A. The Post-Colonial Phase

Plantations mark the origins of foreign investment in Sri Lanka. It was one of the fundamental methods by which foreign investment flowed into the colonial territories.Footnote ¹ Amongst the European powers that colonized Sri Lanka, it was the Dutch who initially practised cinnamon plantation in order to ensure a steady trade in the spice.Footnote ² The British were also interested in these plantations, although they also tested out numerous other crops in various parts of the country.Footnote ³ Amongst such crops, coffee was one of the successful exports, facilitated by various governmental assistance and incentives such as, inter alia, land grants and exemptions from land taxes.Footnote ⁴ It was the tea plantation that became the most significant export crop introduced by the British rulers after the collapse of the coffee plantation.Footnote ⁵ The zenith of tea plantation was marked by the embodiment of the Sri Lankan identity in the world under the name “Ceylon Tea”. The tea industry was dominated by sterling companies based in London and managed by British-controlled agency houses in Colombo when Sri Lanka gained independence from British rule in 1948.Footnote ⁶

The end of colonialism, however, was accompanied by growing resentment towards foreign owned plantations and their investments, which were commonplace in almost all of the former colonies.Footnote ⁷ This is primarily because of the yearning of newly independent states, including Sri Lanka, to end the dominance of former colonial powers over important sectors of their economies.Footnote ⁸ Nationalization of foreign-owned property was one of the most frequently used means by which these newly independent states sought to realize their economic sovereignty in the post-colonial era.Footnote ⁹ Large-scale nationalization of the plantation sector took place in Sri Lanka too, particularly during 1971–1972.Footnote ¹⁰ The closed economic policy that coincided with this nationalization programme prevented new investment from flowing into the country.Footnote ¹¹ A socialist economic philosophy compelled the country to follow an import substitution policy that was prevalent in the international arena.Footnote ¹² As a result, the significance of foreign investments in the Sri Lankan economy gradually declined,Footnote ¹³ and thereby marked the end of the first phase of foreign investment in the country.

B. The Economic Liberalization Phase

Introducing an open economic policy in 1977 was a paradigm shift which resulted in restoring the significance of foreign investment in the Sri Lankan economy.Footnote ¹⁴ The strategic approach that the country adopted after 1977 marked the commencement of the second phase of foreign investment in Sri Lanka. For instance, free trade zones were established specifically to attract foreign investment in manufacturing and vital public sector investment projects, such as the Mahaweli Irrigation, Power, and Settlement Project.Footnote ¹⁵ This phase was further emboldened by establishing the Board of Investment (BOI) of Sri Lanka, the primary function of which was to foster and generate the economic development of the country.Footnote ¹⁶ Encouraging and promoting foreign investment within the country was one of the main objectives of the BOI.Footnote ¹⁷

The civil war that started shortly after the implementation of the economic liberalization programme prevented the creation of an investment-friendly environment within Sri Lanka.Footnote ¹⁸ The gradually intensifying war-related risks dissuaded foreign investors from locating their investment projects within Sri Lankan territory.Footnote ¹⁹ The civil war further prevented Sri Lanka from reaping the maximum benefits from foreign investment by compelling the country to provide foreign investors with very favourable incentive packages.Footnote ²⁰ Such packages were designed to mitigate the war-related risks and uncertainties, some of which jeopardized the creation of a more competitive market economy, which was one of the purposes of the economic liberalization programme.Footnote ²¹ Nevertheless, the second wave of liberalization contributed to attracting a significant amount of foreign investment, particularly between 1990 and 2001.Footnote ²²

In addition, this phase was also marked by an attempt to improve Sri Lanka’s reputation as a secure destination for foreign investment by entering into IIAs. This was one of the more ambitious endeavours undertaken during the second phase, to signal Sri Lanka’s readiness to host foreign investment, in contrast to its bygone hostility towards any significant foreign presence in its economy. Sri Lanka, thus, after 1977, entered into a number of BITs with the aim of encouraging and safeguarding investments made by nationals or companies of the Contracting State Parties in each other’s territory. For context, Sri Lanka entered into seven BITs within three years, compared to the Singaporean and Malaysian experience, which took twelve years to enter into the same number of BITs.Footnote ²³ The treaty protection accorded to foreign investors was further advanced by a constitutional guarantee stipulated in Article 157 of the 1978 Sri Lankan Constitution.Footnote ²⁴ This is a clear articulation of the country’s legislative policy to give any treaty between the government of Sri Lanka and any foreign state approval by a two-thirds majority in Parliament, as it was deemed essential for the development of the national economy. This conferred the force of law upon these treaties, against which no legislative, executive, or administrative action could be taken except in the interests of national security. The extensive legal protection afforded to foreign investors, and Sri Lanka’s willingness to continue with a liberalized trade and investment policy, resulted in the assimilation of foreign investment into the Sri Lankan economy.Footnote ²⁵

C. The Postwar Phase

Economic revival and development was given top priority in the country’s national agenda after the ending of thirty years of war in 2009, and the significance of foreign investments in this respect is frequently highlighted.Footnote ²⁶ Circumvention of war-related risks and uncertainties, together with a positive economic outlook,Footnote ²⁷ resulted in the cultivation of a business and investment-friendly environment within the country. Such a positive outlook strengthened the country’s potential as a destination for foreign investment, and thereby marked the beginning of the third phase of foreign investment in Sri Lanka, which can be divided into two segments.

The first segment of the third phase took place between 2009 and 2015. This segment mainly focused on enhancing the country’s potential for attracting foreign investment, depending on the “five hub concept”, which embraces the maritime hub, the aviation hub, the knowledge hub, the energy hub, and the commercial hub.Footnote ²⁸ In addition, the tourism sector, manufacturing sector, infrastructure sector, services sector including utilities, and agriculture sector were Sri Lanka’s main emphases.Footnote ²⁹ The BOI was, accordingly, tasked with attracting an increased volume of foreign direct investment (FDI). For instance, Sri Lanka aimed to attract US$2 billion FDI in 2014,Footnote ³⁰ and succeeded in attracting FDI amounting to US$1,685 million, which fell below the targeted amount.Footnote ³¹ Bank loans comprised the most significant element of the overall FDI figure in 2014.Footnote ³² In addition, the first segment witnessed an increase in public protest over high-profile development projects such as the Kalpitiya Integrated Tourism Resort Project (KITRP)Footnote ³³ and Colombo Port City Project,Footnote ³⁴ as well as over the proposed investment project to develop a foreign casino gaming venture.Footnote ³⁵ This is mainly because of the alleged negative impacts of these projects on the environment in particular, and on other aspects of citizens’ daily life in general.Footnote ³⁶ The intense community protest over these projects further exhibited the gradually evolving “grassroots activism” through which the protection of foreign investment projects would be challenged.Footnote ³⁷ The increased amount of bank loans and the intensified public protest over development projects considerably challenged the sustainability of the expected development through foreign investment. In addition, the commercial unviability of certain high-profile investment projects completed during this segment was the subject of widespread criticism.Footnote ³⁸ Nevertheless, the attention paid and endeavours taken during this segment to develop the physical infrastructure of the country was of vital significance to increase its potential as a dynamic destination for foreign investment.Footnote ³⁹

The second segment of the third phase started when a new government came into power in 2015. The inception of this segment was quite problematic because of the new government’s manifesto commitment to reject the much criticized foreign gaming venture projectFootnote ⁴⁰ and to halt the much disputed Colombo Port City Project.Footnote ⁴¹ In spite of these two specific incidents, the new government’s overall political and economic policy appears to be more favourable to foreign investment, as they have been identified as the key factors in achieving one of its main goals, i.e. generating one million new employment opportunities within five years,Footnote ⁴² while attracting US$5 billion FDI within the following three years.Footnote ⁴³ In addition, the government has already indicated its willingness to restart the postponed Colombo Port City Project by integrating it into the proposed “Megapolis Development Master Plan”.Footnote ⁴⁴ The second segment of the third phase shows Sri Lanka’s continuing enthusiasm towards trade and investment agreements, which has resulted in a number of BITs under Article 157 of the Constitution. The significance of ratifying these BITs has been further emphasized to ensure the protection of foreign investors, as well as to protect the interests of Sri Lankans who have invested in various projects, such as clothing factories in India, hydropower plants in Uganda, and plantations in Indonesia.Footnote ⁴⁵ The third phase can thus be generally considered as more favourable to foreign investment, indicating that it is essential for the realization of economic development. Therefore, the legal framework applicable to foreign investment in Sri Lanka is highly significant, a brief overview of which will form the next part of this paper.

A. Domestic Legal Framework

The most significant piece of legislation applicable to foreign investments in Sri Lanka is the BOI Law No. 4 of 1978 as amended in 1980, 1983, 1992, 2002, and 2012, and the regulations made under this Act. The Exchange Control Act No. 24 of 1953 and its regulations, the Strategic Development Projects Act No.14 of 2008 as amended, and the Finance Act No. 12 of 2012 Part (IV) as amended, further spell out the domestic legal framework governing foreign investment in Sri Lanka.Footnote ⁴⁶ In addition, under Sri Lanka’s land policy, any foreign national, foreign company, and company incorporated in Sri Lanka with fifty percent or more of its shareholding held by a foreign national or a foreign company is prohibited from purchasing land outright, whether the land is owned by the state or an individual.Footnote ⁴⁷ However, a foreigner or a foreign company is legally permitted to lease land subject to a maximum period of ninety-nine years.Footnote ⁴⁸

The BOI is the fundamental state entity that has the power to approve any business or project activity under Section 16 or 17 of the BOI Act.Footnote ⁴⁹ Foreign investment projects approved under Section 16 of the Act operate according to the normal laws of the country.Footnote ⁵⁰ Such foreign investors are thus not exempt from the application of provisions in the Inland Revenue Laws, Custom Laws, and Exchange Control Regulations.Footnote ⁵¹ On the contrary, foreign investment projects approved under Section 17 of the Act are given the opportunity to enter into an agreement with the BOI, which mandates exemptions from any law referred to in Schedule B of the BOI Act.Footnote ⁵² In addition, the Strategic Development Projects Act No. 14 of 2008 vests the BOI with the authority to identify a particular investment project as a strategic development project.Footnote ⁵³ This identification has to be accompanied by consultations with relevant ministries,Footnote ⁵⁴ and it further requires considering a number of factors. These factors include the national interest of a given project, its contribution to the economic and social benefit of the country, its potential for changing the landscape of the country through its involvement in providing substantial employment, transforming technology, substantial inflow of foreign exchange to the country, and benefits to the public.Footnote ⁵⁵ Such investment projects would be granted exemptions from the application of legislation specified in the schedule of the Strategic Development Projects Act.Footnote ⁵⁶

B. Sri Lanka’s International Obligations in the Realm of Foreign Investment

As indicated, the country’s international obligations in the realm of foreign investment are mainly derived from the BITs that Sri Lanka has entered into with twenty-nine countries. Most of these BITs were concluded during the 1980s and 1990s—the era in which almost all developing countries increasingly entered into BITs to establish their credibility for foreign investment.Footnote ⁵⁷ The purpose of this endeavour was to indicate Sri Lanka’s willingness to welcome foreign investment, as opposed to its previous hostility, as demonstrated by the large scale of the nationalization programme. It was further intended to promote the economic liberalization programme initiated in 1977, which welcomed foreign investors and their capital under the aegis of an open economic policy. In addition, the requirement for BITs was heightened by the civil war that shattered the investment-friendly environment in Sri Lanka, particularly by challenging the physical protection of foreign investment within the Sri Lankan territory in general, and war-affected areas in particular.Footnote ⁵⁸ This contextual background compelled Sri Lanka to conclude its BITs in a manner which provided foreign investors with the greatest possible legal protection against the host state’s interference and any other damages.

The extent to which the country’s international obligations in the realm of foreign investment have contributed to an increase in foreign investment is an unsettled question. This is mainly because of the contradictory views expressed in different forums pertaining to the interplay between concluding BITs and the influx of foreign investment. For instance, in 2014, it was stated at the World Investment Forum that Sri Lanka was adopting an approach that would “move away from BITs” due to the “tenuous relationship between BITs and increased inward investment”.Footnote ⁵⁹ However, in 2016, it was stated at the national parliament that ratifying BITs is an action that needed to be taken to increase the influx of foreign investment into the country.Footnote ⁶⁰ Furthering this explanation, it was pointed out that investments had more than doubled in the three years after the ratification of the Australia-Sri Lanka BIT compared to the three years before the agreement was ratified.Footnote ⁶¹ Whatever the real interplay between the ratification of BITs and inward investment, Sri Lanka’s international obligations in the realm of foreign investment had provided foreign investors with direct and unilateral access to international arbitration against the country three times between 1990 and 2012. The next part of this paper thus discusses Sri Lanka’s experiences in investment treaty arbitration—the method by which the substantive treaty protection is given effect.

A. Asian Agricultural Products Ltd v. Democratic Socialist Republic of Sri Lanka

The claimant in this case was a Hong Kong corporation called Asian Agricultural Products Ltd (AAPL), which invested in a local company by participating in the equity capital. The company’s shrimp farm, which was reported to be used by local rebels, was destroyed during a military operation conducted by the security forces of Sri Lanka. The investor thus claimed compensation from the government of Sri Lanka for the damages that it suffered therefrom. This claim was based on the dispute settlement clause in the UK-Sri Lanka BIT of 1980 which had been extended to Hong Kong. The claimant’s arguments consisted of the violation of the full protection and security provided for in Article 2 of the BIT, and the obligation specified in Article 4(2) of the BIT to pay adequate compensation for losses suffered by investors due to war or any other civil disturbances. In contrast, Sri Lanka was of the opinion that any damage to the claimant’s property was either necessary under the circumstances or not caused by the security forces of Sri Lanka, but by the rebels. In its award, the tribunal rejected strict liability for the country for its failure to provide full protection and security, dismissing the claimant’s argument that Article 2 of the BIT created an unconditional obligation in this respect.Footnote ⁶² The tribunal did not find Sri Lanka liable to pay compensation under Article 4(2) of the BIT, as the destruction complained of occurred during a military operation that could be considered a combat action.Footnote ⁶³ Liability under Article 4(2) was further denied because of the lack of evidence to prove that the losses were a result of actions committed by the security forces of Sri Lanka and the difficulty in ascertaining whether the alleged destruction was caused out of necessity.Footnote ⁶⁴ The tribunal, however, found Sri Lanka liable due to the country’s failure to undertake reasonably expected measures to prevent the eventual destruction of property and killings, by referring to international law under Article 4(1) and Article 2 of the UK-Sri Lanka BIT.Footnote ⁶⁵

B. Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka

In 1993, the Sri Lankan government entered into negotiations with the Mihaly International Corporation (Canada) for the purpose of constructing a new power generation facility. These negotiations resulted in the exchange of three fundamental documents that explicitly denied any binding obligation between the parties until the execution of a final contract between the parties and the making of an investment. Sri Lanka, however, never entered into such a contract with Mihaly (Canada), and thus the claimant Mihaly (USA) brought this case against Sri Lanka as the lawful assignee of all the rights, interests, and claims of Mihaly (Canada), which was also the Canadian partner of the claimant, to reimburse the pre-investment and development expenditures made on a project that never took place. Sri Lanka raised preliminary objections to the jurisdiction of the centre and the tribunal, and rejected the relationship between Mihaly (USA) and Mihaly (Canada). In its objections Sri Lanka further denied the existence of an “investment” in the sense of the ICSID Convention and under the US-Sri Lanka BIT. Dismissing the preliminary objection ratione personae, the tribunal accepted the capacity of the claimant, Mihaly (USA) to file a claim against Sri Lanka due to its international partnership with Mihaly (Canada).Footnote ⁶⁶ Accepting preliminary objection ratione materiae, the tribunal concluded that the pre-investment and development expenditures made by Mihaly (Canada) had not constituted an investment in the sense of ICSID Convention, and under the US-Sri Lanka BIT, since the final contractual relationship between the parties was never concluded to prove the admission of an investment.Footnote ⁶⁷ The tribunal thus dismissed the case, finding itself without jurisdiction to consider the substantive question submitted to it either in part or in whole.

C. Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka

In July 2008, Deutsche Bank and Ceylon Petroleum Corporation (CPC) entered into an oil hedging agreement, the main purpose of which was to protect Sri Lanka against the impact of a rising oil price. In December 2008, Deutsche Bank exercised its right to terminate the agreement and initiated arbitration proceedings against Sri Lanka before the ICSID. The claimant’s arguments involved the violation of Articles 2(2) and 4(2) of the Germany-Sri Lanka BIT of 2004, under which the disputed hedging agreement was said to constitute a protected investment. Sri Lanka, however, initially objected to the jurisdiction of the tribunal, arguing that the hedging agreement was a stand-alone financial product and an ordinary commercial transaction which did not constitute an investment for the purposes of either the Germany-Sri Lanka BIT or the ICSID Convention. Dismissing the country’s preliminary objection ratione materiae, the tribunal ruled the hedging agreement “an asset and a legal property with an economic value for Deutsche Bank”, as well as a “claim to money which has been used to create an economic value” which constitutes an investment under the Germany-Sri Lanka BIT.Footnote ⁶⁸ The existence of an investment for the purposes of the ICSID Convention was also determined, as the hedging agreement fulfils the three main criteria of the Salini test, i.e. contribution, risk, and duration.Footnote ⁶⁹ Thus, the tribunal had jurisdiction to consider whether the conduct of Sri Lanka violated its obligation to ensure Fair and Equitable Treatment (FET) of Deutsche Bank’s investment and constituted an expropriation which should be compensated.Footnote ⁷⁰ Taking into consideration the Supreme Court’s interim order of 28 November 2008, that ordered the suspension of all payments by CPC to Deutsche Bank, the Central Bank’s investigation, and its Stop-Payment Order of 16 December 2008 which prevented performance of the hedging agreement, the tribunal found Sri Lanka liable for violating the FET standard, as the country’s conduct had exceeded its own power and had breached due process, without any proper motive, transparency, or good faith.Footnote ⁷¹ The tribunal also found that the Supreme Court’s interim order of 28 November 2008, and the Central Bank’s letter of 16 December 2008, amounted to an expropriation of Deutsche Bank’s claim to debt under the hedging agreement, since they prevented the claimant from receiving payment under the hedging agreement, while depriving Deutsche Bank of the economic value of the hedging agreement even before the investor decided to terminate the agreement.Footnote ⁷² At the same time, the tribunal did not give weight to Sri Lanka’s disproportionate discretion to interfere with investments, and rejected the argument that the actions of the Supreme Court and the Central Bank were legitimate regulatory actions taken for the benefit of Sri Lanka.Footnote ⁷³ The tribunal thus determined the claimant’s entitlement to compensation for breaches of the Germany-Sri Lanka BIT of 2004.Footnote ⁷⁴

D. Sri Lanka’s Approach to its Investment Treaty Obligations

These three arbitral awards provided Sri Lanka with bitter experiences of investment treaty arbitration. However, the country did not radically respond to these experiences like certain Latin American countries by denouncing the ICSID Convention.Footnote ⁷⁵ It did not constructively reconsider its conventional approach towards the IIAs, as the North American countries did after defending a number of investment arbitration cases brought under the North American Free Trade Agreement (NAFTA).Footnote ⁷⁶ Instead, Sri Lanka adopted a “wait and see” approach between the cases of AAPL v. Sri Lanka and Deutsche Bank AG v. Sri Lanka, while remaining silent in relation to existing BITs. This was mainly because of the country’s reluctance to change the substantive treaty protection accorded to foreign investors, for fear of impairing the investment climate.Footnote ⁷⁷ In the opinion of this author, the time has come for Sri Lanka to relinquish its “wait and see” approach for three reasons. First amongst them is the increased emphasis given by states to draft recent IIAs in a way that ensures an appropriate policy space for implementing public welfare regulations.Footnote ⁷⁸ The second reason is the changes that have taken place in Sri Lankan society to eliminate the legal and physical threats to investment protection, such as the nationalization of foreign owned property, war, and other civil disturbances that existed in the original context in which most of the Sri Lanka’s BITs were concluded. The third reason is the augmented grassroots activism within Sri Lanka, which highlights the significance of providing the country with an appropriate policy space to regulate foreign investment for the public interest, such as environmental protection, public health, etc. These reasons, therefore, call for an overview of existing BITs in Sri Lanka to highlight the urgency of reconsidering the country’s conventional investment treaty-making practice.

A. Definition of Foreign Investment

The definition of foreign investment is one of the major inclusions in all of Sri Lanka’s BITs, which is crucial to determine what constitutes a protected investment. In the context of Sri Lanka’s treaty practice, the adopted method is to include an open-ended expression which defines foreign investment as “any kind of asset or every kind of asset”.Footnote ⁷⁹ This approach is expounded in literature as the “asset-based” definition.Footnote ⁸⁰ This open-ended phrase is usually accompanied by a non-exhaustive list of assets that includes movable and immovable property and any other property rights, shares, stocks, and debentures of companies or any other interests in such companies, claims to money or any performance under contract having a financial value, industrial rights, intellectual property rights, goodwill, and business concessions conferred by law or under contract, including concessions.Footnote ⁸¹ Some of the BITs, however, emphasize the requirement of making investments “in accordance with the laws and regulations of the host state”, while linking this clause with the definition of investment. The BITs that Sri Lanka entered into with China, the Czech Republic, Egypt, India, Indonesia, Italy, Iran, Kuwait, Pakistan, Vietnam, and Qatar are examples of treaties that have followed this approach.Footnote ⁸² The Australia-Sri Lanka BIT is also aligned to this end by defining the term investment as “every kind of asset … admitted by the other Party subject to its law”.Footnote ⁸³ According to this approach, investments that do not comply with the applicable host state laws would not be accorded treaty protection, either by rejecting the jurisdiction of the tribunalFootnote ⁸⁴ or by denying the substantive treaty protection for an illegal investment.Footnote ⁸⁵ This technique thus emphasizes the significance of the compliance of foreign investment with all of the local laws and regulations of the host state and thereby ensures a “level playing field” for both local and foreign investors.Footnote ⁸⁶

It is thus obvious that the existing BITs do not contain any other textual technique to narrow the scope of protected investment other than emphasizing the legality of an investment. This fact further demonstrates the scope given to foreign investors to make broad arguments as to what constitutes an investment under Sri Lanka’s BITs. The cases of Mihaly International Corporation v. Sri Lanka and Deutsche Bank AG v. Sri Lanka are the best examples to show the breadth of arguments that can be made by foreign investors under existing Sri Lankan BITs. At the same time, these two awards indicate the inadequacy of continuing with a web of BITs that include the conventional “asset-based” definition of investment. This is mainly due to the risk of exposing the country to investment treaty arbitrations which read the “asset-based” definition of investment in an expansive manner.Footnote ⁸⁷ This risk is furthered by the insufficiency of emphasizing the legality of an investment to effectively restrict the scope of protected investment in certain circumstances. To be precise, the illegality of an investment does not prevent foreign investors from seeking treaty protection in a situation where the applicable laws and regulations of the host state have been violated by the host state itself, but not by the foreign investor.Footnote ⁸⁸ In other words, the illegality of an investment cannot be used as an absolute prerequisite to narrow the scope of protected investment in every circumstance, except where the laws and regulations of host states have been violated by foreign investors themselves. This is one of the prime factors that highlights the need for modifying the definition clause of investment in the current Sri Lankan BITs. The importance of such a modification is furthered by the gradually declining legal significance of explicitly mentioning the requirement of complying with local laws due to the increased arbitral insight that this requirement is implicit even where it is not expressly stated in a particular BIT.Footnote ⁸⁹

B. Fair and Equitable Treatment Standard

The FET standard is one of the primary substantive protections included in Sri Lanka’s BITs.Footnote ⁹⁰ It is thus obvious that the country has never followed an approach which omits the FET standard and thereby prevents investment arbitral tribunals from assessing the decisions of its domestic courts and reviewing the decisions made by its administrative authorities. Almost all of Sri Lanka’s BITs stipulate the country’s obligation to accord FET to foreign investors at all times. The expression “at all times” entitles foreign investors to receive substantive treaty protection during the whole period in which they are present in the country.Footnote ⁹¹ The Japan-Sri Lanka BIT is the only treaty that does not include a precise clause on the FET standard. However, it explicitly stipulates the State Parties’ obligation to ensure nondiscriminatory treatment relating to the “access to the court of justice and administrative tribunal and agencies in all degrees of jurisdiction both in pursuit and in defence of investors’ rights”.Footnote ⁹² This provision, accordingly, can be considered as a clear indication of the State Parties’ intention to ensure one of the very purposes of the FET standard, i.e. non-denial of justice.Footnote ⁹³ All of the other BITs include substantive provisions on the FET standard under different headings, such as “promotion and protection of investments”,Footnote ⁹⁴ “protection of investments”,Footnote ⁹⁵ “protection and treatment of investments”,Footnote ⁹⁶ or “promotion and guarantee of investment”.Footnote ⁹⁷ Amongst them, the Belgo-Luxemburg Economic Union (BLEU)-Sri Lanka BIT combines the FET standard with the MFN obligation,Footnote ⁹⁸ whilst the Iran-Sri Lanka BIT combines the FET standard with both the MFN and NT obligations.Footnote ⁹⁹ Combining the FET standard with the duty not to impair the investments is another drafting variation adopted in most of the Sri Lankan BITs, reflecting the elementary aspects of the international minimum standard of treatment, i.e. prohibiting arbitrary and discriminatory measures against foreign investment.Footnote ¹⁰⁰ At the same time, some of the Sri Lankan BITs articulate the obligation to accord FET without combining it with the duty to accord full protection and security or the duty not to impair investment made by the nationals or companies of the other Contracting Party.Footnote ¹⁰¹ Certain other BITs combine the FET standard with the obligation to accord full protection and security, but not with the duty not to impair investment.Footnote ¹⁰² On the contrary, the Germany-Sri Lanka BIT combines the FET standard with the duty not to impair investment without combining it with the obligation to accord full protection and security.Footnote ¹⁰³ In addition, the USA-Sri Lanka BIT juxtaposes the FET standard with the obligation to accord full protection and security, while articulating the obligation to treat foreign investment by a standard not lower than what is required by international law.Footnote ¹⁰⁴

The distinctiveness of the FET clauses in the France-Sri Lanka BIT, Kuwait-Sri Lanka BIT, and Finland-Sri Lanka BIT is marked by linking the FET standard with international law. These three BITs can thus be considered as the few occasions where Sri Lanka moved away from its cultural inclination towards the “unqualified” formulationFootnote ¹⁰⁵ which makes a simple reference to the FET standard. These few treaties have, however, employed different dictions to link the FET standard with international law. Specifically, the France-Sri Lanka BIT stipulates the Contracting Parties’ obligation to accord FET “in accordance with the general principles of international law”,Footnote ¹⁰⁶ whilst the Kuwait-Sri Lanka BIT stipulates the Contracting States’ obligation to accord FET “in a manner consistent with the recognized principles of international law”.Footnote ¹⁰⁷ Adopting a unique approach, the Finland-Sri Lanka BIT stipulates the obligation to accord FET at all times “in conformity with international law” and “subject to the laws and regulations of contracting states”.Footnote ¹⁰⁸ This provision attempts to make the FET standard contingent on domestic law, while simultaneously linking it with international law, indicating a problematic drafting pattern. This is mainly because subjecting FET to the domestic law of a given host state itself challenges the idea of having “an independent international standard” that is expected to be established by linking the FET standard with international law.Footnote ¹⁰⁹

It is, accordingly, obvious that Sri Lanka’s BITs include different types of FET clauses. Some of them, such as those that juxtapose the FET standard and the guarantee of full protection and security, can be considered as mere stylistic matters which do not give rise to serious substantive issues.Footnote ¹¹⁰ In contrast, certain drafting variations, such as combining the FET with international law or domestic law, are of vital significance in determining the substantial scope of protection guaranteed by a given FET clause. It is further interesting to see that none of Sri Lanka’s BITs that link FET with international law refer to principles of customary international law but only to general international law. It is, ultimately, Sri Lanka’s conventional inclination to adopt the “unqualified” FET formula or make a simple reference to FET that becomes a real issue yet to be considered. This is mainly because it provides investment arbitral tribunals with enhanced interpretative discretion over the content of the FET standard, which had been used to read it in an expansive manner at the expense of the public rights of host states.Footnote ¹¹¹ The recent award of Deutsche Bank AG v. Sri Lanka is the best example in this respect, where the Deutsche Bank Tribunal comprehended the simple reference made to FET in the Germany-Sri Lanka BIT as evidence of the Contracting Parties’ intention to adopt it as an autonomous treaty standard, which includes the protection of the legitimate and reasonable expectation of foreign investors as well.Footnote ¹¹²

C. Protection Against Uncompensated Takings

Uncompensated nationalization and expropriation are the most severe political risks against which foreign investors are protected by the Sri Lankan BITs.Footnote ¹¹³ The country’s inclination to provide foreign investors with the greatest possible protection against uncompensated expropriation is clearly demonstrated in the Kuwait-Sri Lanka BIT. The expropriation clause in this BIT articulates that the term “expropriation” includes “any intervention through regulatory measure, such as freezing or blocking the investment”.Footnote ¹¹⁴ In addition, all the other expropriation clauses have been comprehensively drafted to provide foreign investors with enhanced legal protection against uncompensated takings. For instance, the expropriation clause in the Germany-Sri Lanka BIT stipulates the State Parties’ commitment not to expropriate and nationalize investments made by the nationals or companies of the other State Party to the treaty.Footnote ¹¹⁵ It further spells out the Contracting Parties’ commitment not to directly or indirectly subject such investments to any other measure the effects of which would be tantamount to expropriation or nationalization.Footnote ¹¹⁶ In addition, the Germany-Sri Lanka BIT mentions two of the main conditions upon which the State Parties can take expropriatory measures, i.e. for a public interest and against compensation, while entitling the investor to review the legality of any expropriation, nationalization, or comparable measure and the amount of compensation by the due process of law.Footnote ¹¹⁷ In the same way, Article 4(1) of the Denmark-Sri Lanka BIT recognizes the foreign investors’ right to prompt review of the legality of the measures taken against the investment and of their valuation by the due process of law in the territory of the State Party making the expropriation. The China-Sri Lanka BIT also articulates the prospect of reviewing the legality of any measure of expropriation in the manner prescribed by the law of the State Party taking the measures impugned.Footnote ¹¹⁸ The China-Sri Lanka BIT further specifies the relevant court of the State Party taking such measures as the competent authority to do such a review, at the request of the national or company thereby affected.Footnote ¹¹⁹ Adopting a similar approach, the Italy-Sri Lanka BIT expresses the requirement of submitting disputes relating to the conformity of the expropriation with the laws and regulations of the Contracting Party which made the expropriation to the competent court of that particular party, while leaving disputes over the amount of compensation to be settled either by the court of the Contracting Party which made the expropriation or by an international arbitration tribunal.Footnote ¹²⁰

In addition, a number of Sri Lankan BITs explicitly mention the foreign investors’ right to prompt review of their case and of the valuation of investment in accordance with the principles set out in the expropriation clauses in respective treaties.Footnote ¹²¹ Article III(2) of the USA-Sri Lanka BIT is unique in this respect as it provides investors with the right to determine whether an expropriation has occurred and, if so, whether such expropriation, and any compensation thereon, conforms to the principles of international law.Footnote ¹²² The reference this provision explicitly makes to international law cannot be found in any other Sri Lankan BIT. In addition, the BITs that Sri Lanka entered into with Korea, the Netherlands, Pakistan, the Swiss Confederation, and the UK further recognize foreign investors’ rights to prompt determination of the amount of compensation.Footnote ¹²³ Some of Sri Lanka’s BITs, however, mention neither the foreign investors’ right to prompt review of their case and of the valuation of their investment, nor their right to prompt determination of the amount of compensation.Footnote ¹²⁴ Furthermore, the BLEU-Sri Lanka BIT and the Germany-Sri Lanka BIT mention the Contracting Parties’ obligation to accord MFN treatment in respect of the matters provided for in the expropriation clauses,Footnote ¹²⁵ whilst the Japan-Sri Lanka BIT and the Thailand-Sri Lanka BIT emphasize non-discrimination treatment with respect to matters dealt with in the respective expropriation clauses.Footnote ¹²⁶

The conditions that determine the legality of an expropriation is another issue covered by the expropriation clauses, for which Sri Lanka has adopted greatly diverse approaches. Some BITs lay down the four criteria which are typically articulated in IIAs as the yardsticks for determining the legality of an expropriation, i.e. public purpose, due process of law, non-discrimination, and paying compensation.Footnote ¹²⁷ The BITs that Sri Lanka entered into with Australia, the BLEU, the Czech Republic, Egypt, India, Indonesia, Iran, Japan, Kuwait, the Netherlands, Pakistan, and the US are the treaties that have included all of these four typical criteria. Amongst them, the Australia-Sri Lanka BIT, the Korea-Sri Lanka BIT, the Kuwait-Sri Lanka BIT, and the Thailand-Sri Lanka BIT, as well as the Denmark-Sri Lanka BIT, complement the criterion of public purpose by adding the phrase “public purpose related to the internal need” of the Contracting Party making the expropriation.Footnote ¹²⁸ Likewise, the BITs that Sri Lanka entered into with the Netherlands, Pakistan, and the UK have been aligned to this end by mentioning this criterion as the public purpose related to the need of the Contracting Parties.Footnote ¹²⁹ In the meantime, the China-Sri Lanka BIT and the Singapore-Sri Lanka BIT include the criterion of lawful purpose instead of the usually articulated criterion of public purpose.Footnote ¹³⁰ The Indonesia-Sri Lanka BIT is the only treaty that includes both the lawful purpose and public purpose as yardsticks for the legality of an expropriation.Footnote ¹³¹ The France-Sri Lanka BIT articulates the condition of public utility,Footnote ¹³² whilst the BITs that Sri Lanka entered into with Finland, Germany, Malaysia, Norway, Sweden, and Qatar stipulate public interest as a condition for lawful expropriation.Footnote ¹³³ The Romania-Sri Lanka BIT articulates the criteria of public purpose, duly constituted legal procedures, and compensation, except for the criterion of non-discrimination, which is well established in international law.Footnote ¹³⁴ The Italy-Sri Lanka BIT, the Korea-Sri Lanka BIT, the Swiss Confederation-Sri Lanka BIT, the Thailand-Sri Lanka BIT, and the UK-Sri Lanka BIT mention only two of the four typical criteria, i.e. public purpose and compensation.Footnote ¹³⁵

The standard of compensation is another important matter dealt with in expropriation clauses.Footnote ¹³⁶ Almost all of Sri Lanka’s BITs have aligned their standard of compensation with the Hull Formula by emphasizing the State Parties’ obligation to pay effective, prompt, and adequate compensation in the event of expropriation.Footnote ¹³⁷ However, the BIT that Sri Lanka entered into with India mentions “fair and equitable compensation” as the standard, whereas the China-Sri Lanka BIT is silent in this respect.Footnote ¹³⁸ Most of the other BITs articulate the “market value” of the expropriated investment as the basis for calculating the quantum of compensation. Amongst them, the US-Sri Lanka BIT and the Indonesia-Sri Lanka BIT mention “fair market value”,Footnote ¹³⁹ whilst the Japan-Sri Lanka BIT includes “normal market value” as the standard.Footnote ¹⁴⁰ Certain other BITs have adopted “genuine value of the investment expropriated”Footnote ¹⁴¹ and “actual value of the expropriated investment”Footnote ¹⁴² as the basis for calculating the quantum of compensation, which represents the value or worth of the property at a given time.Footnote ¹⁴³ The “value of the investment immediately before the expropriation or impending expropriation became public knowledge” has also been articulated as a basis for computing the compensation in the event of an expropriation.Footnote ¹⁴⁴ The Malaysia-Sri Lanka BIT and the Sweden-Sri Lanka BIT are treaties that specify the State Parties’ duty to pay prompt, adequate, and effective compensation without specifying a methodology to calculate the quantum of compensation.Footnote ¹⁴⁵ In addition, most of Sri Lanka’s BITs recognize the application of treaty protection guaranteed by the expropriation clause to the situations where a State Party expropriates the assets of a company which is incorporated under the law of that Party, and in which a national or a company of the other Party owns shares.Footnote ¹⁴⁶ The Denmark-Sri Lanka BIT includes debenture holders as well as the shareholders.Footnote ¹⁴⁷ The Egypt-Sri Lanka BIT also recognizes forms of participation in such companies other than that of shareholding.Footnote ¹⁴⁸ The Kuwait-Sri Lanka BIT mentions a wide range of participation in such companies, i.e. ownership of shares, stocks, and debentures, including the other rights or interests therein,Footnote ¹⁴⁹ whilst the Vietnam-Sri Lanka BIT includes debenture holders and other forms of participation in such companies.Footnote ¹⁵⁰

The above discussion makes clear that Sri Lanka’s BITs do not contain any “qualifiers” and “limitations” regarding the concept of expropriation and any criteria to be considered in distinguishing indirect expropriation from non-compensable regulatory measures. Expropriation clauses in Sri Lanka’s BITs thus generally belong to the “high protection model”Footnote ¹⁵¹ of expropriation clauses, which does not provide the country with an appropriate policy space in which to implement public welfare objectives.Footnote ¹⁵² The need to continue with such a “high protection” form of expropriation clause is questionable, as the fundamental factor that compelled Sri Lanka to adopt this formula, i.e. the threat of nationalization of foreign property, has entirely disappeared from Sri Lankan society with the economic reforms that took place in 1977. At the same time, increased grassroots activism within the country indicates the significance of making investment treaties in a way which ensures an appropriate policy space to implement essential public welfare regulations.

A. Notion of Harmonious Investment Treaties

As a consequence, most states have already devised newer versions of investment treaties driven by the urgency of adequately safeguarding the right to regulate in the public interest. Such newer treaties embrace two perspectives with the aim of compromising the private interests of foreign investors and the public interests of host states in order to directly and indirectly facilitate a proper equilibrium between them. First amongst them is devising investment treaties in a way which restricts the greater interpretative discretion vested in the private arbitrators by the conventional vaguely drafted and undefined treaty provisions in IIAs, by clarifying the understanding of substantive provisions.Footnote ¹⁵⁸ This attempt is apparent with respect to the provisions that had been subjected to expansive interpretation, i.e. the FET standard and protection against uncompensated expropriation.Footnote ¹⁵⁹ Newer investment treaties thus explicitly articulate Contracting Parties’ understanding regarding the concepts of expropriation and FET, while further stipulating the criteria that should be taken into consideration when determining an indirect expropriation. For example, Annex B of the US 2012 Model BIT explicitly articulates that the treaty reflects customary international law regarding the obligation of states with respect to expropriation, while defining the concept of expropriation.Footnote ¹⁶⁰ It further provides for basic factors that would be helpful in determining the occurrence of an indirect expropriation in a specific situation.Footnote ¹⁶¹ Similarly, Article 5 of the 2012 US Model BIT enunciates the obligation to treat foreign investment according to customary international law, including FET and full protection and security.Footnote ¹⁶² Clarifying its scope of protection, Article 5 further commissions the protection accorded to foreign investors on the customary international law minimum standard of treatment of aliens. It explicitly excludes additional treatment that goes beyond what is required by this standard, and denies the creation of any additional substantive rights.Footnote ¹⁶³ At the same time, the 2012 US Model BIT articulates State Parties’ understanding of the concept of customary international law—the fundamental criterion upon which investment protection is commissioned under both the FET and expropriation clauses of the treaty.Footnote ¹⁶⁴ The fundamental purpose of this endeavour is to prevent arbitral tribunals from overinterpreting these substantive treaty protections at the expense of states’ right to regulate, and thereby indirectly facilitating a balance between private and public interests. Second, newer IIAs include a number of non-investment issues to directly facilitate a proper balance between the private interests of foreign investors and the public interests of host states,Footnote ¹⁶⁵ while realizing the ideal of balanced investment treaties.Footnote ¹⁶⁶ Such non-investment considerations frequently include health, safety, and environmental measures, labour standards, essential security measures, disclosure of information, taxation, prudential measures, etc. For instance, the 2004 Canadian Model BIT includes a general exception clause together with prudential measures, health, safety, and environmental measures, a taxation measure, and transparency.Footnote ¹⁶⁷ Furthermore, the 2012 US Model BIT includes transparency, environmental protection, labour standards, essential security measures, disclosure of information, financial services, and taxation measures.Footnote ¹⁶⁸ The inclusion of such non-investment concerns into the texture of IIAs would be of vital significance in providing the host states with an appropriate regulatory space by conferring them with a number of defences against liability for violating their international obligations in the realm of foreign investment.Footnote ¹⁶⁹

These two perspectives, as a whole, give rise to the notion of harmonious investment treaties, which are premised on the idea of making investment treaties adequate in relation to blending provisions for ensuring the protection of foreign investments and safeguarding the state’s right to regulate in the public interest. The notion of harmonious investment treaties thus seeks to address the cultural imbalance of the international legal framework on foreign investment resulting from the conventional practice of making investment treaties focus exclusively on the protection of foreign investment. While advancing the notion of harmonious investment treaties, almost all of the newer IIAs include a progressive preamble which indicates State Parties’ desire to achieve investment protection in a manner which is not inconsistent with other competitive public welfare objectives, such as the protection of health, safety, and the environment, and the promotion of internationally recognized labour rights.Footnote ¹⁷⁰ All of these new approaches demonstrate the gradual dilution of IIAs from the original purpose for which they were concluded during the post-colonial era, i.e. ensuring the greatest possible protection for foreign investment against host state interference.

B. Status Quo of the Existing Sri Lankan BITs

It is beyond debate that Sri Lanka’s BITs are not generally compatible with the notion of harmonious investment treaties, as they have been drafted based on the neoliberal vision of providing foreign investors with the greatest possible protection. This phenomenon is understandable, as the protection of investment was the fundamental purpose for which BITs were originally drafted, and most of Sri Lanka’s BITs have been entered into within a context where investment protection was required to be given the utmost priority. The most recent BITs that Sri Lanka entered into with the Czech Republic in 2011 and Qatar in 2012, however, demonstrate the country’s emergent readiness to align its investment treaty-making practice with the contemporary tendency of balancing investment protection with other public interest objectives, as these two BITs include certain characteristics found in modern harmonious investment treaties. For example, Article 11 of the Czech Republic-Sri Lanka BIT ensures the Contracting Parties’ ability to take any action necessary for the protection of essential security interests relating to a number of issues, such as criminal and penal offences, international obligations under the United Nations Charter for the maintenance of international peace and security, etc. Additionally, Article 9 of the Qatar-Sri Lanka BIT articulates the Contracting Parties’ capacity to take necessary actions for the protection of their essential security interests, or public order, or morality effecting public order, or national treasures of historic or artistic value in circumstances of extreme emergency, in accordance with the applicable laws of the host states and without any discrimination.

When compared, it is apparent that the scope of Article 9 of the Qatar-Sri Lanka BIT is broader than Article 11 of the Czech Republic-Sri Lanka BIT, as it deals with issues other than essential security interests, such as morality and national treasures of historic or artistic value. Both of these exception clauses, however, are considerably narrower when compared with the classic general exception clause found in the Canadian Model BIT of 2004, due to the fewer issues covered by them as the exceptions to the country’s international obligations in the realm of foreign investment.Footnote ¹⁷¹ In other words, none of these clauses encompass typical exceptions, such as measures adopted for the protection of human, animal, or plant life or health, the conservation of living or non-living exhaustible natural resources, and the reasonable measures adopted and maintained for prudential reasons, such as ensuring the integrity and stability of a State Party’s financial system. These two recently concluded BITs, nevertheless, are of vital significance as a sign of Sri Lanka’s willingness to deviate from its conventional practice of making BITs, by including defences against the liability of violating the country’s international obligations in the realm of foreign investment, for the first time in its investment treaty-making history.

A. Adopting the “Closed-list” Approach to Define the Term “Foreign Investment”

The first modification should be defining the term “investment” more specifically, mentioning assets and economic activities that would be considered as a protected investment under a particular BIT. As previously indicated, this is mainly because of the inappropriateness of continuing with the conventional “asset-based” definition of investment, which exposes the country to investment treaty arbitrations which would read the “asset-based” definition of investment in an expansive manner. Amongst the solutions that have developed to prevent the risk of such overextensive interpretations, Sri Lanka may possibly select the “closed-list” approach. The definition of investment included in the Canadian Model BIT of 2004 provides the classic illustration in this respect.Footnote ¹⁷² It prescribes a set of tangible and intangible assets that would be protected by the treaty, together with a clear list of exclusions to which treaty protection is not applicable. The exclusion list includes certain purely commercial transactions, sales contracts, and purely financial loan agreements involving no capital risk.Footnote ¹⁷³ This approach, accordingly, provides State Parties with considerable freedom to predetermine the protected assets and economic activities under a given BIT in a detailed manner. The potential disadvantages of retaining regulatory discretion by narrowing the scope of investment covered by BITs have been expounded in the literature.Footnote ¹⁷⁴ It is, however, desirable for Sri Lanka to at least adopt the “closed-list” approach rather than continuing with the country’s conventional inclination towards the “asset-based definition”. This is mainly because of the lesson that the country learnt in the case of Deutsche Bank AG, where the claimant-investor successfully invoked the “assets-based” definition clause included in the Germany-Sri Lanka BIT to get his interests derived from the disputed hedging agreement protected as an investment covered by it.

B. Forsaking the “Unqualified” Formulation of EFT Standard

Second, Sri Lanka should reject its preference for the “unqualified” formulation of the FET standard. As indicated, this is because of the enhanced interpretative discretion it gives to arbitrators to interpret the content of an FET clause in a way which includes a number of obligations on the part of the host state. As expounded in scholarship, these obligations include “host states’ obligations to act consistently, transparently, reasonably, without ambiguity, arbitrariness or discrimination, in an evenhanded manner, to ensure due process in decision-making, and respect the investors’ legitimate expectations”.Footnote ¹⁷⁵ The breadth of the host state’s obligations under the FET standard has raised many concerns about the threshold of protection guaranteed by the obligation to accord FET to foreign investors.Footnote ¹⁷⁶ The recent IIAs thus demonstrate attempts by states to redraft the conventional “unqualified” FET clause in a manner which indicates the parameters of protection accorded by this treatment standard.Footnote ¹⁷⁷ Newer investment treaties, accordingly, utilize a number of modified formulas to enclose the FET standard. At the same time, some states have omitted the FET standard without leaving any room for the investment arbitral tribunals to assess the decisions of their domestic courts and to review their administrative decision-making under the FET standard in IIAs.Footnote ¹⁷⁸ The urgency of attaining a proper balance between investment protection and other competing policy objectives of host states was the other crucial factor that compelled states to digress from the conventional “unqualified” formulation of the FET standard.Footnote ¹⁷⁹

Amongst these modified drafting patterns, Sri Lanka may opt for the formula which explicitly sets out the substantive elements of the FET standard in the treaty itself. This is to delineate the substance of the FET standard in advance and thereby demarcate the scope of protection that will be accorded to foreign investment under this treatment standard. The elements such as “denial of justice, unreasonable or discriminatory measures, breach of other treaty obligations, and accounting for the level of development” have been identified as the frequently stipulated elements of the FET obligation in recent IIAs.Footnote ¹⁸⁰ In addition, demarcating the scope of the FET standard by way of predetermined substantive elements is of vital significance to make the states’ obligation to accord FET more precise and predictable, while reducing the risk of interpreting this standard of protection in an expansive manner.Footnote ¹⁸¹ This option is more advantageous compared to the other main methods adopted in recent IIAs, i.e. to combine the FET standard with the general international law or international minimum standard of treatment. This is because the vagueness of the principles of international law and international minimum standard provides more scope for arbitral discretion over the concept of FET.Footnote ¹⁸² Despite this, they have been admired as methods which direct arbitrators to consider either principles of international law or customary international law principles when interpreting the concept of FET.Footnote ¹⁸³ The suggestion that Sri Lanka may adopt a formula which makes the FET standard contingent on the domestic legislation of the host state is problematic, as the country’s existing domestic legal framework applicable to foreign investment does not contain any treatment standard that should be accorded to foreign investors in Sri Lanka.

C. Leaving Out the “High Protection Model” Expropriation Clause

Third, Sri Lanka should move away from the “high protection model” expropriation clauses which only articulate the criteria that determine the legality of an expropriation without any “qualifiers” and “limitations” regarding the concept of expropriation and any criteria to be considered in distinguishing indirect expropriation from non-compensable regulatory measures. This is mainly because of the lacuna in the model that allows arbitrators to find the criteria that establish the occurrence of an indirect expropriation by looking beyond investment treaties,Footnote ¹⁸⁴ while conferring an enhanced interpretative discretion over the concept of indirect expropriation. Investment arbitration tribunals have used this interpretative discretion in a manner which ensures the greatest possible protection for foreign investors by giving the concept of indirect expropriation a broader understanding.Footnote ¹⁸⁵ This broader understanding posed a huge challenge to the state’s right to regulate in the public interest, and the desire of host states to expand the range of measures that are commonly accepted as police powers of states.Footnote ¹⁸⁶ States have thus developed textual techniques to ensure that the protection of foreign investment is not achieved at the expense of the states’ right to regulate in the public interest.

Sri Lanka may first opt for the “increased predictability” model expropriation clauses which provide for the definition of direct and indirect expropriation and the factors to be considered in determining the occurrence of an indirect expropriation, while reaffirming the state’s right to regulate.Footnote ¹⁸⁷ The Canadian Model BIT of 2004 and the US Model BIT of 2012 are frequently cited examples of investment treaties that adopted the “increased predictability” model by integrating explanatory annexes to the expropriation provision. Such explanatory annexes specifically provide for factors that will be used in establishing indirect expropriation on a case-by-case basis, namely, “the economic impact of the government action, the extent to which the government action interferes with distinct, reasonable investment-backed expectations, and the character of the government action”.Footnote ¹⁸⁸ They further guide arbitrators to make a distinction between indirect expropriation and non-compensable regulation by generally articulating that “non-discriminatory regulatory actions … that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations”.Footnote ¹⁸⁹ As a second option, Sri Lanka may choose the drafting pattern that articulates explicit and precise exceptions to the concept of indirect expropriation.Footnote ¹⁹⁰ Under this approach, IIAs include a provision which enunciates the fact that the measures taken by a host state in good faith and a non-discriminatory manner, with the objective of protecting and enhancing a legitimate public welfare objective, do not constitute an indirect expropriation. Modern IIAs, such as the Investment Agreement for the COMESA Common Investment Area of 2007 and the ASEAN Comprehensive Investment Agreement of 2009, have frequently been cited as illustrations of this approach which “directly and specifically stipulates exceptions to or carve-outs from indirect expropriations”.Footnote ¹⁹¹ This approach would thus be of vital significance to directly and precisely stipulate exceptions to the concept of indirect expropriation compared to the third drafting pattern, which includes a general exception clause which applies to the entire treaty, including the expropriation clause.Footnote ¹⁹²

These two options are advocated as suitable for a general exception clause in investment treaties, as well as its actual contribution to establishing firm exceptions to the concept of indirect expropriation, and have been subjected to academic criticism, even though its significance in giving due recognition to the state’s right to regulate in the public interest is admirable.Footnote ¹⁹³ Whichever option Sri Lanka adopts, it should reject the expression found in recent Model BITs that includes the phrase “except in rare circumstances”, if it wishes to establish genuine exceptions to the concept of indirect expropriation under either of these two approaches. This is because this phrase blurs the distinction between expropriatory measures and non-compensable regulatory measures.Footnote ¹⁹⁴ Sri Lanka may otherwise adopt the approach taken in the China-Japan-Korea trilateral investment treaty of 2012 and in the Canadian Model BIT of 2004, where the phrase “except in rare circumstances” has been further clarified in the treaty itself. For instance, the China-Japan-Korea trilateral investment treaty explains such rare circumstance “as an action or a series of actions which is extremely severe or disproportionate in light of its purpose”, on the one hand,Footnote ¹⁹⁵ while the Canadian Model BIT of 2004 explains such rare circumstance as a measure or series of measures complained of that are “so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith”, on the other.Footnote ¹⁹⁶ In addition, Sri Lanka should pay close attention to adopting a uniform drafting practice pertaining to the criteria by which the legality of an indirect expropriation is determined instead of the drafting variations apparent in existing Sri Lankan BITs.

D. Enclosing Exceptions to the Investment Treaty Obligations

Fourth, attention should be paid to including essential exceptions so as to provide the country with defences against the liability of violating its treaty obligations in the realm of foreign investment. Among such defences, essential security exceptions in relation to both national and international security are the most important exceptions Sri Lanka should retain. Measures adopted and maintained for prudential reasons, such as ensuring the integrity and stability of the country’s financial system, are the other important exceptions that should be included. This is because Sri Lanka is a country which is “badly burdened by the debt”, and of which it has been said that “debt to gross domestic product (GDP) ratio is on the slide” and its “debt as an amount and the debt service cost are on the rise”.Footnote ¹⁹⁷ In addition, measures that are adopted and maintained for ensuring environmental protection should also be identified as one of the exceptions for the country’s investment treaty obligations due to the alleged high environmental impact of the recently initiated development projects, which gave rise to grassroots activism within the country. In the opinion of this author, Article 12 of the US Model BIT 2012 is the best guiding light for Sri Lanka to ascertain the way in which the relationship between investment and environment should be framed within the context of BITs or any other form of investment agreement. More specifically, Article 12 of the US Model BIT explicitly recognizes the significance of environmental laws and policies and multilateral environmental agreements to protect the environment, along with the inappropriateness of encouraging investment by weakening or reducing the protections afforded in domestic environmental laws. At the same time, it safeguards the State Parties’ right to exercise “discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters, and to make decisions regarding the allocation of resources and enforcement with respect to other environmental matters determined to have higher priorities”.Footnote ¹⁹⁸ The inclusion of such essential exceptions would be of vital significance to align Sri Lanka’s contemporary investment treaty-making practice with the notion of harmonious investment treaties, the latter of which emphasize the need for integrating non-investment considerations into the texture of IIAs so as to directly facilitate a better balance between the protection of foreign investment and other regulatory interests of host states.

E. Including Progressive Preambles to BITs

Fifth, Sri Lanka should embrace the method of progressive preambles to BITs, which recognizes the idea of protecting foreign investment without jeopardizing the implementation of public welfare objectives. This is because of the significance of such even-handed preambles to firmly establish the county’s deviation from its conventional investment treaty-making practice encouraged by the neoliberal idea of ensuring the greatest possible protection for foreign investment. It will further exhibit Sri Lanka’s readiness to espouse the new liberalism idea of compromising investment protection with the regulatory interests of host states.Footnote ¹⁹⁹ Including such progressive preambles is also crucial for two other reasons. First amongst them is the interpretative value of the preamble as an integral part of a given BIT, which expresses the intentions and objectives of the Contracting State Parties to the treaty.Footnote ²⁰⁰ The second reason is the emergent state practice of giving non-investment concerns such as sustainable developmentFootnote ²⁰¹ and states’ commitment to human rights, labour, and environmental standardsFootnote ²⁰² the same significance as given to the principal objective of IIAs, i.e. the protection of foreign investment.Footnote ²⁰³ Furthermore, including such progressive preambles becomes essential as every BIT to which Sri Lanka is a party contains an non-comprehensive overture which focuses only on investment flows, investment protection, and economic development. Such vague preambles have been expounded in the literature as “a licence to promote teleological interpretation of the treaty provisions, favouring investment protection”.Footnote ²⁰⁴ Such conventional preambles, further, do not comply with the emergent state practice of denoting a desire to compromise investment protection with other non-investment matters, such as protecting the environment and human rights, promoting internationally recognized labour rights, and the concept of sustainable development and anti-corruption issues.