(Asian Journal of International Law, Page 1 of 22 doi:10.

1017/S2044251310000330 r Asian Journal of International Law, 2011

Sovereign Wealth Funds and the Existing Structure of the Regulation of Investments
M. SORNARAJAH* National University of Singapore, Singapore lawsorna@nus.edu.sg

Abstract
The strategic investments made by SWFs in vital economic sectors of the developed states have caused national security concerns. The existing law on foreign investment, which was designed by the developed states to permit liberal ows of foreign investment and emphasize protection against government interference, sits uneasily with recent moves to control SWF investments. The developed states may have to dismantle to a signicant extent the international law they had created to protect foreign investment and retreat into principles of sovereignty earlier advocated by the developing states. This will result in dramatic changes to customary law as well as treaty norms and signicantly undermine the present structure of investment protection: a complete reversal of the neoliberal vision may occur. This phenomenon provides an opportunity for the examination of how events that lead to the quick making of legal rules in line with a legal theory favoured in a particular political context are, equally quickly, replaced by another set of rules to suit rapid changes in the power balances. Between the second edition of my book The International Law on Foreign Investment 1 and the third edition, which was published in May 2010, many signicant events have taken place that more than justied a new edition within a short period of time. One of them, clearly, is the emergence of sovereign wealth funds (SWFs), particularly in the context of the present global crisis. This adds to the many dramatic changes that are taking place in the global investment scene in that the emergence of these funds further accentuates the erosion of the old picture on which the law was foundedthe neat division of the world into the capital-exporting rich nations and the capital-receiving poor nations, the so-called North-South divide

which so permeated discussions of international law in this and many other elds. 2 * C.J. Koh Professor of Law, National University of Singapore; Tunku Abdul Rahman Professor of Public International Law, University of Malaya. 1. M. SORNARAJAH, The International Law on Foreign Investment, 2nd ed. (Cambridge: Cambridge University Press, 2004). 2. The post-colonial period extending from the end of World War II to the fall of the Soviet Union was characterized by the movement on the part of the newly independent states and the non-aligned nationsErstwhile capital exporters are fast becoming the largest importers of capital and erstwhile capital importers are rapidly emerging as the exporters of capital. The SWF is the symbol of that change as the largest holders of such funds are the erstwhile importers of capital belonging to the developing world. 3 It is for that reason that it lends itself to scrutiny in the context of the international law on foreign investment. Such scrutiny is attempted in this article. SWFs are also emblematic of a more profound change taking place within international relations. They reect the passing of economic power to newly emerging centres of wealth within what was formerly considered the developing world. This could bring about profound changes to the world order and, with it, to international law. Such a study will no doubt engage many scholars within the discipline. For the moment, one has to be content with studying the changes that one aspect of the emergence of some developing states, principally China, India, and Brazil, along with smaller states like Malaysia, bring to the area of the international law on foreign investment through the enormous excess capital assets that they have accumulated in the form of SWFs to channel into overseas investments. A major issue is whether the newly emerging states would conform to the rules that the developed

states devised for investment protection or whether they would want to ensure that the rules they had sought to advance as erstwhile developing states are reected. Another issue is how the developed world itself would respond. It could respond by changing the rules to protect its interests, by advocating the very rules that the developing states had advanced in the past by seeking refuge in sovereignty-centred, protectionist norms that it has hitherto resisted. The emergence of new and competing trends would provide interesting contexts in which change in international law could be studied. The existing international law on foreign investment comes down from the earlytwentieth-century attempts of the United States to formulate concrete standards for the protection of foreign investment that American investors brought into Latin America. 4 For the rest of the world, foreign investment took place within a colonial context. It was subject to imperial laws or, in the singular instances where a state stood outside the colonial system (for instance, China and Thailand), gunboat diplomacy and extraterritoriality were sufcient to deal with such minor irritants. It was in the context of the Americas that an international law was needed and the US pioneered the construction of to establish a New International Economic Order. It was part of that package of norms to recover sovereignty over issues of foreign investment. The Charter of Economic Rights and Duties of States, GA Res. 3281 (XXIX), UN Doc. A/9631 (1974), art. 2(2)(c) asserted that the domestic law of each state alone had competence over matters relating to foreign investment, denying the relevance of international law. In many senses, this was a restatement of the international law that had existed in the past, as most authoritative pronouncements in the eld left such issues to domestic law. See e.g., Case Concerning the Payment of Various Serbian Loans Issued in France, [1929] P.C.I.J, Series A, No. 20. However, developed states had sought to build up notions of an international minimum standard and a theory of internationalized foreign investment contracts.

3. China leads with an estimated reserve of over 3 trillion US dollars. Smaller states like Singapore and Dubai hold large amounts of capital through such funds. Norway and Sweden are developed states operating surplus capital through SWFs. Smaller developing states, like Malaysia, also have SWFs. 4. Charles LIPSON, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (Berkeley: University of California Press, 1985). 2 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a wthat law, 5 although its formulation was heavily contested by the Latin American states, thereby bringing about an early schism within the law between the set of norms on investment protection espoused by the US and the negation of those norms and insistence on exclusive national control by the Latin Americans. 6 The law on the subject was clearly born in the context of the relations between the US and the Latin American states. The second phase of the development was the internationalization of this regional law. After decolonization, the African and Asian states began a bout of nationalization of the investments made during colonial times. The erstwhile colonial powers intervened diplomatically to argue on the basis of the same norms that the Americans had created. The response of the Afro-Asian nations was similar to that of the Latin Americans. The tussle was transferred to the United Nations General Assembly, where the Afro-Asians had numerical strength, and a series of resolutions attempting to remake international law were passed proclaiming a New International Economic Order (NIEO). Although the capital-exporting states did not regard these resolutions as creating law, the resolutions obviously brought about a set of new norms that amounted at least to opinio juris and had the effect of contesting the unilateral formulations of the law by the US and the later espousal of the norms by the European states. Thus, a battle was initiated between two camps of states, identiable on the basis of being capital exporters (US and Europe) and capital

importers (Latin America, the Middle East, Africa, and Asia). There was division on the basis that one camp consisted of the former colonizers, and the other the former colonized, now newly independent states. Japan, of course, belonged to the capital exporters. It was, as in this case and for many other purposes of international law, not a part of Asia. It is also interesting to note the policy of China and India as leaders of the Asian states in supporting national control over foreign investment. Now, they are among the leading practitioners of investment treaties, exporters of large capital assets, homes to SWFs, and users of arbitration to protect investments. 7 The schism that was brought about had denite results in making the law move into a third phase. This began in 1959, when Germany initiated the practice of bilateral investment treaties, the object of which was to bypass disputes as to what the general international law was by stating the law that would apply between the two states making the treaty. The treaty was usually between a capital exporter and a capital importer. The practice did make progress, with some 800 treaties made 5. Lipson, ibid., contains a history of the manner in which US administrations formulated a doctrine justifying intervention to protect American investments in Latin America. Sometimes, there was forcible intervention. 6. This took the form of the Calvo Doctrine, which asserted that no external standards applied by foreign tribunals were relevant to the settlement of investment disputes. Instead, such disputes were subject to local laws applied by local tribunals. See e.g., Kurt LIPSON, The Place of the Calvo Clause in International Law (Oxford: Oxford University Press, 1946). 7. The rst case by a Chinese national has been brought against Peru. See Tza Yap Shum v. Republic of Peru, Decision on Jurisdiction and Competence of the Arbitral Tribunal of 19 June 2009, ICSID Case No. ARB/07/6. The rst case by an Indian national has been brought against the UK. See City of London

v Sancheti [2008] EWCA Civ. 1283. There is a case against Germany brought by a Swedish claimant. See Vattenfall A.B., Vattenfall Europe A.G., Vattenfall Europe Generation A.G. v. Federal Republic of Germany, ICSID Case No. ARB/09/6 (status pending). The tables have indeed been turned, in that developed states are becoming respondents in investment arbitrations. sw fsand t he existing structure of the regulat ion of investments 3by 1990. In the next decade, the number of treaties exploded to nearly 3,000. The phenomenon requires explanation. The fourth phase begins with the roaring nineties. 8 It was a period when greed took over the world, with Thatcherism and Reaganomics holding sway. The area of investment did not escape its impact. 9 The panacea to the worlds problems was to be provided by the liberalization of trade and investment. Investment ows were said to be universally benecial in bringing economic development to the poor and had to be promoted. The Washington Consensus promoted a concept of the rule of law that heavily emphasized the protection of property and the settlement of disputes through external arbitration. Even Argentina, the home of the Calvo Doctrine, became a party to investment treatiesa decision that it was to regret. By the end of the decade, the number of investment treaties catapulted to reach a gure near 3,000. Neoliberalism held sway. Becoming rich was proclaimed not to be wicked. There would be trickle-down effects for the poor, as the droppings from the oats fed to the ne horses would always contain sufcient undigested seeds that could feed the little birds. Poverty would be a thing of the past. However, with a succession of economic crises, rst in Asia, then in Russia and Argentina, the neoliberal vision crumbled. But it was not before its prudent application in China, India, Brazil, and some smaller states like Vietnam, Singapore, and Dubai had resulted in spectacular growth resulting in excess

capitalthe source of SWFs. It was also not before a massive expansion of the law on investment protection had been made by a large number of investment arbitrations. 10 Much of this expansion was made on the basis of fervour for neoliberalism. 11 Even if economic development did not take place as a result of the investment treaties in the poorer states, 12 it did take place for large law rms and arbitrators. In this present phase, the law has travelled full circle. The US is the largest recipient of foreign capital. Brazil, China, and India are among the largest investors in the US and Europe. In this context, the old model of investment protection that the US had created and helped to impose on the rest of the world must undergo changes. The inexible model of investment protection that the US promoted in the earlier phases of its history is no more. Instead, a balance is now sought, which is what the developing states may have desired all along. The picture has changed dramatically, with the US and Europe being dependent on capital from the BRIC13 countries as well 8. The phrase is taken from a book with that title. See Joseph STIGLITZ, The Roaring Nineties: Why Were Paying the Price for the Greediest Decade in History (London: Penguin Books, 2003). 9. For the role of greed in fashioning international law principles, see M. SORNARAJAH, The Law for Need or the Law for Greed? Restoring the Lost Law in the International Law of Foreign Investment (2008) 6 International Environmental Agreements: Politics, Law and Economics 329. 10. My own views on this have been stated in A Coming Crisis: Expansionary Trends in Investment Treaty Arbitration in Karl SAUVANT, ed., Appeals Mechanism in International Investment Disputes (New York: Oxford University Press, 2008), 39; M. SORNARAJAH, The Retreat of Neo-Liberalism in

Investment Arbitration in Catherine ROGERS and Robert ALFORD, eds., The Future of Investment Arbitration (New York: Oxford University Press, 2009), 273. 11. M. SORNARAJAH, The Ravage and Retreat of Neo-Liberalism in Foreign Investment Arbitration (2010) 2 Yearbook on International Investment Law & Policy. 12. There is presently an economic debate taking place as to whether investment treaties help in the ow of foreign investment into developing countries. 13. These are Brazil, Russia, India, and China. 4 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a was the smaller rich countries of Australasia and the Middle East. Neoliberalism is a thing of the past. With the realization that greed-driven economic policies brought about the global economic crisis, regulatory structures, both national and international, will change as a result. SWFs, formed with excess capital in the emerging countries, assume signicance in this context. It is the global economic crisis that makes the West dependent on SWFs. However, dependence on these SWFs is not by choice, as security considerations as well as nationalist sentiments baulk at the idea that sensitive sectors of industries should be controlled by foreign government-linked entities, some of which belong to countries perceived not so long ago as enemy states with which trade was prohibited. China is the obvious instance. The issue arises as to how well these investments t in with the principles of international law on foreign investment as it has developed through the stages described above. It is necessary to look at the stances adopted towards similar entities in the past and to assess the present problems that arise in the context of the existing rules on investment protection in international law. i. the legal status of sovereign wealth funds in international investment law SWFs are relative newcomers to international investment law. Investments were largely made by multinational corporations (MNCs), which were private entities. Their entry was through direct investment and not through the acquisition of shares,

although the picture changed during the era of privatization. 14 The traditional role of state-controlled entities was to operate in sectors of the economy subject to socialistcontrolled governments. In doing so, their principal role was to act as the means through which investment was channelled. Thus, when some states in Eastern Europe rst began to admit foreign investment, they required that the foreign party enter through the making of foreign investment with a state entity operating as a monopolist in the sector in which entry was made. The state entity was always the monopolist of the sector in a socialist economy and the entry of foreign investment was only possible in socialist theory if the entry was made in association with the state entity. This was the way in which socialism was married with capitalism. In Asian states where communism prevailed, namely China and Vietnam, early foreign investments had to seek entry through joint ventures. The strategy was adopted by states like Indonesia and India, where joint ventures still remain the principal means of entry into several sectors. Some of the state entities engaged in international business, particularly in the export of manufactured goods or natural resources like oil. As an obvious result, the transactions they made had to be subjected to the law. There was early difculty because of sovereign immunity. The law of many Western states permitted sovereign immunity even when breach of contract actions were brought before their courts 14. The recent Argentine cases largely arose out of privatization of shares in state companies. See infra note 19. sw fsand t he existing structure of the regulat ion of investments 5against these foreign state entities, which had sufcient presence within jurisdiction. This gave a great advantage to these companies. The law had to be changed and it is well known that the change made in continental Europe conning immunity to acts iure imperii and denying it to acts iure gestionis came to be accepted in the US through the Tate Letter, through decisions of the courts, and nally through the

Sovereign Immunities Act 1976. Similar developments took place in English law, where the changes made on the basis of continental developments were accepted in judgments and the State Immunity Act was enacted in 1978 to recognize the distinction between governmental acts which carried immunity and commercial acts of state entities which did not. Singapore promptly copied this legislation. Most other Commonwealth states have similar legislation. These developments give clues as to the characterization of SWFs in the law of government-linked funds. They do have personality in their domestic legal systems either as entities or as bodies formed under the law. The Government of Singapore Investment Corporation Private Limited is a body established by the government to manage its foreign reserves. It is an example of a SWF. Its status in international law can be taken to be akin to that of state entities that operate as monopolies within specic sectors. Since it performs a commercial function, it must be taken to be performing commercial acts and its linkage with the government does not provide it with any immunity. This then indicates how a government-linked fund can be characterized. It enjoys no special privileges by being linked to the government. It must operate as any private entity would simply because of the fact that it performs a commercial function. It is, at best, like Singapore Airlines, which is known to have pleaded sovereign immunity unsuccessfully before the American courts. This is only if a fund becomes subject to a suit. However, it seems unlikely that the issue of immunity would crop up at the initial stages of entry and establishment. It is the problems at the stage of entry and establishment that need to be addressed in the present context, although the issue of liability of these funds may arise at a future time. When it does, the clear proposition is that their liability would be decided as if they were private actors, notwithstanding their link to governments, simply because they perform entirely commercial functions. Their purpose is to invest funds, even though the funds belong to the government. Their nature is similar to any corporation or entity holding funds for investment. Are there any indications as to how such funds would be treated in respect to the

making of entry and later at the post-entry phases? Here, an early episode may provide parallels. During the NIEO days, the developing countries were intent on setting up a code of conduct for MNCs to curb what was considered conduct that was deleterious to their economic development. It was also a period of time when there was concern with the power of MNCs in the Western world, a concern encapsulated in the work of Raymond Vernon in his book Sovereignty at Bay. 15 The excessive power of the MNCs caused general concern, but more so among developing countries which saw that their enormous economic power had the capacity for good as well as for bad and that the bad aspects should be subject to binding international codes. 15. Raymond VERNON, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises (New York: Basic Books, 1971). 6 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a wThe multinationals did not like binding codes and the principal home states of these corporations were often intent on wrecking the project to create binding codes. Thus, one of the arguments that the US advanced was that if the private MNCs were to be subject to binding obligations at the international level, so should their counterparts, the state entities of the socialist and the developing worlds. These state entities, the US argued, were in no different a position from the MNCs and should be subject to the same code. The US and its allies proceeded to draft a code of conduct that would apply to these state entities as well as to MNCs. The idea was that there had to be parity of status between MNCs and the state entities. Coupled with the situation of sovereign immunities, the idea that the state entity should be treated exactly like the MNC has received acceptance in the practice of states. One must conclude that the sovereign-linked wealth fund, being no different from a state entity, must, as far as international status and personality is concerned, be treated no differently from a MNC. The governments which form these SWFs may want to distance

themselves from the funds. 16 However, that is a futile attempt. Their state constitutions would require that the funds are controlled through secure mechanisms. If so, it has the same rights of entry and establishment and the same rights of treatment after establishment as a MNC. The only possible difference would be if it were not legal. In the case of a MNC, a state has discretion whether or not to intercede diplomatically. In the case of a government-linked SWF, it is certain that a state would intervene to protect the interests of the fund, diplomatically as well as through other means. Since the investment it makes may be protected under the investment treaties made by the state on account of its status as an investor no different from any MNC, the SWF will also have standing to protect its own interests through recourse to treaty mechanisms of dispute settlement, usually arbitration before the tribunals mentioned in the provision on dispute settlement. The new ASEAN (Association of South-East Asian Nations) Comprehensive Investment Agreement mentions SWFs and entitles them to the same treatment as private foreign investors. 17 In this article, attention is focused on the latter point. A. Some Preliminary Points Obviously, portfolio investment is not considered here. SWFs do make portfolio investments and assume again the same risks as others who make such investments. There is little or no international law on portfolio investments. There is usually no recourse to any action when things go wrong. What is dealt with here is the situation of a foreign direct investment where government interference in the host state in which the investment is made by the SWF causes loss. The most obvious situation is where shares are brought in an existing corporation. These shares are not to be regarded as portfolio investments bought on stock markets but as foreign direct investment as there is entry into a host state to function as a shareholder of an

16. Temaseks Revised Charter Wall Street Journal (31 August 2009) (reporting that Singapore has instituted measures to divorce the fund from the government and states that this may be illusory as the President has residual control over these funds). 17. ASEAN Comprehensive Investment Agreement, 26 February 2009, online: ASEAN /http:// www.aseansec.org/22244.htmS, arts. 4(d) and (e) [ASEAN Investment Agreement]. sw fsand t he existing structure of the regulat ion of investments 7existing company. There is authority that regards such shareholding as protected by investment treaties. 18 Most of the Argentine cases involved shares purchased during privatizations by foreigners. 19 The preliminary view that such shareholdings are protected by investment treaties changed existing customary law on the point. 20 The issue is whether there are remedies when shares purchased by SWFs are affected by governmental measures. The proposition that the SWF has the same standing as any private entity making the investment may mean that it may have such remedies as provided by international law. The most signicant of these remedies in modern times arise under investment treaties. This again is a preliminary view taken at this stage for further discussion. 21 Another preliminary point to remember is that the entry of foreign investment can be prohibited by the host state. This is a matter of sovereign prerogative. It is a basic that any foreign investor, like any foreigner, has to obtain immigration clearance before he can enter and function as a foreign investor in a state. The assumption is that the sovereign foreign investor enters the state to acquire shares with the

intention of exercising shareholder rights, and not to make a portfolio investment. Almost every state, whether developed or developing, exercises entry controls for foreign investment. The developed states do this overtly for reasons of national security. However, they could do this covertly through their anti-trust laws, on the ground that infusion of capital through acquisition may create dominance, or through other regulatory devices. In the case of developing countries, particularly in Asia, there are administrative clearances that have to be obtained before entry. The right to prevent entry may, however, be surrendered by an investment treaty which recognizes a pre-entry national treatment standard. Pre-entry rights are uncommon in European treaties but are common in the investment treaty practice of the US, Canada, Japan, and South Korea. States which adopt pre-entry national treatment may and have exempted sectors of the economy from this standard of treatment. The list of sectors could be extensive. Another point to note is that although there is a network of nearly 3,000 investment treaties, they do not create customary international law. It is an argument of those who want to introduce multilateral rules into the area that this large number of treaties constitutes customary international law. It is not likely that such an idea would be taken seriously, even by developed states. These states have found in 18. There are statements in awards that even portfolio investments are protected. However, this would be incorrect unless there are express words to that effect in the treaty. 19. CMS Gas Transmission Company v. Argentine Republic, Award of 12 May 2005, ICSID Case No. ARB/01/8, [2005] 44 I.L.M. 1205 [CMS v Argentina]; Sempra Energy International v. Argentine Republic, Award of 28 September 2007, ICSID Case No. ARB/02/16; Siemens A.G. v. Argentine Republic, Award of 6 February 2007, ICSID Case No. ARB/02/8. 20. The customary law is contained in Case Concerning the Barcelona Traction, Light and Power Company,

Limited, [1970] I.C.J. Rep. 1 and conrmed in Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Decision on the preliminary objections raised, 27 May 2007, [2007] I.C.J. Rep. 87. 21. In the context of ASEAN, a possible test case would be the interference by the Monopolies Commission of Indonesia with shareholdings by Temasek in the Indonesian mobile phone services market. The Indonesian Supreme Court upheld the order of the Monopolies Commission on 24 May 2010. See Indonesian Court Rejects Temaseks Final Appeal on Telecoms Reuters (24 May 2010). 8 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a wcustomary international law a refuge to narrow the interpretation of investment treaties. 22 In any event, the treaties do not bear sufcient similarities to generate customary international law. Besides, the asymmetric nature of their negotiations and conclusion raise suspicions as to whether many of them are concluded with an entirely voluntary opinio juris on the part of the developing states that make them. 23 The Organization for Economic Co-operation and Development (OECD) effort at a Multilateral Agreement on Investment, which would have brought about globally applicable, uniform rules on investment protection, was scuttled by the developed countries themselves. The effort at the World Trade Organization for an instrument on investment was fruitless. It is most unlikely that a multilateral code will eventuate. 24 With the return to regulatory controls over economic sectors in the developed states, it would be the developed states themselves that would resist such an idea in the present context. With these points out of the way, a consideration may now be made of the nature of the protection that international law may provide SWFs. B. Customary International Law

The thrust of my work in this eld has been to demonstrate that customary international law principles are unclear because of the conict between the norms generated by the US (and the later espousal of these norms by Europe) and those favoured by the developing countries, contained in the Calvo Doctrine and the NIEO. This resulted in a situation of normlessness that characterized the anarchical society that is the international community. Developed states continue to adhere to a denite set of norms of investment protection. Their disagreement relates to the entry of investment rather than issues of protection. Technically, then, if a dispute were to arise as to the violation of investment protection rules evolved by developed states as to SWFs invested in these states, there would be clear grounds for litigation before the International Court of Justice on a state-to-state basis. 25 The ordinary rules on state responsibility would have to be satised and this may be possible in a situation where the host states measures amounted to expropriation. However, outside outright physical takings of property, customary international law was not too strong on the taking of intangible property such as shares. As to the success of such litigation, this could only be pure speculation. It is not impossible to contemplate success, but there are too many hurdles such as jurisdiction to be satised. Remedies provided by investment treaties may prove more secure but, here again, not before several hurdles are cleared. It is clear that authors have generally looked towards 22. For instance, the recourse to customary international law by the US and its NAFTA partners to interpret fair and equitable treatment narrowly. See Methanex case, infra note 56. 23. There is evidence that many of them are made because the International Monetary Fund or the World Bank makes them conditions for loans and other facilities. 24. The efforts are traced in M. SORNARAJAH, The International Law on Foreign Investment, 3rd ed. (Cambridge: Cambridge University Press, 2010).

25. There has been a great reluctance to bring investment-related cases before the International Court of Justice. This may be due to the fear that the Court may divide so deeply as to disclose divisions which exist and break the carefully maintained illusion that there is in fact a customary law on foreign investment protection. sw fsand t he existing structure of the regulat ion of investments 9investment treaties and, in at least one reported instance, a SWF contemplated a remedy based on an investment treaty. 26 The hurdles to be cleared in the case of investment treaties, which were hardly made with SWFs in mind, also remain difcult to surmount. C. Accountability of Sovereign Wealth Funds If the assimilation of the investment activities of SWFs to the activities of MNCs is accurate, it then follows that the same rules regarding these activities would apply to SWFs. The basic rule is that foreign investment that enters a state must be subject to the rules that exist in the host state. The rule is an obvious one as all aliens, physical or corporate, who make entry into a state are subject to the laws of the host state. This proposition is one that ows from the sovereignty of the host state but, because of the power equations between the MNCs of the developed states and the developing states into which they go, the rule has been in abeyance and has to be re-established. Unfortunately, so obvious a rule now nds expression in non-binding codes such as the OECD Guidelines on Multinational Corporations 27 and the Asia Pacic Economic Co-operation (APEC) Non-Binding Investment Principles. 28 These are all so-called soft laws, as the MNCs and their home states did not want any hard laws to control the misdeeds of these companies. There is a strong view emerging within international

investment law that foreign investment that does not abide by the investment laws of the host state will move out of the protection of investment treaties. 29 However, for the present, the statement of the duty to adhere to the laws of the host state remains one that is conned to the soft law documents. These Guidelines also require that MNCs not involve themselves in the domestic politics of the host state. The involvement of MNCs in altering the course of internal politics is well known. The classic example is the overthrow of President Allende in Chile, which was inspired by the efforts of his government to nationalize the copper mines owned by Kennecott and other American mining corporations. The US involvement in the dislodging of the Allende government and the subsequent 26. It was reported that Temasek Holdings contemplated such action in relation to shares in Telekom Indonesia. The Monopolies Commissions ndings that the shareholdings of the Singapore sovereign fund violated the monopolies laws of Indonesia were upheld by the Indonesian Supreme Court. See supra note 21. There is speculation as to whether the matter could give rise to an investment dispute. If the dispute comes before an investment tribunal on the basis of the violation of an investment treaty, such as the Agreement Among the Government of Brunei Darussalam, the Republic of Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore, and the Kingdom of Thailand for the Promotion and Protection of Investments, 15 December 1987, online: ASEAN /http:// www.aseansec.org/12812.htmS, it would be the rst time a SWF would have brought proceedings against the host state. The new ASEAN Investment Agreement, supra note 17, specically provides that SWFs would have to be treated as investors under the Treaty. 27. Directorate for Financial, Fiscal, and Enterprise Affairs, Committee on International Investment and Multinational Investments, OECD Guidelines on Multinational Enterprises, online: OECD /http:// www.olis.oecd.org/olis/2000doc.nsf/LinkTo/NT00002F06/$FILE/JT00115758.PDFS.

28. APEC Committee on Trade and Investment, Guide to the Investment Regimes of the APEC Member Economies (Singapore: APEC Secretariat, 2003) at 6734, Annex IIA. 29. This is an inference that has to be drawn from the requirement that host state laws must be complied with as to entry. See Inceysa Vallisoletana S.L. v. Republic of El Salvador, Award of 2 August 2006, ICSID Case No. ARB/03/26 [Inceysa v. El Salvador]. This duty to comply exists throughout the course of the investment. 10 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a winstallation of the Pinochet regime is often recounted. There are many other examples. 30 The concern that SWFs may have political motives is reinforced by the earlier concerns regarding MNCs. 31 The Santiago Principles 32 address this issue, but only in terms of a soft prescription. Earlier, the developed world had required the developing countries to live only with soft prescriptions regarding MNCs. Now, the boot is on the other foot. The manner of control and accountability will remain through the host states laws. Although rules on corporate accountability do develop in international law, they only evolve slowly. The more rapid development is through domestic law statutes such as the Alien Tort Claims Act, 33 which seeks to impute extra-territorial liability for wrongs committed abroad by persons found within American jurisdiction. It is not impossible that SWFs could become implicated with such concerns. The involvement of states like China in the oil and other natural resources of states known to be massive violators of human rights, like Sudan, is well known. It is not unlikely that SWFs may come to be

prosecuted under statutes like the Alien Tort Claims Act. 34 Other extra-territorial techniques would also evolve that would seek to prevent injurious acts of SWFs, very much in the way they prevent the malpractices of MNCs. The manipulation of domestic techniques of control, both at the stage of entry of the SWF and at the post-entry stages through local laws, would be the way to ensure accountability. However, here too there may be limitations imposed by both customary international law and treaty law. Customary international law mandates an international minimum standard of treatment, and treaties require a national standard of treatment as well as fair and equitable standards of treatment. In advanced systems of administration, as are provided in the democracies of the developed world, it is unlikely that these standards would be breached. Still, any domestic control must ensure that the measures of control exerted over the SWF conform to the international obligations that exist. Of these, national treatment is much prized. As the Co-Chair of the International Working Group (IWG) on Sovereign Wealth Funds puts it, in the Santiago 30. The involvement of multinational companies in supporting the Suharto regime is well recorded. Marcos in the Philippines was similarly linked. Likewise, many dictatorships were maintained by the support of MNCs in various parts of the world. 31. The overthrow of Thaksin Shinawatra and the later troubles that resulted in Thailand commenced with the purchase of large shares of telecommunication-related industries by Singapore funds. The political reasons for concern that were given related to the control that would be acquired by such funds, in sensitive areas that involve possible national security concerns. See Thailand Weighs Thaksin Damage as Temasek Stocks Drop Bloomberg (2 March 2010). The acquisition of shares by SWFs in several industrial sectors, as will be seen, causes such concerns.

32. International Working Group of Sovereign Wealth Funds (IWG-SWF), Sovereign Wealth Funds: Generally Accepted Principles and PracticesSantiago Principles (October 2008), online: /http:// www.iwg-swf.org/pubs/eng/santiagoprinciples.pdfS [Santiago Principles]. 33. Alien Tort Claims Act, United States Code, Title 28, Part IV, Chap. 85, Sec. 1350, reads: The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States. 34. The Canadian Oil Company, Talisman, faced Alien Tort Claims Act litigation in respect of its activities in the Sudan. It pulled out of the Sudan due to public pressure. It is unlikely that the SWFs of certain states, which are motivated entirely by prot concerns, would be amenable to such pressures. Another development relates to the view that investments involved in violating ius cogens norms will not be protected. See Phoenix Action Ltd. v. Czech Republic, Award of 15 April 2009, ICSID Case No. ARB/ 06/5. sw fsand t he existing structure of the regulat ion of investments 11Principles, there are provisions conrming the IWGs expectations that recipient counties will not subject the SWFs to discriminatory measures to which other foreign or domestic investors in similar circumstances are not subjected. 35 Yet, there will always be difculty in applying national treatment standards to SWFs. Discrimination must be among like persons. By its quality as a foreign sovereignlinked entity, the SWF sets itself apart from other foreign investors. The investment will always have political connotations for the host state. There will also be the fear that the seemingly inexhaustible assets of SWFs will create dominance within markets. They will have deep pockets with which to ght wars against competitors. The anti-trust effects of such investments alone may justify discriminatory treatment by the host state. It is futile to make a blanket statement that SWFs must be treated entirely like other private foreign investors. In the limited situations that exist, the

fact is that they are not so treated. 36 Unless there is another SWF of similar size and policy operating within the same developed country market, the condition of like circumstances will not be easily satised. The disclosure and other requirements can be imposed by the host state through domestic laws. Any foreigner, including a SWF, obviously has to comply with these requirements. Principle 15 of the Santiago Principles does not say much when it states that SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate. 37 It is simply stating the obvious; the SWF will run into trouble with the local laws if it does not conform to local regulations. National sensitivities would be aroused if it does not so comply. Any subsequent reaction by the host state can hardly be characterized as discriminatory when it will be seen as a regulatory response to a violation of the law. Entry itself must conform to local regulations if treaty protection is to be secured. 38 Failure to do so may indicate circumstances that render the transaction itself void either for illegality or on grounds of fraud. 39 D. Investment Treaties The assessments that have been made in some commentaries regarding investment treaties may be stating the case in optimistic terms. There have been no cases yet 35. Statement by H.E. Hamad Al Hurr Al-Suwaidi, Co-Chair, International Working Group of Sovereign Wealth Funds, Meeting of the International Monetary and Financial Committee (11 October 2008),

online: International Working Group of Sovereign Wealth Funds /http://www.iwg-swf.org/pubs/eng/ imfciwg.pdfS. 36. For example, the acquisition of UNOCAL shares by Chinese interests and the acquisition of telecommunication shares by Singapore funds. See supra notes 21 and 31. 37. Santiago Principles, supra note 32. 38. A series of investment treaty awards have held that these regulatory rules must be conformed to before treaty protection can be sought. Fraport A.G. Frankfurt Airport Services Worldwide v. Republic of the Philippines, Award of 16 August 2007, ICSID Case No. ARB/03/25; Inceysa v. El Salvador, supra note 29. 39. Non-disclosure could clearly raise issues of fraud. On the operation of fraud in investment transactions, see Marvin Roy Feldman Karpa v. United Mexican States, Award of 16 December 2002, ICSID Case No. ARB(AF)/99/1, [2005] 7 ICSID Rep. 341. 12 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a wresulting from breaches of treaty obligations owed to SWFs. The earlier treaties were not made with SWFs in mind. However, as stated above, it may be a sound preliminary view that, since SWFs are operated as private interests, they are to be treated as private foreign investors and hence entitled to treaty protection. The only modern treaty that specically extends protection to SWFs is the ASEAN Comprehensive Investment Agreement, which confers protection on these funds. 40 This would be more so because the more recent types of investment treaties have been made when the neoliberal phase had passed and the states were reversing the trends with the consciousness that a hands-off approach to the economy would lead to greater disaster. As indicated above, investment treaties were asymmetric treaties made between a capital-exporting state and a capital-importing state. There is a North-South basis

for these treaties. The idea that there is an increase in South-South treaties is a red herring waved to conceal the fact that there is, in the context of these treaties, a newly industrializing developing state making a treaty with a state that receives its investment, particularly investments made with disused technology in labour-intensive areas. These treaties enable the foreign investor to invoke remedies unilaterally against the state, alleging violation of the standards of protection in the treaty. SWFs, potentially foreign investors, may be able to seek the protection of these treaties if they can satisfy the indicia for protection and can sustain a claim as to the violation of the substantive rules on protection. In the following sections, the issue of whether SWFs can satisfy the criteria for protection is examined, followed by an examination of whether they would be able to show the violation of any of the substantive rules of the applicable treaties. E. Can the Jurisdictional Criteria be Satised? For treaty protection to be invoked there are a series of criteria that have to be satised. The treaties were made for the protection of MNCs and not for the protection of SWFs. The t between the treaties and SWFs cannot be exact. This will present difculties in the consideration of whether SWFs will have sufcient locus standi to bring claims under treaties. It is best to go through some of the criteria. 1. Do sovereign wealth funds qualify as protected investment? For SWFs to qualify as foreign investment, they must satisfy the criteria of investments that are dened not only in the investment treaty but also in the Convention on the Settlement of Investment Disputes Between States and Nationals of other States (hereinafter the International Centre for Settlement of Investment Disputes (ICSID) Convention). 41 The denition of investment may be straightforward when it comes to a treaty, as the denition in the treaty would indicate that holding shares in companies constitutes investment. A SWF will not invest conventionally, unlike MNCs which do so through the creation of a subsidiary in the host state or through a joint venture with

a local business partner. It will do so through the acquisition of shares in existing 40. ASEAN Investment Agreement, supra note 17. 41. Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, (entered into force 14 October 1966), online: ICSID /http://icsid.worldbank.org/ICSID/StaticFiles/ basicdoc/CRR_English-nal.pdfS, art. 25 [ICSID Convention]. sw fsand t he existing structure of the regulat ion of investments 13companies and businesses. Such an acquisition of shares would fall within the denition of assets that constitute investments in the treaty. However, some writers believe that this is not conclusive. 42 In addition, the ICSID Conventionif ICSID arbitration is the only method of arbitration specied in the treatyleaves investment from which the dispute should arise undened. Thus, the issue of denition has become a problem in many arbitration proceedings. The most widely used denition of an investment is the denition in Salini, 43 which dened a protected investment in terms of four characteristics: contribution, duration of performance, risk, and the promotion of the economic development of the host state. 44 Of these criteria, a SWF can probably satisfy only contribution and possibly risk. Duration of performance may be absent as SWFs would withdraw assets rather than stay in the country if a risk is anticipated, even if the withdrawal would precipitate a crisis. This may be left open, but it is the criteria of economic development that would prove to be troublesome. Economic development is not uniformly accepted as a criterion. In the annulment stage of Malaysian Salvors v. Malaysia,

45 the majority of the ad hoc committee did not accept it as a criterion. However, having regard to the statement of the objectives of the investment treaties, it is clear that the object of the investment treaty is to promote the economic development of the host state. A SWF, by denition, would be more concerned with the protection of the wealth of its own state, rather than the economic development of the host state. Unlike with a MNC, which has to operate a direct investment and ensure that good relations are maintained with the host states government, such considerations would generally be absent in the manner in which a SWF would operate. It is, in this respect, more akin to a portfolio investor whose ability to pull out in the face of risk ensures the avoidance of risk. It is possible to argue that a SWFs investment may not make a sufciently meaningful long-term contribution to the economy of the host state to qualify as a protected investor. However, this is conjecture and remains uncovered by authority. 46 If economic development of the host state is a criterion of a protected investment, it would be difcult for SWFs to satisfy this requirement. They do not invest for anything but prot. This may also be so with MNCs, but the theory is that their investments result in a multitude of 42. Christoph SCHREUER, The ICSID Convention: A Commentary (Cambridge: Cambridge University Press, 2001) at 121. 43. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, [2001] 6 ICSID Rep. 398 [Salini]. 44. Ibid., at para. 52. 45. Malaysian Historical Salvors Sdn. Bhd. v. Malaysia, Decision on the Application for the Annulment of the Award of 16 April 2009, ICSID Case No. ARB/05/10; commentary by Jean HO in (2010) 26

Arbitration International. Another annulment committee was adamant that economic development was an important criterion. See Patrick Mitchell v Democratic Republic of the Congo, Decision on the Application for the Annulment of the Award of 1 November 2006, ICSID Case No. ARB/99/7. See further Rudolf DOLZER and Christoph SCHREUER, Principles of International Investment Law (Oxford: Oxford University Press, 2008) at 6970. 46. On promissory notes as protected investments under treaties, see Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3 (Award, 9 March 1998), [1997] 5 ICSID Rep. 183. On portfolio investments, further see M. SORNARAJAH, Portfolio Investments and Denition of Investments (Paper presented at the 50 Years Of Bilateral Investment Treaties Conference 2009 in Frankfurt, Germany, 13 December 2009). 14 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a wbenets such as transfer of technology, creation of employment, and the upgrading of infrastructure. These incidental benets ow from the investments made by MNCs. SWFs, which have the solitary purpose of enhancing the wealth of their home states and are controlled to achieve specic targets of their home states, simply do not have room for any altruistic result even as an indirect outcome of their investments. This simply does not matter, as far as they are concerned. In that sense, there is a hurdle when it comes to consideration of whether they satisfy the basic denition of a protected foreign investment under a treaty. There is the further difculty of circumventing the argument that the ICSID Convention, being one oated as enhancing economic development, also involves the satisfaction of economic development as a criterion. There are conicting views on this question. 47 It is not necessary to arrive at a conclusion on this point. However, it must be kept in mind that this raises an issue. It must also be kept in mind that there is a division of awards on this question and, that there are awards

that dispense with the need to prove economic development as a criterion. 48 It would be difcult to downplay the requirement of economic development. They form the rationale of the investment treaty as well as the ICSID Convention. Economic development is the reason a state surrenders sovereignty through an investment treaty. It is unlikely that SWFs which do not satisfy the criteria of duration and economic development would be considered to have standing. Another factor is whether or not receiving countries such as the US are in need of economic development from the newly industrializing countries or small states like Singapore and the United Arab Emirates. The traditional reason for the treaties is that the developed state can fuel development through its investment ows into the developing country. That rationale does not exist in the case of the ows of investments to the developed states of North America and Europe. This again indicates the novelty of the issues that SWFs pose. 2. The possible violation of the pre-entry national treatment standard There is the possibility that the national treatment standard is violated where a state refuses to permit acquisition of shares by a SWF of a state with which it has an investment treaty granting pre-entry rights of investment. However, as indicated previously, only a few states (the US, Canada, Japan, and South Korea), routinely and as a matter of policy consistent with their liberalization policies, include preentry national treatment standards mandating rights of entry and establishment in their treaties. 49 This is in contrast to Asian treaties, many of which restrict protection 47. Campbell MCLACHLAN, Laurence SHORE, and Matthew WEINIGER, International Investment Arbitration: Substantive Principles (New York: Oxford University Press, 2008) at 16471. 48. See the more favourable award in Pantechniki S.A. Contractors & Engineers v. Republic of Albania,

Award of 30 July 2009, ICSID Case No. ARB/07/21. However, it would be difcult to downplay the signicance of the requirement of economic development. 49. Sectors could be excluded from these standards. For example, the US has a relatively long list of excluded sectors. There could be limitations requiring special formalities such as residence. See North American Free Trade Agreement, December 1992 (entered into force 1 January 1994), online: NAFTA Secretariat /http://www.nafta-sec-alena.org/en/view.aspx?conID5590&mtpiID5ALLS, art. 1111(1) [NAFTA]). Or that investments be constituted according to the laws and regulations. Residence and control are certainly factors that would impact SWFs. sw fsand t he existing structure of the regulat ion of investments 15to investments made in accordance with their laws and regulations, 50 reecting the screening procedures for investment in their states. One is talking here of a minority of treaties containing a pre-entry national standard, but these have been made with important capital-receiving states. Treaties containing pre-entry rights promise to investors of other states treatment no less favorable than that it accords to its own investors, in like circumstances, with respect to the establishment, acquisition, expansion. 51 Again, technically, this would mean that SWFs, having such treaties, could not be denied entry through the acquisition of shares in existing companies except in excluded sectors. However, as will be seen, these treaties contain many exceptions to the right of entry and subsequent functioning, which will be examined later. For convenience, it may be assumed that provided the acquisition is in an area that is not excluded from national treatment, the SWF has a right of entry into the host state with which its home state has an investment treaty guaranteeing pre-entry rights. Another assumption is that the SWF qualies as an investor. However, for violation of the national treatment standard, as seen above, it must

be shown that the discrimination was in a situation where there were like circumstances. The test requires comparison. The identication of a national comparator is important. Such a comparator would be difcult to nd, as it is unlikely that any national investor would have the deep pockets of the SWF, its association with a foreign state, or possess motivation by national as well as commercial interests. These are difculties in proving violations of both pre- and post-entry standards of national treatment. Under the large majority of treaties, a SWF would not have such rights of entry. It is well within the rights of states with such treaties to exclude a SWF from the acquisition of assets. The ordinary rules on acquisition or even anti-trust laws could be used for this purpose. The fact that such laws are used would itself indicate an assessment that the SWF has been set apart from other investors for reasons that the state could justify. These may include market dominance after entry, or the possibility of predatory practices or of monopolistic behaviour. 3. Is a minority shareholder entitled to standing? A SWF will generally be a minority shareholder in an existing enterprise after acquiring shares in it. This would be particularly so as many states maintain restrictions on the holdings of foreign shares. 52 Where the shares of the SWF have been directly affected, there will be no doubt that it would have standing to sue. However, where the governmental measures are directed at the company as a whole, there is some doubt as to whether the foreign minority shareholder can sue because it is the company as a whole which will have to decide on this. 50. For the scope of the limitation, see Fraport A.G. Frankfurt Airport Services Worldwide v. Republic of the Philippines, Award of 16 August 2007, ICSID Case No. ARB/03/25; Desert Line Projects LLC v. Republic of Yemen, Award of 6 February 2008, ICSID Case No. ARB/05/17. 51. See e.g., NAFTA, supra note 49, art. 1405.

52. Dominance could still be achieved by a minority shareholder through manipulation of other shareholders. This would be particularly tempting for a shareholder with unlimited capital resources. 16 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a w4. Does a sovereign wealth fund qualify as an investor? A tentative conclusion was reached that a SWF has a personality that is similar to that of a private company if it performs purely commercial functions, even though it has links with the government of a state. Indeed, SWFs issue statements seeking to distance themselves from their states. The conclusions were made on the basis of stances taken during debates on codes of conduct as well as on the rules that have developed regarding sovereign immunity. Another analogous principle that supports this conclusion can be drawn from the rules of state responsibility. These rules assess the extent to which a state is responsible for agencies to which it is linked. The rule is that an entity that qualies as an agent of a state engages the responsibility of the state provided it acts in a governmental capacity. In these instances, one would assume that there is sufcient identity between the entity and the state, or that, alternatively, a principle of agency is at work. However, such responsibility would not arise where the entity performs a purely commercial function, in which case its conduct cannot be attributed to the state. Thus, in UPS v. Canada, 53 the issue was whether Canada was responsible for alleged violations of national treatment of the investment under Chapter 11 of the North American Free Trade Agreement (NAFTA) when it permitted the use of facilities 54 to its subsidiary running a parcel delivery service in competition with UPS, an American investor in Canada. The tribunal held that Canada was not liable, as CanadaPost, though a government agency, was performing purely commercial acts in giving advantages to its subsidiary. There is sufcient basis to regard a SWF as a state agency, no doubt, but as one that

performs a commercial function of investing funds. Hence, there is a credible basis for suggesting that it qualies as an investor under the investment treaty, provided it functions through an incorporated entity, or an entity having personality in the local laws, and satises the nationality criteria in the investment treaty. The vesting of sufcient personality so as to create nationality in the SWF is important for the purpose of investment protection. Not all SWFs are created in that manner. F. Conclusion on Jurisdictional Issues The SWF having standing to be an investor would have pre-entry rights of national treatment under some treaties. Under a large majority of treaties, such rights do not exist. There are hurdles. One would relate to the requirement of economic development as a criterion for investments protected under the treaties. As indicated, there are views that this is not a requirement. Another possible way of getting over the hurdle is to argue that capital ows by themselves contribute to economic development, especially in states that are undergoing economic crises. It is clear that the developed states are in need of capital and are actively courting it. Hence, in that context, it is credible to view the ow of SWFs as contributing to the 53. United Parcel Service of America, Inc. v. Government of Canada, NAFTA Award of 24 May 2007, online: Foreign Affairs and International Trade Canada /http://www.international.gc.ca/tradeagreements-accordscommerciaux/assets/pdfs/MeritsAward24May2007.pdfS. 54. Among other things, it permitted the subsidiarys customers to drop off parcels at its post ofces. sw fsand t he existing structure of the regulat ion of investments 17economic development of the developed state party to the treaty. The qualication of the SWF as an investor may not be a difcult problem. Certainly, the treaties were not made in contemplation of such an investor. However, if the investor qualies under the language of the treaties, then it must be given the rights under the treaties. ii. causes of action Now that we have established that it has standing as an investor and that its investment is protected, the next question to determine is whether the SWF has a cause of action.

Here again, unlike in the case of ordinary investors, special issues may arise in the case of SWFs. Thus, it is best to go through the different causes of action. Causes of action under investment treaties arise from violations of (1) treatment standards, (2) expropriation, and (3) of the obligation to permit repatriation of prots and liquidated assets. These are dealt with in turn. A. Violation of Treatment Standards Of the treatment standards, among the more important is the national treatment standard, which has been dealt with above. The standard could be violated where discriminatory measures are aimed specically at the shares of the foreign SWF. Again, as indicated above, a comparator in like circumstances may be lacking to determine whether there has in fact been discrimination. In the absence of a comparator, it would be difcult to allege discrimination. The comparator must have some similar characteristics and operate in the same sector. 55 The SWF is essentially different from other foreign investors and this in itself sets it apart from others in the eld as investors. It has nancial dominance, links with a foreign government, and may have political and strategic objectives. The nature of the SWF may justify its special treatment on a variety of grounds, such as the need to deal with its dominant nature for competition purposes or to treat it differently for purposes of national security. The Methanex test of national treatment is that a national investor must be found with whom the comparison is to be made. 56 This, for obvious reasons, would not be possible, as it is unlikely that a national investor could match the nancial power of the foreign SWF. The fair and equitable standard has emerged in recent arbitral jurisprudence as the most productive of the causes of action as its scope has been expanded through

interpretation. A hitherto dormant basis of action has been given a signicance it did not have for the rst half-century of its existence. The new scope created for it may throw open avenues for relief for SWFs that have been affected by governmental 55. An OECD study on national treatment states this requirement. OECD, National Treatment for ForeignControlled Enterprises (Paris: Organization for Economic Co-operation and Development, 1993). See also Pope & Talbot Inc. v. Government of Canada, [2002] 7 ICSID Rep. 43. 56. Methanex Corporation v. The United States of America, NAFTA Award of 3 August 2005, online: US Department of State /http://www.state.gov/documents/organization/51052.pdfS, at Part IV, Chapter B, Para. 14, which stated, In ideal circumstances, the foreign investor y should be compared to a domestic investor y that is like it in all relevant respects, but for the nationality of ownership [Methanex]. 18 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a wmeasures in the host state. 57 One of them relates to legitimate expectations. It is based on the notion of administrative law that if the state creates legitimate expectations in a citizen and later does not act in accordance with those expectations, relief may be claimed. In most administrative systems, what is provided is a procedural and not a substantive remedy. Otherwise, changes in governmental policies would be near impossible. In investment arbitration, the rule has emerged as a substantive remedy. 58 It may have application to SWFs whose entry had been specically sought by the host states. The Argentine cases that were based on the rule depended on promotional literature and tours made by the President courting foreign investment. If there is evidence that the SWFs were similarly courted and their expectations not fullled, there could be a cause of action. Here again, one is in the realm of speculation, attempting to nd parallels with existing awards. It must also be remembered that the US has beaten back these trends by specically linking the fair and equitable standard with the international minimum

standard in its post-2004 treaties. There is evident concern among states that some arbitral awards have taken the law well beyond what was intended by crafting new remedies for investors. There has been a reaction by states to arbitral adventurism. Many non-US treaties also have followed suit. It could be that the old reticence about the fair and equitable standard could re-emerge. B. Expropriation The emergence of the fair and equitable standard from a hibernation of over fty years is due to the erosion of the signicance of expropriation in international investment law. During the neoliberal era, the notion of expropriation had seen an expansion. A high point was reached in Ethyl Corp. v. Canada, 59 with the argument that anything a state does, including an announcement of an intention in Parliament, which results in depreciation of property values, such as a decline in the value of shares on the stock exchange, would amount to expropriation. Naturally, states recoiled from such stances and reacted strongly by curbing the scope of expropriation. The rst such instance was to be found in the side letter in the US-Singapore free-trade agreement, asserting the idea that a regulatory interference to promote public welfare cannot be regarded as compensable expropriation. 60 Methanex settles the law. 61 Although it is a NAFTA case, it must have wider signicance. In the case of investments made by SWFs, the scope for regulatory 57. Professor Schreuer has traced the developments that have taken place, which he identied as having commenced in 2000. Since then, several awards, particularly those involving Argentina, have expanded the scope of fair and equitable treatment. See Dolzer and Schreuer, supra note 45 at 1758.

58. CMS v. Argentina, supra note 19; Tecnicas Medioambientales Tecmed S.A. v. The United Mexican States, Award of 29 May 2003, ICSID Case No. ARB(AF)/00/2, [2004] 43 I.L.M. 133; MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, Award of 25 May 2004, ICSID Case No. ARB/01/7, [2005] 44 I.L.M. 91. 59. Ethyl Corp. v. The Government of Canada, [1999] 38 I.L.M. 708. 60. Ofce of the United States Trade Representative, US-Singapore Exchange of Letters on Expropriation (26 May 2003), online: USTR /http://www.ustr.gov/sites/default/les/uploads/agreements/fta/singapore/ asset_upload_le58_4058.pdfS . 61. Methanex, supra note 56. sw fsand t he existing structure of the regulat ion of investments 19expropriation is great. The very fact that there may be economic decisions transferred out of the state creates fears, well founded or unfounded, that economic decisions have been extra-territorialized. The inux of a large fund, capable of being quickly withdrawn but yet insulated from the scope of control by the host state, is bound to raise anxieties. The decisions as to these insulated funds are made to advantage another country. The fears may be unfounded, but as long as they exist, they may provide a justication for a government to act. Such acts of allaying public fears would be in the public interest. The case could be made out that where the shares of a SWF are affected, what takes place is a regulatory expropriation. The dwindling scope of expropriation does not hold out comfort for SWFs. There are many indicators as to how the expropriation issue would be addressed in the recent British practice relating to the economic crisis. The British government took over the running of banks affected by the crisis and addressed shareholder compensation in a series of Orders. It also froze the assets of Iceland-owned banks in Britain under the terrorism regulations. 62

The conventional rules on expropriation requiring compensation were not applied. The compensation that was promised to the shareholders of the banks that were nationalized were well below their market value. Foreign shareholders formed a large percentage and would have had treaty protection. No litigation has arisen from these incidents of taking. The reason for absence of litigation is signicant. 63 Neither the states affected Iceland, obviouslynor private foreign shareholders sued the British government, simply because the chances of success of such litigation would have been low. It is true that the nature of the compensation did not measure up to the prompt, adequate, and effective compensation that has been consistently supported in British practice. 64 However, this in itself is not signicant. With the re-emergence of the rule that a regulatory expropriation does not require compensation and the rule that where there is a public interest behind the expropriation, the extent of the compensation should reect the nature of the public interest, it would be extremely difcult to argue for full compensation, or for that matter any compensation at all, where a state interferes with investment in times of severe economic crisis. This is not a rule that has been tested out as yet, as the Argentineans have concentrated to a large extent on the national security and necessity defences rather than argue that the interferences were regulatory and justied by the public interest. Regulatory interference, especially in the form of anti-trust measures, would become common in the case of SWFs. It is not likely that the funds would be protected by treaties in 62. This followed the failure of Icebank to honour withdrawals by customers. On 8 October 2008, the British government announced a freeze of all assets of Iceland in Britain. Landsbanki was similarly affected by orders in other European countries. See Michael WAIBEL, Icelands CrisisQuo Vadis

International Law, 14 ASIL Insight (1 March 2010), online: ASIL /http://www.asil.org/les/ insight100301pdf.pdfS. 63. Iceland threatened litigation before European courts against the freezing, but did not go through with it. The freezing orders were later lifted and the British government gave a loan to Iceland on condition that British customers transactions were honoured. Nevertheless, the original threat of Iceland to sue was not carried out because the suit may have failed. 64. A point that forms the focus of N. Jansen CALAMITA, The British Bank Nationalizations: An International Law Perspective (2009) 58 International and Comparative Law Quarterly 119. 20 a s i a n j o u r n a l o f i n t e r n a t i o n a l l a wthe event of such interferences, as anti-trust measures have been regarded as the quintessential examples of regulatory expropriation. iii. the defences The arbitral adventurism that characterized the neoliberal era has thrown up defences to liability in international investment law. 65 The thrust of the law earlier had been to create a situation almost akin to strict liability in the event that the foreign investor had been affected by governmental measures. This view was enhanced during the neoliberal era. Now there is a reaction to it due to the failure of the neoliberal prescriptions and a return to the view that regulation of market failure and controls are necessary. Investment treaties themselves have changed in response to these events. The obvious instance of this change, as Kenneth Vandevelde records, is the differences between the 1990 model treaty of the US and its 2004 version. 66 The new version is replete with defences to liability, including the subjective appreciation of the national security preclusion. It is the national security preclusion that would be of great signicance to SWFs. Their very nature as funds linked to foreign states,

sometimes perceived to be potentially hostile, makes them easy targets of the national security preclusion. Argentina has striven mightily to argue the national security exception, and the indications are that it may be succeeding, at least to a limited degree. 67 The old model treaty of the US (1990) forming the basis on which the Argentina-US treaty was made did not make the preclusion self-judging, as the 2004 model treaty does. Nevertheless, Argentina argued that the provision should be self-judging. The plea of necessity in customary international law was also argued. The defences have received extensive commentary. 68 It would appear that the tribunals are moving closer to the position held by Argentina. 69 If the national security exception is regarded as self-judging, as indeed it must be if it is expressly stated to be so in a treaty, then measures taken on that basis against a SWF would conclude the issue of responsibility under the investment treaty. There are many other defences that could be pleaded under the newer treaties as well as 65. M. SORNARAJAH, The Ravage and Retreat of Neo-Liberalism in International Investment Law (2010) 2 Yearbook on International Investment Law & Policy. 66. Kenneth VANDEVELDE, A Comparison of the 2004 and1994 U.S. Model BITs: Rebalancing Investor and Host Country Interests in Karl SAUVANT, ed., Yearbook on International Investment Law & Policy 20082009 (New York: Oxford University Press, 2009). 67. See CMS v. Argentina, supra note 19 (Decision on the Argentine Republics Request for a Continued Stay of Enforcement of the Award, 1 September 2006); LG&E Energy Corp., LG&E Capital Corp. and

LG&E International Inc. v. Argentine Republic, Award of 3 November 2008, ICSID Case No. ARB/02/ 1 (annulment proceeding pending); National Grid P.L.C. v. Argentine Republic, online: Investment Treaty Arbitration /http://ita.law.uvic.ca/documents/NGvArgentina.pdfS. 68. See for instance, William W. BURKE-WHITE and Andreas VON STADEN, Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties (2008) 48 Virginia Journal of International Law 307. 69. The present writer was an expert witness for Argentina in El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15 (status pending). The views here are admittedly coloured by that experience. sw fsand t he existing structure of the regulat ion of investments 21under customary international law. The emergence of customary international law as the context in which the treaties have to be read opens up many possibilities that have not been thought of in the past. iv. conclusion SWFs have to be located somewhere in the law. International investment law provides a possible location for them, or at least a basis for analogical reasoning. It is fascinating to consider whether a new mechanism that was not contemplated in the investment treaties could yet be brought under the protection of the treaties. It is as yet too early to give answers which would have any nality on many of the issues that may arise if this area of the law is opened up in order to accommodate SWFs. Students of international investment law will have a fascination for the new entity, for it will affect their subject to a signicant extent. The fact that arbitrations were for the rst time aimed against developed countries led to many changes in the substantive principles of international investment law. Neoliberalism changed it considerably. Now, in the new phase, the law is assuming dimensions that make developed states the target of changes and claims. At the same time, neoliberalism is receding. The manner in which the developed states will respond to the SWFs at their

gates will affect international investment law to a signicant degree.