes
that this is not an expropriation case.”91
4. Purpose of the measure
A very significant factor in characterising a government measure as falling

within the expropriation sphere or not, is whether the measure refers to
the State’s right to promote a recognised “social purpose” or the “general
welfare” by regulation. “The existence of generally recognised
considerations of the public health, safety, morals or welfare will normally
lead to a conclusion that there has been no ‘taking’”. “Non-discriminatory
measures related to anti-trust, consumer protection, securities,
environmental protection, land planning are non-compensable takings
since they are regarded as essential to the functioning of the state”
6.4 Legality of Expropriation
States have a sovereign right under international law to take property

held by nationals or aliens through nationalization or expropriation for
economic, political, social or other reasons. In order to be lawful, the
exercise of this sovereign right requires, under international law, that the
following conditions be met:
a. Property has to be taken for a public purpose;

b. On a non-discriminatory basis;
c. In accordance with due process of law;
d. Accompanied by compensation.
While the right of States to expropriate is recognized as a fundamental

one, the exercise by States of this right has triggered conflicts, debates
and disagreements that are far from over, although the tone and content,
coupled with the procedural means to settle disputes, have varied
90 Tecmed v. Mexico, Award, 29 May 2003, para. 116

91 SD Myers v. Canada, First Partial Award, 13 November 2000, paras. 287–288
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significantly over time. This is normally the standard where expropriation

is direct.
6.4.1 Measure must serve a Public Purpose
According to section 19(1) of ZDA Act, an investor’s property shall not be

compulsorily acquired nor shall any interest in or right over such property
be compulsorily acquired except for public purposes. The term ‘public
purpose’ is devoid of singular meaning or clarity. Judge Bwalya in William
David Wise v Attorney General 92, stated, “What constitutes public use
frequently and largely depends upon facts surrounding the subject.” It is
required that a requirement for ‘public interest’ shows some genuine
interest of the public. If mere reference to ‘public interest’ can magically
put such interest into existence and therefore satisfy this requirement
would be rendered meaningless as there can be no situation where this
requirement would not have been met. 93
6.4.2 Measure must not be Arbitrary and Discriminatory
A discriminatory taking is one that singles out a particular person or group

of persons. Thus an expropriation that singles out aliens of particular
jurisdiction would violate international law. In British Petroleum v
Libya94, the Tribunal found that: “…the taking of the property by the
Respondent of the property…clearly violates public international law as it
was made for purely extraneous political reasons and was arbitrary and
discriminatory in character.”
6.4.3 Procedure must follow the Due Process
Due process is an expression of the minimum standard under customary

international law and of the requirement of fair and equitable treatment.
To be internationally lawful, the measure must not only be supported by
valid reasons, it must also have been taken in accordance with a lawful
procedure. 95
6.4.4 Prompt, Adequate and Effective Compensation
Section 19(2) of ZDA Act requires that, any compensation payable be

made promptly at the market value and be fully transferable at the
92 (1990 - 1992) Z.R. 124 (HC)

93 ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary ICSID Case No. ARB/03/16,
Award, 2 October 2006
94 Award 10 October 1973, 53 ILR 297
95 Goetz v Burundi ICSID Case No. ARB/95/3
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applicable, exchange rate in the currency in which the investment was

originally made, without deductions for taxes, levies and other duties,
except where those are due. According to the World Bank Guidelines on
Treatment of foreign Direct Investment, compensation is deemed
"adequate" if it is based on the fair market value of the taken asset as
such value is determined immediately before the time at which the taking
occurred or the decision to take the asset became publicly known. The
determination of the “fair market value" will be acceptable if conducted
according to a method agreed by the State and the foreign investor or by
a tribunal or another body designated by the parties. Compensation is
deemed “effective” if it is paid in the currency brought in by the investor
where it remains convertible. Compensation will be deemed to be
"prompt" in normal circumstances if paid without delay.
The wording in section 19(2) of ‘prompt, adequate, and effective’ is what

is referred to as Hull Formula. The formulation came about Due Mexico’s
expropriation of various assets belonging to US citizens between 1915 and
1930. These expropriation included agricultural lands and petroleum
concessions. What followed was a lengthy diplomatic exchange where
Mexico felt that it was not under any international legal obligations to pay
compensation because Mexican law (which did require some sort of
compensation) applied. The United States Secretary of State Cordell Hull
disagreed. He contended that Mexico was under an obligation to pay
prompt, adequate and effective compensation. The exchange between
the two was as follows:96
The Mexican Minister of Foreign Affairs to the American Ambassador,

August 3, 1938:
My government maintains…that there is in international law no rule

universally accepted in theory nor carried out in practice, which makes
obligatory the payment of immediate compensation nor even of deferred
compensation, for expropriations of a general and impersonal character
like those which Mexico has carried out for the purpose of redistribution of
the land…
Secretary of State Hull to the Mexican Ambassador, August 22, 1938:
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
96 Green Hackworth (1942) 3 Digest of International Law, 660-665

101
(2002) 15 ICSID Rev. 72
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payment therefor. In addition, clauses appearing in the constitutions of

almost all nations today, and in particular in the constitutions of the
American republics, embody the principle of just compensation. These, in
themselves, are declaratory of the like principle in the law of nations.
The universal acceptance of this rule of law of nations, which, in truth, is

merely a statement of common justice and fair-dealing, does not in view of
this Government admit of any divergence of opinion.
The Mexican Minister of Foreign Affairs to the American Ambassador:
This attitude of Mexico, is not, as Your Excellency’s Government affirms,

either unusual or subversive. Numerous nations in recognizing their
economy, have been under the necessity of modifying their legislation in
such manner that the expropriation of individual interests nevertheless
does not call for immediate compensation and, in many cases, not even
the subsequent compensation; because such acts were inspired by
legitimate causes and the aspirations of social justice, they have not been
considered unusual or contrary to international law.
The Hull formula entails payment of full compensation. However, it is

sometimes opined that to pay compensation is to reward a wrongdoer or
recognize an absence of overwhelming public interest in the use of the
property. This has led to arguments that what should be paid is
appropriate compensation. The problem is to find a rational basis for the
distinction between regulatory non-compensable takings and other forms
of takings. In Santa Elena v Costa Rica101, the tribunal stated:
“expropriatory environmental measures- no matter how laudable and how
beneficial to society as a whole- are in this respect, similar to any other
expropriatory measures that a state may take in order to implement its
policies: where property is expropriated, even for environmental
purposes, whether domestic or international, the states obligation to pay
compensation still remains.”
In determining compensation, there must be a causal link between

breaches and losses. In Biwater Gauff v Tanzania, although the tribunal
found that Tanzania's actions in respect of its lease contract with Biwater
amounted to an expropriation and a violation of several standards in the
UK-Tanzania BIT, it concluded that Tanzania did not owe Biwater any
compensation since there was no causal link between the breaches and
the losses sustained by Biwater, as Biwater’s mismanagement of its
investment prior to the breaches had already been the cause of its own
losses.
6.5 Exercises
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1. The greatest fear of an investor is political risk which may

arise out of nationalization, expropriation or renegotiation.
With the aid case law, studies or practical examples, discuss
the legal position on investor protection in Zambia.
2. “Political risk remains one of the main obstacles to foreign

investment in emerging markets and is likely to continue
being so over the medium term.” Critically discuss
3. There is controversy in the computation of compensation for

expropriation in BITs. Discuss.
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UNIT 7
SETTLEMENT OF FOREIGN INVESTMENT DISPUTES
7.0 Introduction
Investment disputes are characterised by allegations from foreign

investors that the host country is not in compliance with treaty or
contractual obligations. Where such disputes have arisen, the problem has
been how such disputes can be resolved. In many instances, parties may
build in clauses in their agreements to either minimize or insulate
themselves from submitting a matter to a tribunal for dispute resolution.
In other instances, they may actually provide in their agreements a clause
that subjects all disputes to an international forum.
This Unit assists students to understand how foreign investment disputes

are settled under the jurisdiction of the ICSID, SADC, and COMESA. It gives
an in-depth analysis of the criteria and jurisdictional requirement for
settlement of state-investor disputes.
7.1 International Centre for Settlement of Investment Disputes
The gaps in the existing structures for the settlement of investment

disputes led to a new initiative in the 1960s. The plan was to create a
mechanism specifically designed for the settlement of disputes between
host States and foreign investors. The initiative came from the World
Bank, an institution that is concerned with economic development. The
driving force behind the Convention’s drafting was the World Bank’s
General Counsel at the time, Aron Broches.
The Convention’s drafting took place from 1961 to 1965. The main bodies
involved were the World Bank’s legal department, the World Bank’s
Executive Directors and a series of regional meetings in which experts
from 86 States participated. The text of the Convention together with a
short explanatory report was adopted by the Executive Directors of the
World Bank on 18 March 1965. Its official designation is Convention on the
Settlement of Investment Disputes between States and Nationals of Other
States.1 It created the International Centre for Settlement of Investment
Disputes (ICSID). This is why the Convention is commonly referred to as
the ICSID Convention.
The ICSID Convention came into force on 14 October 1966, following

approval by twenty countries. It established ICSID as an independent
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international organisation. Under the Convention, the President of the

World Bank is the Chairman of ICSID's governing body. This body is called
the Administrative Council and, except where a Contracting State makes a
contrary designation, it consists of members of the Bank's Board of
Governors. Although ICSID is an independent organisation, it is closely
linked with the World Bank i.e. through its finances, leadership and
location at the World Bank offices in Washington, DC. ICSID provides
facilities for conciliation and arbitration of investment disputes between
Contracting States and nationals of other Contracting States.
The provisions of the ICSID Convention are complemented by Regulations

and Rules adopted by the Administrative Council of the Centre. The use of
the Convention’s mechanisms was scant during its early years. The first
case was not decided before 1974. This situation has since changed
profoundly. Especially the 1990s have seen a dramatic increase in the
number of registered cases. The current rate of new registered cases is
about one per month. By September 2002 there were 66 concluded cases
and 39 cases were pending.
In 1978 the Additional Facility was created. It is designed primarily to offer

methods for the settlement of investment disputes where only one of the
relevant States, either the host State or the State of the investor’s
nationality, is a party to the Convention. The Additional Facility may also
be used for disputes which do not directly arise out of an investment or for
fact-finding proceedings. The Additional Facility is subject to its own rules
and regulations. The ICSID Convention does not apply to it.
7.1.1 Purpose of the ICSID Convention
The Convention’s primary aim is the promotion of economic development.

The Convention is designed to facilitate private international investment
through the creation of a favourable investment climate. The Preamble to
the Convention expresses this purpose in the following terms:
Considering the need for international cooperation for economic

development, and the role of private international investment therein;
The link between an orderly settlement of investment disputes, the

stimulation of private international investments and economic
development is explained in the Report of the Executive Directors on the
Convention in the following terms:
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9. In submitting the attached Convention to governments, the Executive

Directors are prompted by the desire to strengthen the partnership
between countries in the cause of economic development. The creation
of an institution designed to facilitate the settlement of disputes between
States and foreign investors can be a major step toward promoting an
atmosphere of mutual confidence and thus stimulating a larger flow of
private international capital into those countries which wish to attract it.
...
12. ... adherence to the Convention by a country would provide additional
inducement and stimulate a larger flow of private international
investment into its territories, which is the primary purpose of the
Convention.97
The Tribunal in Amco v Indonesia explained that ICSID arbitration is in

the interest not only of investors but also of host States. It concluded:
Thus, the Convention is aimed to protect, to the same extent and with
the same vigour the investor and the host State, not forgetting that to
protect investments is to protect the general interest of development
and of developing countries.98
7.1.2 Jurisdiction of ICSID
The resolution of any dispute is through arbitration. Article 42 (1)

provides: The Tribunal shall decide a dispute in accordance with such
rules of law as may be agreed by the parties. In the absence of such
agreement, the Tribunal shall apply the law of the Contracting State party
to the dispute (including its rules on the conflict of laws) and such rules of
international law as may be applicable.
Jurisdiction means the power, right, or authority to interpret and apply the
law. The jurisdiction of ICSID is established by Article 25(1) which provides
that:
The jurisdiction of the Centre shall extend to any legal dispute arising
directly out of an investment, between a Contracting State and a national of
another Contracting State, which the parties to the dispute consent in
writing to submit to the Centre. When the parties have given their consent,
no party may withdraw its consent unilaterally.
The Tribunals have classified jurisdictional issues as falling in three (3)

classes: (1) Subject matter jurisdiction (jurisdictio ratione materiae); (2)
Personal jurisdiction (jurisdictio ratione personae); (3) Consent jurisdiction
(jurisdictio voluntatis).
97 1 ICSID Reports 25
98 Amco v. Indonesia, Decision on Jurisdiction, 25 September 1983, 1 ICSID Reports 400.
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7.1.2.1 Subject matter jurisdiction
The ICSID arbitrator or tribunal can only arbitrate 'a legal dispute arising
directly out of an investment.' A definition of the terms 'legal dispute' and
'investment' were not included in the Convention. The ICSID Convention
does not define what is obviously the most important term of the
Convention – investment. Therefore a broad discretion is given to the
parties in defining this term. This definition, however, must be in
accordance with “the need for international cooperation for economic
development and the role of private international investment therein”, as
stated in the Preamble of the Convention.
In defining the term ‘investment’, two approaches have been taken by

ICSID tribunals: (1) objective approach; and (2) the subjective approach.
The test states that the ICSID Convention entails objective requirements
to define an investment. Thus, state parties in the treaty cannot
determine the definition of investment for the purposes of the ICSID
Convention for tribunals following the objective test to determine
investment. In contrast, the subjective approach relies on the parties’
consent to ICSID arbitration to determine the notion of investment as set
out in their International Investment Agreement (IIA).
1. The objective approach
The first publicly known award to consider the meaning of investment in a

detailed manner was Fedax NV. v Republic of Venezuela.99 The
investor, Fedax, was the beneficiary, by way of endorsement, of debt
instruments issued by Venezuela. The respondent state, Venezuela,
argued that Fedax had not made a direct investment into its territory
involving a long term transfer of financial resources. The tribunal rejected
this argument and adopted an approach to the effect, that the basic
features of an investment have been described as involving a certain
duration, a certain regularity of profit and return, assumption of risk, a
substantial commitment and a significance for the host state’s
development.
The tribunal noted, in particular, the significant relationship between the

transaction and the host state’s development. Another important finding
by the tribunal was the rejection of Venezuela’s contention that the
dispute did not arise directly out of an investment because the disputed
transaction was not a direct foreign investment. The tribunal stated that
99 Fedax NV. v. Republic of Venezuela Jurisdiction 5 ICSID Rep 183 (ICSID, 1997, Orrego Vicuna P, Heath &
Owen)
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the term directly in Article 25 of the ICSID Convention related to the fact
that the dispute should arise directly out of the investment, and did not
apply to the definition of the investment itself. Accordingly, the tribunal in
Fedax held that jurisdiction could exist even with respect to investments
that are not made directly into the host state’s economy, as long as the
dispute arises directly from the investment in question.
Although there is no concept of binding precedent in international

investment law, the Fedax approach was followed by a number of awards,
for example in Consortium RFCC v Kingdom of Morocco 100 and more
famously Salini Costruttori S.p.A. v Kingdom of Morocco.101 In Salini
v Morocco, the tribunal, while recognizing that the parties could, in
principle, agree on the kind of disputes that could be submitted to
arbitration under the treaty, went a step further than in Fedax and
explicitly recognized the existence of objective criteria that have to be
met if a particular asset is to be considered an “investment” for the
purposes of the ICSID Convention. The tribunal considered that its
jurisdiction depended upon not only the existence of an “investment”
within the meaning of the applicable IIA, in this case the BIT between Italy
and Morocco (1990), but also on the basis of the ICSID Convention, in
accordance with case law. Salini Costruttori S.p.A. and Italstrade S.p.A. v
Morocco102 is often quoted as the key case espousing the objective. Salini
required five conditions to identify such an investment under the ICSID
convention: (1) Duration; (2) Regularity of profit and return; (3)
Assumption of risk; (4) Substantial commitment; and (5) Significance for
the host state’s development.
Although there is no concept of binding precedent in investment treaty

jurisprudence, subsequent tribunals have referred to the Salini approach.
The tribunal in Joy Mining v Egypt103 further developed the Fedax and
Salini approaches to find that the investor’s assets, in this case bank
guarantees, had failed to satisfy the test of what constituted an
investment under the ICSID Convention. The tribunal was clear in holding
that: “[t]he parties to a dispute cannot by contract or treaty define as
investment, for the purpose of ICSID jurisdiction, something which does
not satisfy the objective requirements of Article 25 of the Convention.”
100 Consortium RFCC v. Morocco, Award, ICSID Case No ARB/00/6, IIC 76 (2003), (2005) 20 ICSID Rev. - FILJ
391
101 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Jordan, Award, ICSID Case No ARB/02/13, IIC 208 (2006)
102 ICSID Case No ARB/00/4; 42 ILM 609 (2003), 23 July 2001, at para 53
103 Joy Mining Machinery Ltd v. Egypt, Award on jurisdiction, ICSID Case No ARB/03/11; IIC 147 (2004); 19
ICSID Rev—Foreign Investment L J 486 (2004); (2005) 132 Journal du droit international 163
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Thus, according to this ruling the parties’ definition of an investment

under the IIA must also meet the objective criteria of a definition under
the ICSID Convention.
Recently, a number of decisions have also determined whether the

investment was made within the definition of Article 25 of the ICSID
Convention. In Saipem S.p.A. v Bangladesh 104, the tribunal applied the
so-called Salini test23 in order to hold that the investor had made an
investment within the meaning of Article 25 of the ICSID Convention.
However, not all awards have been aligned with the Salini criteria.
The recent Phoenix v Czech Republic105111 award disqualified a claim by

the Israeli-based Phoenix Action Ltd., concluding that its purchase of two
Czech companies was solely a pretext for exploiting the Israel-Czech
Republic BIT. The tribunal held that although at first sight the investor’s
operation appeared to be an investment, it could not be a protected
investment under the treaty because it was not made in good faith and
constituted an abuse of rights under the investment treaty regime. The
tribunal started with the so-called Salini criteria but modified this
significantly as follows:
To summarize all the requirements for an investment to benefit from the

international protection of ICSID, the Tribunal considers that the following
six elements have to be taken into account:
1— a contribution in money or other assets;

2— a certain duration;
3— an element of risk;
4— an operation made in order to develop an economic activity in the host
State;
5— assets invested in accordance with the laws of the host State; 6—
assets invested bona fide.
The Phoenix tribunal took issue with the fourth criterion in the Salini test—
contribution to the host state’s development— on the premise that
determining an investment’s contribution to development is “impossible
to ascertain.” Instead, the tribunal favoured “a less ambitious approach,”
and proceeded to consider if there had been a contribution to the
economy of the host state. The Phoenix tribunal unanimously rejected the
notion that a contribution to development should be criteria of an ICSID
investment. The tribunal also added two further criteria to the Salini test,
104 Saipem S.p.A. v. The People’s Republic of Bangladesh, ICSID Case No. ARB/05/07. The Salini
criteria was: (i) duration; (ii) regularity of profit and return; (iii) assumption of risk; (iv) substantial
commitment; and (v) significance for the host state’s development
105 Phoenix Action Limited v. Czech Republic, Award, ICSID Case No ARB/06/5, IIC 367
(2009), 9 April 2009 111 Para 114, Ibid
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that is, whether the assets were invested in accordance with the laws of
the host state and whether there was a bona fide investment of those
assets. Phoenix Action’s claim failed to meet the tribunal’s benchmark for
of bona fide investment as the investment. The tribunal stated:
It is the duty of the Tribunal not to protect such an abusive manipulation of

the system of international investment protection under the ICSID Convention
and the BITs. It is indeed the Tribunal’s view that to accept jurisdiction in this
case would go against the basic objectives underlying the ICSID Convention as
well as those of bilateral investment treaties. 106
The Phoenix award shows that tribunals will freely modify Salini criteria
even if following the so-called objective approach.
2. The subjective approach
Other tribunals have explicitly rejected the objective test, which requires
the definition of investment to meet an independent criterion under the
ICSID Convention, and have followed the so-called subjective approach.
The subjective approach focuses on the state parties’ definition of
investment in the IIA, and does not enforce an independent requirement
to be met for the purposes of the ICSID Convention. For example, in
M.C.I. Power Group L.C. v Ecuador,107 which concerned a power plant
investment in Ecuador, the tribunal concluded that the dispute at hand
indeed arose out of an “investment” as defined by Article 25 of the ICSID
Convention. The tribunal held:
From a simple reading of Article 25(1), the Tribunal recognizes that the
ICSID Convention does not define the term “investments”. The Tribunal
notes that numerous arbitral precedents confirm the statement in the
Report of the Executive Directors of the World Bank that the Convention
does not define the term “investments” because it wants to leave the
parties free to decide what class of disputes they would submit to the
ICSID [. . .] The BIT indicates in its Article 1 which investments are to be
protected under it. Thus, the BIT complements Article 25 of the ICSID
Convention, for purposes of defining the Competence of the Tribunal with
respect to any legal dispute arising directly out of an investment.
The majority of the ICSID Annulment Committee in the Malaysian

Historical Salvors case was also clear on their rejection of the Salini
criteria:
106 Para 144, Phoenix Action Limited v Czech Republic, Award, ICSID Case No ARB/06/5, IIC 367 (2009), 9
April 2009
107 MCI Power Group LC and New Turbine Incorporated v Ecuador, Award, ICSID Case No ARB/03/6, IIC 296
(2007), 26 July 2007
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While this Committee’s majority has every respect for the authors of the
Salini v. Morocco Award and those that have followed it, such as the Award in
Joy Mining v. Egypt, and for commentators who have adopted a like stance—
and, it need hardly add, for its distinguished co-arbitrator who attaches an
acute Dissent to this Decision—it gives precedence to awards and analyses
that are consistent with its approach, which it finds consonant with the
intentions of the Parties to the ICSID Convention.
As a basis for its view, the Malaysian Historical Salvors Annulment

Committee members quoted the following passages from the Biwater v
Tanzania108 award as follows:
The Criteria for an ‘Investment’: An initial point arises as to the relevant test
to be applied. In advancing submissions on Article 25 of the ICSID
Convention, parties not infrequently begin with the proposition that the term
‘investment’ is not defined in the ICSID Convention, and then proceed to
apply each of the five criteria, or benchmarks, that were originally suggested
by the arbitral tribunal in Fedax v. Venezuela, and re-stated (notably) in Salini
v. Morocco, namely (i) duration; (ii) regularity of profit and return; (iii)
assumption of risk; (iv) substantial commitment; and (v) significance for the
host State’s development [citations omitted].
In the Tribunal’s view, there is no basis for a rote, or overly strict, application
of the five Salini criteria in every case. These criteria are not fixed or
mandatory as a matter of law. They do not appear in the ICSID Convention.
On the contrary, it is clear from the travaux préparatoires of the Convention
that several attempts to incorporate a definition of ‘investment’ were made,
but ultimately did not succeed. In the end, the term was left intentionally
undefined, with the expectation (inter alia) that a definition could be the
subject of agreement as between Contracting States. Hence the following oft-
quoted passage in the Report of the Executive Directors: [. . .] [citations
omitted].
Given that the Convention was not drafted with a strict, objective, definition
of ‘investment’, it is doubtful that arbitral tribunals sitting in individual cases
should impose one such definition which would be applicable in all cases and
for all purposes…
Further, the Salini Test itself is problematic if, as some tribunals have found,
the ‘typical characteristics’ of an investment as identified in that decision are
elevated into a fixed and inflexible test, and if transactions are to be
presumed excluded from the ICSID Convention unless each of the five criteria
are satisfied. This risks the arbitrary exclusion of certain types of transaction
from the scope of the Convention. It also leads to a definition that may
contradict individual agreements (as here), as well as a developing consensus
in parts of the world as to the meaning of ‘investment’ (as expressed, e.g., in
108 Biwater Gauff (Tanzania) Ltd v Tanzania, Award and Concurring & Dissenting Opinion, ICSID Case No
ARB/05/22; IIC 330 (2008)
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bilateral investment treaties). If very substantial numbers of BITs across the

world express the definition of ‘investment’ more broadly than the Salini Test,
and if this constitutes any type of international consensus, it is difficult to see
why the ICSID Convention ought to be read more narrowly.
The Arbitral Tribunal therefore considers that a more flexible and pragmatic
approach to the meaning of ‘investment’ is appropriate, which takes into
account the features identified in Salini, but along with all the circumstances
of the case, including the nature of the instrument containing the relevant
consent to ICSID.
The Arbitral Tribunal notes in this regard that, over the years, many tribunals
have approached the issue of the meaning of ‘investment’ by reference to
the parties’ agreement, rather than imposing a strict autonomous definition
as per the Salini Test [citation omitted].
The above-mentioned findings of tribunals raise concerns for states

defining investment in their treaties when opting for arbitration under the
ICSID Convention as the tribunals have a wide discretion to determine if
the covered investment under the IIA also meets the test of an investment
under Article 25. The fact that the ICSID Convention does not define the
term investment leaves tribunals with considerable discretion in
determining if the particular asset or interest satisfies the criteria of an
investment under both instruments, in order to determine their
jurisdiction.
7.1.2.2 Personal jurisdiction
The personal jurisdiction of ICSID restricts the parties eligible for dispute
resolution to a Contracting State and a foreign investor. Article 25(2)
defines a National of another Contracting State as:
(a) any natural person who had the nationality of a Contracting State other
than the State party to the;
(b) any juridical person which had the nationality of a Contracting State
other than the State party to the dispute and any juridical person
which had the nationality of the Contracting State party to the dispute
on that date and which, because of foreign control, the parties have
agreed should be treated as a national of another Contracting State.
This provision attempts to define the term “national of another

Contracting State” by distinguishing between a natural person and a
juridical person. Investors are required to meet a positive and a negative
nationality requirement. To satisfy the positive requirement, investors are
required to be nationals of a Contracting State. To satisfy the negative
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requirement, investors must not have the nationality of the host State.
Juridical persons will qualify as nationals of Contracting States through
their place of incorporation or seat of business. A juridical person may,
however, possess the host State’s nationality and still qualify as a national
of another Contracting State under an exception contained in Article 25(2)
(b).
a. Natural person
An individual’s nationality is determined by the domestic legislation of the

State whose nationality is claimed. Two criteria are generally accepted
under international and domestic laws in determining the nationality of
individuals. The first criterion confers nationality on the individual on the
basis of descent from a national of a particular State (ius sanguinis). The
second criterion emphasizes the territoriality principle under which the
nationality is conferred according to the place of birth (ius soli). The
domestic legislation of most countries adheres to one of or both these
criteria in regulating the concept of nationality. In addition, there are other
accepted criteria for the acquisition of a nationality, such as a grant of
nationality on the basis of long residence or other ties linking the
individual to a State. However, there are instances where a State’s rules
on nationality may be ignored. This would be the case where a nationality
is conferred without regard to any effective link between the State
conferring the nationality and the individual. This is often referred to as
“nationality of convenience” which may be obtained from certain
countries by the mere compliance with certain procedural steps. These
kinds of nationalities may be challenged by host States.
An agreement between a host State and an investor may specifically state

the investor’s nationality. Such an agreement creates a presumption that
the nationality in question exists. However, if the facts demonstrate that
the investor does not qualify as a national under the law of the State
whose nationality has been claimed, the agreement will be of little use. An
investor’s nationality has to be objectively determined irrespective of
agreements between the host State and the investor. To that end, an
investor must show the possession of the nationality of a Contracting
State.
The purpose of ICSID is to encourage the settlement of disputes that

involve States and private foreign investors who are often reluctant to
settle disputes in host States’ courts. Investors who hold the nationality of
the host State are barred from bringing claims before the Centre. The
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motive behind this prohibition is to exclude disputes that are normally

settled locally. This also applies to investors with dual nationality, one of
which is that of the host State. This exclusion applies to investors with
dual nationality even if the host State’s nationality is not the effective one.
Only under extreme circumstances may an individual investor with the

host State’s nationality be allowed to institute proceedings at the Centre.
This would be the case if the host State conferred its nationality on an
investor involuntarily for the sole purpose of undermining the Centre’s
jurisdiction. Under these circumstances, the prohibition against the
unilateral withdrawal of consent would override the negative nationality
requirement.
b. Juridical person
Two criteria are decisive in determining the nationality of a corporation.

First, the place of incorporation, i.e., the law under which the corporation
is formed. Second, the place of its seat (siège social), i.e. the State where
the headquarters or the centre of its management is located. Another
relevant criterion in determining the nationality of a company is that of
foreign control. A foreign investor may exercise control through the
holding of equity shares in the company, through managerial control or by
having the necessary voting power to affect the decisionmaking process
in the investment. The concept of foreign control is relevant in situations
where a company is locally incorporated under the host State’s law.
ICSID tribunals have consistently adopted the traditional test of

incorporation or seat in determining the nationality of a corporation. The
Centre’s practice reflects a reluctance to adopt the control test in defining
the nationality of a juridical person outside the narrowly defined exception
in Article 25(2)(b). A juridical person must be a national of a Contracting
State. A corporation that has the nationality of a non-Contracting State
will not be able to institute proceedings before the Centre. A corporation
may, however, have more than one nationality. If all nationalities are
those of Contracting States, the Centre will have jurisdiction. If one of the
nationalities belongs to a non-Contracting State, the juridical person has
to demonstrate that it holds the nationality of a Contracting State on the
basis of incorporation or seat. The concurrent possession of the nationality
of a non-Contracting State, established on the basis of these same
criteria, would not exclude jurisdiction.
An agreement on the nationality of the investor between the host State

and a corporate investor strongly indicates that the nationality
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requirement has been fulfilled. Such an agreement will carry much weight,
but it cannot create a nationality that does not exist. Therefore, the
existence of such an agreement will not preclude the tribunal from
examining the compliance with this requirement.
An agreement on an investor’s nationality where the juridical person is

registered in a nonContracting State but controlled by a national of a
Contracting State may allow for the Centre’s jurisdiction. The validity of
this agreement would depend on the host State’s knowledge of the
circumstances underlying the investor’s nationality combined with the
State’s consent to submit to the Centre’s jurisdiction. This situation differs
from the one where the juridical person is a national of the host State. In
the latter case, the agreement is subject to the explicit exception of
Article 25(2)(b).
There are a plethora of cases that have attempted to give an

interpretation of Article 25(2)(b) second sentence. The Tribunal in Amco
Asia v Indonesia 109 expanded and changed its interpretation of Article
25(2)(b). In this case, Indonesia argued that assuming that Indonesia
consented to ICSID arbitration with P.T. Amco, an Indonesian company,
there was no “explicit consent” to treat P.T. Amco as a “national of
another Contracting State”. The tribunal, in its analysis, emphasized in its
decision on jurisdiction the purpose of ascertaining “the true common will
and intention of the parties ...from the normal expectations of the parties,
as they may be established in view of the agreement as a whole.” The
tribunal decided that the govt. had accepted that Amco Asia would control
P.T. Amco, and thus had implicitly consented to treat P.T. Amco as a
“national of another Contracting State” within the context of the
Convention for Article 25(2)(b) does not require an express clause.
In Letco v Liberia110, LETCO, a Liberian company, but controlled by

French interest signed a forestry concession agreement, which had an
ICSID clause, Government of Liberia. However, there was no explicit
agreement between parties that LETCO “should be treated as a national
of another Contracting State.” The Tribunal concluded that when a
Contracting State signs an investment agreement, containing an ICSID
arbitration clause, with a foreign controlled juridical person with the same
nationality as the Contracting State and it does so with the knowledge
that it will only be subject to ICSID jurisdiction if it had agreed to treat that
company as a juridical person of another Contracting State, the former
Contracting State could be deemed to have agreed to such treatment by
having agreed to the ICSID arbitration clause.
109 ARB/81/1
110 ARB/83/2
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In SOABI v Senegal111, SOABI, a Senegalese company, was owned by

Flexa, a Panamanian company. Panama had not signed the Convention
and hence was not an ICSID Contracting State. However, the Panamanian
company, Flexa, was controlled by Belgian nationals who were nationals
of a Contracting State. The Tribunal held that indirect control by nationals
of Contracting States of the company established under local law was
sufficient to satisfy the nationality requirements of Article 25 of the
Convention. The Tribunal found that, although the nationality of Flexa was
Panamanian, control over Flexa was exercised by nationals of Belgium, a
contracting state and therefore, the nationality requirement of the
Convention was satisfied. In Vacuum Salt Product v Ghana 112, the
Tribunal applied Article 25(2)(b) by giving effect to each of its provisions
and limited its desire to expand jurisdiction. In 1988, Vacuum Salt, a
Ghanaian company, and Ghana signed a lease agreement. This
agreement had an ICSID arbitration clause. Ghana objected to the
jurisdiction on the ground that Vacuum Salt was a Ghanaian company and
that they never agreed to treat Vacuum Salt as “a national of another
Contracting State”. The Tribunal held that the second clause in Article
25(2)(b) required both that: (l) there be an agreement that such party,
though a national of one Contracting State party to the dispute, should be
treated as a national of another Contracting State; (2) and such
agreement be “because of the foreign control”.
The uncertainty of who a ‘national of another Contracting State’ is arose in

Rompetrol v Romania113 in which the Tribunal held that:
…the drafters of the Convention abandoned efforts to define

“nationality” for the purposes of Article 25, and instead left the States
Parties wide latitude to agree on the criteria by which nationality would
be determined…To determine the criteria by which the Contracting
Parties to a BIT have agreed that nationality would be determined for its
purposes, we must look, of course, to the BIT itself.
The above cases demonstrate that it is not easy to describe who a

‘national of another Contracting State’ is.
7.1.2.3 Consent jurisdiction
This is the main cornerstone of ICSID jurisdiction. In Holiday Inn v

Morocco114, the respondent govt. claimed that lack of consent should
111 Decision on Jurisdiction, 1 August 1984

112 (1997) 4 ICSID Reports 323
113 ICSID ARB/6/03
114 (1980) 51 BYIL 123
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have precluded it from being a party to the proceedings. The claimants

responded that several partial assignments made under a basic
agreement with the consent of the government had given the claimants
the right to avail themselves of that contract's provisions, including the
ICSID arbitration clause. The Tribunal agreed.
In Amco Asia v Indonesia115, in this case the ICSID clause was contained
in an investment licence application. The government argued: (i) its
approval of the application containing the clause did not constitute
consent for the purpose of the ICSID Convention; (ii) that consent to ICSID
arbitration by a state should be construed restrictively since it constitutes
a limitation of the state's sovereignty. The Tribunal disagreed, declaring
that an arbitration agreement 'is not to be construed restrictively, nor as a
matter of fact, broadly or liberally. It is to be construed in a way which
leads to find out and to respect the common will of the parties...'
In cases where the framework investment agreement contained an ICSID

clause but the dispute involved a separate agreement containing no such
clause, ICSID tribunals have tended to reach the conclusion that the
parties had jointly consented to submit the dispute to ICSID jurisdiction. In
Holiday Inn, Klockner et al. v Cameroon et al and Société Ouest
Africaine des Betons Industriels (SOABI) v. Senegal 116, ICSID
tribunals found jurisdiction on the ground that the matters involved were
implicitly embraced by the basic or framework agreements and hence
covered by the arbitration clauses that they contained, even though they
were specifically regulated by separate agreements. In other instances, an
arbitration clause has provided for consent. In AAPL v Sri Lanka117, an
arbitration clause was incorporated in a BIT. Because Sri Lanka admitted
the jurisdiction of the Centre, the issue of consent based on bilateral
investment treaties and the implication of Article 25 had not been fully
discussed in this case. Thus consent was held to be based on the
arbitration clause. It is noteworthy that consent can also be given after
the dispute arises. In the case of Icelandic Aluminum Co. Ltd. v
Iceland118, the tribunal held that the consent could be given even after
the dispute arises.
Consent can also be construed from the provisions of a BIT. In Aguas del
Tunari SA v Republic of Bolivia 119, AdT, under the “Contract for
Concession of Use of Water and for the Public Potable Water and Sewer
Service for the City of Cochabamba” concluded in 1999, received the right
115 (1984) 23 ILM 351

116 ICSID Case No. ARB/ 82/1
117 4 ICSID Rep. 245
118 ICSID Case No. ARB/83/1
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to provide water and sewage services for the city of Cochabamba, Bolivia.
AdT claimed that Bolivia through various acts and omissions breached
various provisions of a BIT. AdT initiated this proceeding against Bolivia
before the ICSID invoking the BIT as the basis of jurisdiction. Bolivia raised
a number of objections to the jurisdiction of the Tribunal including
arguments that it did not consent to ICSID jurisdiction and that AdT is not
a Dutch national as defined by the BIT. The tribunal concluded that the
dispute is within the jurisdiction of the Centre and the competence of the
Tribunal.
Based on case law, the consent to the ICSID arbitration does not need to
be expressed in a single instrument. It could be expressed: (a) in the
domestic legislation of the host state (a unilateral act of the contracting
state); (b) in an investment agreement between parties to the dispute;
and (c) in an international treaty (bilateral or multilateral). The most
important requirement for consent to ICSID arbitration is for the consent
to be in writing.
7.1.2.3.1 Conditions to Consent
A State can give its consent conditionally. However, in many instances,

the giving of consent by s State may be subject to condition. The main
ones are:
1. Exhaustion of local remedies
In addition to article 25(1) of the ICSID Convention, article 26 provides

that consent of the parties to arbitration shall be deemed consent to such
arbitration to the exclusion of any other remedy. A Contracting State may
require the exhaustion of local administrative or judicial remedies as a
condition of its consent to arbitration. In Hochtief v Argentine
Republic120, Hochtief claimed that Argentina breached the requirements
set forth in Article 10 of the BIT which provided that: “Disputes shall as far
as possible be settled amicably between the parties to the dispute. If a
dispute cannot be settled within six months, it shall be submitted to the
competent courts of the Contracting Party in whose territory the
investment was made.” The Tribunal stated:
The Tribunal is, however, not convinced that it is correct to interpret the
BIT to mean that litigation is always an essential precondition to unilateral
reference of a dispute to arbitration, and does not decide the point or rest
its decision upon the rejection of this interpretation and the existence of
an implied right of unilateral reference to arbitration…The Tribunal thus

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proceeds on the assumption, and without deciding the point, that Article
10 of the Argentina-Germany BIT imposes a mandatory 18-month
submission to the national courts as a precondition of unilateral recourse
to arbitration under the BIT.121
However, recourse to local remedies does not preclude the Centre from
having jurisdiction. In Enron Corporation and Ponderosa Assets v
Argentine Republic122, the Claimants sought to protect investments
made in the important gas industry of Argentina, the privatization of
which was carried out under the terms of the Gas Law and related
instruments. The Argentine Republic made a jurisdictional objection on
the ground that TGS had applied to various courts of the Argentine
Republic seeking remedies in respect of the tax measures affecting it. It
affirmed that this amounts to the choice of local courts under the Treaty
and hence the jurisdiction of an ICSID tribunal would thus be precluded.
The Tribunal held that the dispute was within the jurisdiction of the Centre
and the competence of the Tribunal. In its own words “…even if there was
recourse to local courts for breach of contract this would not prevent
resorting to ICSID arbitration for violation of treaty right….”
2. Attempt at amicable settlement
In Tradex v Albania, the consent clause in the Albanian Law was subject
to the condition that the dispute “cannot be settled amicably”. The
Tribunal noted that Tradex had sent five letters over four months to the
competent Albanian Ministry but that none of these was answered or
resulted in any relevant action. The Tribunal found these letters to be a
sufficient good faith effort to reach an amicable settlement.
3. Diplomatic immunity
According to article 27, States are not allowed to give diplomatic immunity
where one of its nationals and another Contracting party has consented to
submit to arbitration. In Lucchetti v Peru123, the investor had initiated
arbitration against the host State under a BIT. Thereupon the respondent
State initiated inter-State proceedings under the BIT against Chile, the
investor’s home State, and sought a suspension of the investor-State
proceedings. Peru argued that interpretative priority should be given to
the State-State proceedings. The Tribunal in the investor-State
proceedings rejected the request for the suspension of proceedings
without giving reasons.
121 Page 15
122 ICSID CASE No. ARB/01/3
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7.1.2.3.2 Irrevocability of Consent
Article 25 (1), last sentence of the ICSID Convention provides:
When the parties have given their consent, no party may withdraw its
consent unilaterally.
The binding and irrevocable nature of consent to the jurisdiction of ICSID

is a manifestation of the maxim “pacta sunt servanda” and applies to
undertakings to arbitrate in general. The applicability of this maxim is
obvious where the consent is expressed in a compromissory clause
contained in an agreement. It applies equally where an offer of consent is
contained in national legislation or in a treaty which has been accepted by
the investor. Consent to ICSID’s jurisdiction is always by agreement even
if the elements of agreement are expressed in separate documents.
The irrevocability of consent operates only after the consent has been
perfected. A mere offer of consent to ICSID’s jurisdiction may be
withdrawn at any time unless, of course, it is irrevocable by its own terms.
In the case of national legislation and treaty clauses providing for ICSID
jurisdiction, the investor must have accepted the consent in writing to
make it irrevocable. Therefore, it is inadvisable for an investor, to rely on
an ICSID consent clause contained in the host State’s domestic law or in a
treaty without making a reciprocal declaration of consent. This may be
done by a simple letter addressed to the host State. Alternatively, the
investor may accept the offer of consent simply by instituting proceedings
before the Centre but in doing so runs the risk that the offer may be
withdrawn at any time before then.
The irrevocability of consent only applies to unilateral attempts at

withdrawal. It is clear that the parties may terminate consent to
jurisdiction by mutual agreement either before or after the institution of
proceedings.
The ICSID Convention not only declares the unilateral withdrawal of

consent inadmissible but also makes provision for the institution and
continuance of proceedings despite the refusal of a party to cooperate.
The provisions on the constitution of arbitral tribunals (Arts. 37-38) on ex
parte procedure (Art. 45) and on the enforcement of awards (Art. 54) are
designed to secure the successful conclusion of proceedings even in the
face of a recalcitrant party.
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The parties are free to subject their consent to limitations and conditions.
However, once consent has been given, its irrevocability extends to the
introduction of new limitations and conditions. In other words, the
prohibition of withdrawal covers the full extent of the consent to
jurisdiction.
Consent, once it is perfected, may not be withdrawn indirectly through an

attempt to remove one of the other jurisdictional requirements under the
Convention. To this end Art. 72 of the ICSID Convention provides that the
Convention’s denunciation by the host State or the investor’s home State
shall not affect consent to jurisdiction given previously.
Similarly, if the consent to ICSID’s jurisdiction was given by way of an

investment licence or similar authorization, the withdrawal of the licence
will not defeat jurisdiction.
A host State is free to change its investment legislation including the

provision concerning consent to ICSID’s jurisdiction. An offer of consent
contained in national legislation that has not been taken up by the
investor will lapse when the legislation is repealed. The situation is
different if the investor has accepted the offer in writing while the
legislation was still in force. The consent agreed to by the parties then
becomes insulated from the validity of the legislation containing the offer.
It assumes a contractual existence independent of the legislative
instrument that helped to bring it about. Therefore, repeal of investment
legislation providing for ICSID’s jurisdiction will not affect a withdrawal of
consent if the investor has accepted the offer during the legislation’s
lifetime.
7.2 Southern Africa Development Community Tribunal
The SADC was established by the SADC Treaty which was signed on 17
August 1992. Article 4 of the Treaty confirms that “SADC and its Member
States shall act in accordance with certain principles, including “the rule of
law” and the “peaceful settlement of disputes”. To these ends, the Treaty
created a permanent tribunal, the SADC Tribunal, whose mandate is:
To ensure adherence to and the proper interpretation of the provisions of

[the] treaty and subsidiary instruments and to adjudicate upon such
disputes as may be referred to it.124
124 http://www.lexology.com/library/detail.aspx?g=e420a271-0395-4751-ada5-dcb985104307 (accessed 31 January 2013)

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The operations of the SADC Tribunal are governed by the Protocol on

the Tribunal and Rules. According to the Protocol, Article 3(1) provides
that:
The Tribunal shall consist of not less than ten (10) Members, appointed
from nationals of States who possess the qualifications required for
appointment to the highest judicial offices in their respective States or
who are jurists of recognised competence.
Each State is allowed to nominate one candidate with due consideration

given to fair gender representation in the nomination and appointment
process.125 The nomination of the Members shall be done within 3 months
and the appointment shall be done by the Summit upon recommendation
of the Council.126 The Members shall be appointed for a term of five (5)
years and may only be re-appointed for a further term of five (5) years. 127
7.2.1 Jurisdiction of the Tribunal
The Protocol provides the basis of jurisdiction by stating in article 14 that:
The Tribunal shall have jurisdiction over all disputes and all applications
referred to it in accordance with the Treaty and this Protocol which relate
to:
(a) the interpretation and application of the Treaty;
(b) the interpretation, application or validity of the Protocols, all subsidiary

instruments adopted within the framework of the Community, and acts
of the institutions of the Community;
(c) all matters specifically provided for in any other agreements that
States may conclude among themselves or within the community and
which confer jurisdiction on the Tribunal.
It is clear from article 14 that the basis for jurisdiction relates to

interpretation of the SADC treaty, the related Protocols, and matters that
parties have agreed to amongst themselves. The exercise of jurisdiction is
limited by article 15 which provides:
1. The Tribunal shall have jurisdiction over disputes between States, and
between natural or legal persons and States.
125 Article 4(1)(2)

126 Article 4(3)(4)
127 Article 6(1)
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2. No natural or legal person shall bring an action against a State unless he

or she has exhausted all available remedies or is unable to proceed under
the domestic jurisdiction.
3. Where a dispute is referred to the Tribunal by any party the consent of

other parties to the dispute shall not be required.
The jurisdiction of the Tribunal is twofold: (1) between States; and (2)
between the State and a person. Under the Protocol, the Tribunal has
“exclusive jurisdiction over all disputes between the States and the
Community” and “disputes between natural or legal persons and the
Community”. Such disputes may be referred to the Tribunal either by the
State concerned or by the competent institution or organ of the
Community.128
7.2.2 Enforcement of Rights
Regarding the enforcement of investors’ rights, Article 27 of the Annex

provides generally that:
[…] investors have the right of access to the courts, judicial and
administrative tribunals, and other authorities competent under the laws
of the Host State for redress of their grievances in relation to any matter
concerning any investment […].”
Accordingly, if an investor is denied access to the domestic courts, this

would constitute a breach of the Protocol. However, it is Article 28 which is
of key significance. This provision entitles investors to refer disputes to
international arbitration. Article 28(1) provides:
Disputes between an investor and a State Party concerning an

obligation of the latter in relation to an admitted investment of the
former, which have not been amicably settled, and after exhausting
local remedies shall, after a period of six (6) months from written
notification of a claim, be submitted to international arbitration if
either party to the dispute so wishes.
Accordingly, investors have the right to resort to arbitration provided (a)

that the dispute relates to an “admitted investment,” (b) local remedies
have been exhausted and (c) six months have lapsed since the State was
notified of the claim.
128 Article 17 and 18

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As regards the different fora before which an investor may initiate

proceedings, Article 28(2) states that the investor and State Party may
agree to: (a) The SADC Tribunal; (b) The International Centre for the
Settlement of Investment Disputes (ICSID); or (c) Arbitration under the
arbitration rules of the United Nations Commission on International Trade
Law (UNCITRAL Rules). Article 28(3) provides that, in the absence of any
agreement, the parties shall submit the dispute to arbitration under the
UNCITRAL Rules.
7.2.3 Mike Campbell v Republic of Zimbabwe
The case of Mike Campbell (Pvt) Ltd and Others v Republic of

Zimbabwe was brought under the SADC Treaty (as opposed to the
Protocol) by a group of companies and individuals with ownership
interests in commercial farms in Zimbabwe, led by the late Mike
Campbell, who challenge Zimbabwe’s compulsory acquisition of their
agricultural lands. The applicants (who included white farmers) alleged
that: the compulsory acquisitions were unlawful; they had been denied
access to the courts to challenge the acquisitions; and they had suffered
racial discrimination. In a judgment rendered on 28 November 2008, the
SADC Tribunal upheld its jurisdiction over the claims and accepted the
applicants’ claims on the merits. The Tribunal found that the applicants
had been:
deprived of their lands without having had the right of access to the courts
and the right to a fair hearing, which are essential elements of the rule of
law, and […] consequently […] that the Respondent has acted in breach of
Article 4(c) of the Treaty.
The Tribunal went on to hold that, since the implementation of the land
reform legislation “affects white farmers only and consequently
constitutes indirect discrimination or de facto or substantive inequality”;
Zimbabwe had “discriminated against the Applicants on the basis of race
and thereby violated its obligation under Article 6(2) of the Treaty.” The
Tribunal further held that the applicants were entitled to “fair
compensation,” although such compensation was not quantified in the
judgment. Mike Campbell attempted to enforce the judgment in
Zimbabwe, but was denied. He then proceeded to enforce it in South
Africa following the grant of leave to do so by the Constitutional Court.
7.2.4 Status of the SADC Tribunal
Zimbabwe objected strongly to this decision and the subsequent

enforcement in South Africa. The issue was ultimately elevated to the
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diplomatic level. On 20 May 2011, at an extraordinary summit of Heads of

State and Government of SADC, the SADC Member States decided not to
reappoint or replace SADC Tribunal members and to bar the SADC
Tribunal from hearing new cases; the SADC Tribunal was effectively
suspended.
7.3 Common Market for Eastern and Southern Africa Court of

Justice
The Common Market for Eastern and Southern Africa (COMESA) is an

organisation of 20 African states established in 1994, replacing the
previous Preferential Trade Area between the members. Since its
inception COMESA has taken an active role in the economic integration of
its members. In 2000 the COMESA Free Trade Area was established. On
22 and 23 of May 2007 the twelfth Summit of COMESA Authority of Heads
of State and Government, held in Nairobi,
Kenya, adopted the Investment Agreement for the COMESA Common
Investment Area (CCIA Agreement). According to COMESA, “the CCIA
Agreement is a precious investment tool whereby the COMESA Secretariat
contemplates to create a stable region and good investment environment,
promote cross border investments and protect investment, and thus
enhance COMESAs attractiveness and competitiveness within COMESA
Region, as a destination for Foreign Direct Investment (FDI), and in which
domestic investments are encouraged.” Among the key pillars of the
Agreement is the, “settlement of investment disputes through
negotiations and arbitration mechanism.”
According to Article 2 of the CCIA Agreement, the essence of the

Agreement is to establish a competitive COMESA Common Investment
Area through a more liberal and transparent investment environment in
order to: (a) substantially increase the free flow of investments into
COMESA from both COMESA and non-COMESA sources; (b) jointly promote
COMESA as an attractive investment area; (c) strengthen and increase the
competitiveness of COMESA's economic activities; and (d) gradually
eliminate investment restrictions and conditions which may impede
investment flows and the operation of investment projects in COMESA. 129
7.3.1 Court of Justice
Article 7(c) of the Treaty establishes, as one of the organs of the COMESA,
the Court of Justice. The Court is composed of seven Judges who are
chosen from among persons of impartiality and
129 Article 2, CCIA

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Independence and appointed by the Authority.130
7.3.1.1 Jurisdiction
The Court has jurisdiction to adjudicate upon all matters which may be
referred to it pursuant to the Treaty. 131 The reference can be made
threefold by: (1) a Member State which considers that another Member
State or the Council has failed to fulfil an obligation under the Treaty 132;
(2) the Secretary-General who considers that a Member State has failed to
fulfil an obligation under the Treaty or has infringed its provision 133; and
(3) any person who is resident in a Member State requesting the court’
determination of the legality of any act, regulation, directive, or decision
of the Council or of a Member State. 134 The Treaty also gives the Court
jurisdiction over matters arising from a contract that has an arbitration
clause. Article 28 provides:
The Court shall have jurisdiction to hear and determine any matter:
(a) arising from an arbitration clause contained in a contract which confers

such jurisdiction to which the Common Market or any of its institutions
is a party; and
(b) arising from a dispute between the Member States regarding this
Treaty if the dispute is submitted to it under a special agreement
between the Member States concerned.
7.4 Exercises
1. What are the similarities in terms of jurisdiction between the

ICSID, COMESA Court of Justice, and SADC Tribunal?
2. What are the potential benefits of having an investment

matter resolved by the COMESA Court of Justice, and SADC
Tribunal?
130 Article 20(1)(2)

131 Article 23
132 Article 24
133 Article 25
134 Article 26
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3. Scholars postulate that certain provisions of the ICSID

Convention are skewed in favour of Investors. However, this
appears not so under the COMESA Common Investment
Agreement (CCIA). Discuss
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Investment LAW Module Highlighted

Jurisprudence and Legal Theories (University of Lusaka)

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Studocu is not sponsored or endorsed by any college or university

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International Investment Law involves a broad array of issues that

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responsibility of States and of Multinational corporations; problems

The main objective of the course is to equip students with a critical

At the end of the course, students should be able to:

 Understand the nature and function of the various legal instruments,

 Possess a basic knowledge of the international law rules on the

 Develop an in-depth understanding of key issues of the substantive

UNIT 1 INTRODUCTION TO FOREIGN

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2.5 Grant of Certificate of

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6.4.2 Measure must not be Arbitrary and

INTRODUCTION TO FOREIGN INVESTMENT

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This Unit introduces student to principles, theories, ideologies, and

1.1 Defining investment

The Zambia Development Agency (ZDA) Act defines ‘investment’ as

1.1.1 Foreign Direct Investment

The World Trade Organisation (WTO) defines it as what occurs when an

The ZDA Act states that it is investment brought in by an investor from

Types of foreign direct investment

There are four (4) major types of FDI. These are:

Greenfield investment means the expansion of existing facilities or a

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Agency’s duties is to promote Greenfield investments through joint

This is the purchasing of an existing production or business facility by

3. Mergers and Acquisitions

An acquisition normally involves the purchase of another firm’s assets and

This means an enterprise that is a business undertaking between two or

1.1.2 Portfolio investment

Portfolio investment refers to investment in securities that is intended for

4 http://www.investorwords.com/11918/brownfield_investment.html#ixzz1xYm6HRVb (accessed 25 June 2012)

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1.2 Economic theories on foreign investment

1.2.1 Classical theory

1.2.2 Dependency theory

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By acting in such a manner, the advanced nation states will continuously

1.2.3 Middle path theory

1.3 Benefits of foreign investment

Foreign Direct Investment is seen as an important source of capital

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It is more important that technology is diffused with spill-over into the

Foreign Direct Investment is not always accompanied by substantial

4. Transfer of management skills

5. Increased export competitiveness

There is an increased anticipation of export competitiveness given the

6. Spill overs effects

Spillovers are broadly defined as the transfer of managerial practices,

Furthermore, MNCs have been said to improve labour skills through