Introduction

The last two decades have seen a growth in the flow of foreign direct investment into the Republic of Zambia. The World Trade Organisation (WTO) says foreign direct investment 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”. There are therefore two elements to foreign direct investment: management and acquisition of an asset.

Direct Investment: transfer of assets; investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of an investor, the investor’s purpose being to have an effective choice in the management of the enterprise.

However portfolio Investment which is the movement of money to buy shares will not count as foreign direct investment under the WTO definition because the management element is missing.

There are two main reasons why Investment in shares is not included in the WTO definition. The first reason is that it may cause instability and the second is that the risks in portfolio investments are manageable: whereas asset management is not.

HISTORY

Most of the investment rules we are dealing with were developed after the Second World War. This period saw the fall of the world’s major empires and the rise of independent states. Because colonial powers invested in their own territories, they simply resolved any legal disputes regarding their corporations by applying the law of the mother country. However, as soon as their territories were decolonised there were questions as to how to resolve disputes. This was an especially imperative issue when nations began to nationalise corporations. It became apparent that international rules to govern such conduct were needed.

International investment rules built on the old doctrine of state responsibility which essentially dictates that injuries caused by a State to nationals of another State should be compensated. However, this doctrine in itself was inadequate because for example if IBM was to invest in South Africa, it would be registered as a South African company and therefore a South African national (this will be elaborated further when we touch upon the Barcelona Traction case which essentially dictates that a corporation is a national of the State in which it is registered). Therefore if injury occurs there might be a problem because South Africa can claim that IBM is a South African national.

Now before we touch further on international norms governing foreign direct investment I would like to take a moment to look at the sources of international law which are discussed in the next section of these notes.

SOURCES OF INTERNATIONAL LAW

According to Article 38 of the Statute of the International Court of Justice there are four sources of International Law. These are:

a) International Conventions and Treaties: so if you have a dispute the first question you must ask yourself: "is there a convention in this area?"
b) International Custom: Custom can mature into a legal norm.
c) The general principles of law recognized by “civilized nations”.
d) Judicial decisions and teachings if the most highly qualified publicists of the various nations. Publicists are people who are considered to be extremely knowledgeable in the area of international law. This is very unusual. We wouldn’t adopt such an approach in domestic law.

a) Treaties:

A treaty is defined in Article 2 of the Vienna Convention as “an international agreement concluded by States in written form and governed by international law”. From this definition one can see that only States can make a treaty.

The way a treaty comes along is variable; it can be proposed by corporations, NGOs etc. They meet as working groups and then send it to States who make comments. Next states have a diplomatic conference. Treaties can be bilateral (between two countries) and multilateral (between many countries).

States signify acceptance of a treaty by ratifying or acceding to it. When a State merely accedes to the treaty it essentially connotes that the State has joined the treaty has not signed it. On the other hand if a State ratifies a treaty then it means that they have both joined and signed the treaty. Once ratified, the treaty becomes binding on the State thus upholding an essential principle of international law: Pacta sunt servanda means “agreements must be kept”.

There are two ways that treaties are incorporated into national laws. One way is through legislative incorporation. The State essentially ratifies a treaty and then implements it into national law through the legislature. For some States, treaties are automatically.

A breach of a treaty is a breach of international law - this is important for foreign investment purposes. A State may make reservations on a treaty which essentially means that certain provisions of the treaty will not apply to the state claiming the reservation. I hasten to add that some treaties do not allow for reservations.

b) Custom

These are State practices that have been observed and accepted over a period of time. Article 38(1) of the ICJ Statute acknowledges the existence of customary norms. It says that: "The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply...international custom, as evidence of a general practice accepted as law."

The Paquete Habana case gave some guidance as to what factors to look at in determining whether something constitutes a customary norm. This case involved two fishing vessels that ran in and out of Havana and regularly fished on the coast of Cuba. Each sailed under the Spanish flag. They were totally oblivious to the war between Spain and the United States until they were stopped by a blockading squadron. Both ships captured and taken Key West and a final decree of condemnation and sale was entered. Each vessel was sold by auction the Paquete Habana was sold for $490 and the Lola for $800. The United States Supreme Court held that because these were fishing vessels customary law dictated that they were exempt from being captured as a prize of war. The US Supreme Court looked at various issues such as historical policies of “civilized” states coupled with US practice and the works of commentators. These three factors in their view determined whether a practice constituted a customary norm.

Indeed capital exporting nations are concerned about how their nationals are going to be treated once they are in the nation. As a general rule, multinational corporations are supposed to be treated in the same way as local ones. However, this is not much help if the way nationals are being treated is beneath the standard that investors had anticipated.

This is essentially why multinational corporations prefer some sort of international regime instead of relying on a national one. The advantage of international laws is that a nation cannot excuse itself from its international obligations simply on the basis that national law prevents them from doing so. This view was certainly taken by the International Court of Justice ELS case where they held that domestic law is not a defence to State’s for derogating from its international obligations.

A further more in the Israel Case; UN Official was killed in Israel. ICJ ruled that all states are bound by the UN Charter regardless of whether you have joined or not. The whole norm of sovereignty itself is a creature of international law.

A foreign investment is subject to both domestic law and international law. This looks like it was a fight between developing nations and developed states. One interesting issue that might arise in the future is the issue of Sovereign investment. This is where the State-owed Corporation is investing. An example of this is China where many of its companies are still in the hands of the government.