The rules of public international law have long placed restrictions on the measures that a state can take against the property or person of foreign nationals. One area in which the international rules are well developed is in relation to the protection of foreign investments. International agreements between states establish protections by “internationalising” the applicable rules. They do so either in the form of bilateral investment treaties (Bits) or regional agreements, such as the North Atlantic Free Trade Agreement between the US, Mexico and Canada (Nafta) or the European Energy Charter Agreement. Recent efforts at the Organization for Economic Cooperation and Development (OECD) to adopt an investment protection agreement of potentially global application – the Multilateral Agreement on Investment – collapsed two years ago, although there is now talk of pushing for new negotiations within the framework of the World Trade Organisation.

Bilateral and regional agreements are usually based on two fundamental principles: they internationalise the standard of protection for investments and provide for disputes between an investor and a host state to be resolved before international adjudicatory bodies. The international standard of protection will include a prohibition on expropriation. Article 1110 of Nafta, the subject of the arbitral awards last year in Metalclad v Mexico and Myers v Canada, provides that Canada, Mexico and the US may not “directly or indirectly nationalise or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalisation or expropriation of such an investment”, unless the expropriation is for a public purpose, is on a non-discriminatory basis, is in accordance with due process of law and is the subject of payment of compensation. A number of these treaties extend their protection to other interferences with property rights which fall short of “expropriation” as it has been traditionally defined. The interest in the Metalclad decision has been intense because of the expansive interpretation it has given to the term “expropriation”, apparently opening the door to claims for “regulatory” type takings, which may diminish an investor's rate of return without transferring property rights.

The other main form of protection which is typically accorded by Bits is to establish “minimum standards of protection”. Article 1105(1) of Nafta, for example, provides that “each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security”.

The tribunal in Myers relied on the “fair and equitable treatment” language – which is necessarily open to a range of different interpretations – to find that the investor's rights had been violated. This was the first Nafta award to find a violation of this language, hence the considerable interest, particularly if the tribunal's approach is to be exported outside North America.

The second type of internationalised protection relates to the forum to which disputes can be taken. Foreign investors may be unwilling to resolve disputes before the host state's national courts; equally, the host state will not want to go to the foreign investor's national courts. The answer is to “internationalise” the tribunal with the jurisdiction. Nafta and Bits provide for disputes relating to expropriation and fair and equitable treatment to be referred to international arbitration. In the case of Nafta, the disputes may be referred to the International Centre for the Settlement of Investment Disputes (Icsid), part of the World Bank family, or to other arbitration.

In recent years there has been an increase in Icsid's caseload under Nafta and Bits, which seems set to continue as investors become more aware of the rules. However, some arbitral tribunals are aware of claims being artificially dressed up in the language of “expropriation”, as the recent decision of an Icsid tribunal in Tradex Hellas SA v Albania demonstrated.

Philippe Sands is a barrister at Matrix Chambers and a professor of international law at the University of London.