When is an “investment” an “Investment”? - Formalities of Approval and Limitations on their Application
Many early bilateral investment treaties (BITs) contain a restriction of the treaty’s application ratione materiae to investments that have been “approved” by the host country. Such approval mechanisms were popular at the dawn of BITs but have fallen into less frequent use. Nonetheless, they continue to exist in a large heritage of BITs and remain popular in particular among some Asian states. Moreover, as the debate over the meaning of “protected investment” continues unabated after fifty years and pressure increases, particularly in Latin America, explicitly to include provisions about the development dimensions of the investment in future agreements, approval mechanisms may enjoy a resurgence or at least provide the base materials for a reinvention.
This essay looks at the historical context of the introduction of approval clauses in the early BITs, examines certain issues that have arisen in their implementation and in their application by arbitral tribunals and concludes with some observations about the conclusions that can be drawn from this existing experience should states consider adopting these or similar measures in future BITs, including some recommendations for best practice.
The purpose of this article is neither to encourage nor to disapprove the use of such clauses. It is rather to warn that, whenever approval mechanisms are used, they contain the potential for abuse, particularly if questions of approval become divorced from the economic development prerogatives of the host state concerned. Above all, they must be applied transparently and in good faith. That means that they must be implemented even-handedly and with an eye toward encouraging the inflow of those types of investments they were intended to promote, and they must not be allowed to be invoked arbitrarily and above all ex post facto to enable a state to evade its international law obligations with respect to those very foreign investments that it has solicited and encouraged for the purpose of achieving its declared economic objectives.
 Published in Liber Amicorum Professor Bernardo Cremades, ed. M.Á. Fernández-Ballesteros, David Arias, La Ley (Wolters Kluwer) 2010 (ISBN 978–84–8126–590–3 / 978–84–8126–591–0)