THE LEGAL FRAMEWORK FOR INTERNATIONAL INVESTMENT PROTECTION: SOFT LAW AND CUSTOMARY NORMS

ПРАВОВАЯ БАЗА ДЛЯ ЗАЩИТЫ МЕЖДУНАРОДНЫХ ИНВЕСТИЦИЙ: МЯГКОЕ ПРАВО И ОБЫЧНЫЕ НОРМЫ

Сафар Адалят Сафарли

докторант, Бакинский государственный университет,

Азербайджан, г. Баку

ABSTRACT

This paper explores the role of customary international law and soft law instruments in the legal regulation of foreign investments. While bilateral and multilateral treaties remain the formal backbone of investment protection, they often leave gaps in areas where rapid economic and political changes demand more flexible or emerging normative responses. Customary international law has historically shaped key principles such as fair and equitable treatment and protection from expropriation, many of which were later codified in treaty law. Meanwhile, soft law—non-binding instruments such as UN resolutions, OECD guidelines, and declarations of international organizations—has increasingly influenced the formation of legal standards and guided state and investor behaviour. The paper analyses how soft law contributes to the development of new customary norms and complements treaty-based obligations, especially in addressing issues such as sustainable development, nationalization, and investor-state disputes. It also examines the critique that early customary rules reflected the interests of colonial powers, and how developing states responded by proposing alternative doctrines like the national treatment standard and the principle of permanent sovereignty over natural resources. Through legal analysis and case studies, the research demonstrates that soft law and customary norms are not peripheral but central to the evolving international investment regime. Together, they form a dynamic and adaptive legal framework capable of responding to the challenges of global economic integration and the need for balanced investor protection and state sovereignty.

АННОТАЦИЯ

Данная статья посвящена роли норм обычного международного права и инструментов мягкого права в правовом регулировании иностранных инвестиций. Несмотря на то, что двусторонние и многосторонние договоры остаются формальной основой системы защиты инвестиций, они часто оставляют пробелы в тех сферах, где быстрые экономические и политические изменения требуют более гибких или новых нормативных решений. Обычное международное право исторически сформировало ключевые принципы, такие как справедливое и равноправное обращение и защита от экспроприации, многие из которых впоследствии были закреплены в договорном праве. В то же время мягкое право — необязательные к исполнению инструменты, такие как резолюции  ООН, руководящие принципы ОЭСР и декларации международных организаций — все больше влияет на формирование правовых стандартов и направляет поведение государств и инвесторов. В статье анализируется, как мягкое право способствует развитию новых норм обычного права и дополняет договорные обязательства, особенно в таких сферах, как устойчивое развитие, национализация и инвестиционные споры между государствами и инвесторами. Рассматривается также критика в адрес ранних норм обычного права, отражавших интересы колониальных держав, и то, как развивающиеся страны ответили на это, предложив альтернативные доктрины, такие как стандарт национального режима и принцип постоянного суверенитета над природными ресурсами. Посредством юридического анализа и кейс-стади исследование показывает, что мягкое право и нормы обычного права не являются периферийными элементами, а составляют центральную часть развивающейся системы международного инвестиционного права. Вместе они формируют динамичную и адаптивную правовую структуру, способную реагировать на вызовы глобальной экономической интеграции и обеспечивать баланс между защитой инвесторов и суверенитетом государств.

Keywords: international law, soft law, investment protection, bilateral and multilateral investment treaties (BITs and MITs), customary norms.

Ключевые слова: международное право, мягкое право, защита инвестиций, двусторонние и многосторонние инвестиционные договоры (BITs и MITs), нормы обычного права.

Introduction

In an increasingly interconnected global economy, foreign direct investment (FDI) plays a pivotal role in fostering economic growth, technological advancement, and international cooperation. However, cross-border investments are often exposed to a range of political, legal, and economic risks in host countries—especially during periods of instability or conflict (Khadem, 2020) [10]. To address these concerns, the international community has developed a multilayered legal framework designed to protect the rights of foreign investors while balancing the regulatory sovereignty of host states.

Attracting foreign investment for the development of the national economy is a common practice in the global economic process, driven by the prevailing trend of the internationalization of the world economy. Foreign investments in the country are one of the factors contributing to the development of market relations; through them, not only capital enters the country’s economy, but also modern technologies, new production organization, and advanced management practices (Malakhova et al, 2020). [13, р.39-47]

In the contemporary landscape of international investment relations, the regulation and protection of foreign capital are governed by a complex interplay of treaty law, customary international law, and, increasingly, soft law instruments. While bilateral and multilateral investment treaties (BITs and MITs) remain the cornerstone of legal protections for investors, they do not cover every scenario or emerging challenge, particularly in politically sensitive or rapidly evolving contexts (Javagal, 2024) [12]. As such, customary norms and soft law mechanisms have gained renewed relevance as complementary sources of international legal regulation.

Soft Law and Customary Norms in the Legal Regulation of Foreign Investments

The analysis of international legal doctrine, as well as international judicial and arbitral practice, leads to the conclusion that international investment relations are of a proprietary nature (Howse, 2019) [8]. When making capital investments, a foreign investor expects to receive income, typically in monetary form or another type of property. The national legislation of the host state receiving the foreign investment grants the foreign investor the opportunity to acquire private property and to exercise ownership rights over the acquired assets and rights within its territory.

International law, in turn, regulates the regime and protection of a foreign investor’s property. However, this regulation does not apply to all property, but specifically to that which has been acquired through foreign investments. One of the distinguishing features of international investment law is that it governs so-called direct investments, rather than portfolio investments (Collins, 2023) [6].

The essence of legal regulation in investment activity lies primarily in ensuring guarantees for foreign investments. Legal guarantees for foreign investments are established both by the national law of the host state and by international law. At present, in the absence of an international treaty governing foreign investment, investors must rely on the guarantees provided by domestic legislation.

During the early development of international investment relations, the lack of international treaties in this field was compensated by customary international law, which is understood as "a rule of conduct that has developed in international practice and is recognized by subjects of international law as legally binding." As noted by G. Schwarzenberger, “The rules for the protection of foreign investments, operating in the form of international custom, have traditionally been viewed by international law within the context of the treatment of aliens” (Schwarzenberger, 1970) [16, р.261-262].

However, the main problem in applying custom lies in determining the legally binding nature of a given rule. Today, to address this issue, specialists typically refer to the Statute of the International Court of Justice, specifically subparagraph “b” of paragraph 1 of Article 38, which outlines the characteristics of international custom. These characteristics include universal recognition, uniform application, and acceptance as a legal norm (Zammit Borda, 2013; Fuentes & Fuentes, 2016) [18, р.649-661; 7, р.51-136].

It should be noted that even with universal recognition and consistent application, a rule cannot yet be considered an international custom. The presence of these features merely indicates the emergence of a usage, deviation from which is not regarded as an international legal violation. Only the recognition of a rule as a norm of international law transforms a usage into a customary international legal norm.

For example, the "international minimum standard of civilization," was not codified in any binding international treaty at the time. Nevertheless, it was applied in practice as a customary norm of international law. In legal literature, several generalized principles of this standard are identified, including the following:

1. The obligation of foreign individuals to comply with the laws of the host state;
2. The obligation of the host state to grant foreign individuals a legal regime consistent with the developed international minimum standard;
3. The right of the host state to expropriate the property of foreign individuals located on its territory only on grounds recognized under international law;
4. Measures taken by the state against foreign individuals must be lawful, follow established procedures, and provide the individuals with the right to challenge such measures;
5. Foreign individuals may seek protection of their violated rights before international judicial bodies only after first exhausting local remedies within the host state. (Brauch, 2017) [5]

This example illustrates how international legal custom, even in the absence of treaty codification, can exert binding legal force when universally recognized and consistently applied.

Disputes between states concerning investments have traditionally been resolved in accordance with the norms of customary international law. International arbitral tribunals have often relied on international custom as a source of law in resolving various investment disputes.

For example, in the case of Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, the arbitral tribunal applied a customary norm of international law that establishes state responsibility for the unlawful actions of its officials when acting in the course of their official duties(Southern Pacific Properties, 1993) [].

In Benvenuti and Bonfant SRL v. The Government of the People’s Republic of the Congo, the ICSID tribunal referred to the obligation to provide compensation in the event of nationalization as a customary norm of international law (S.A.R.L., 1993) [17].

Similarly, in Asian Agricultural Products Limited v. Democratic Socialist Republic of Sri Lanka, the tribunal recognized the state’s duty to exercise due diligence in its dealings with the investor as a rule of customary international law (Asian Agricultural Products Limited, 1991) [2].

These cases illustrate how arbitral practice has contributed to reinforcing and clarifying customary legal standards in the context of international investment disputes.

It should be noted, however, that the majority of customary international law norms were formed based on the practice of developed countries during a time when developing nations were largely dependent on them. Therefore, it is difficult to assert that these customs reflected the position of the majority of subjects of international law.

With the attainment of independence, former colonies increasingly rejected the obligation to comply with rules established by industrialized nations without their participation. This became one of the key reasons for the revision of customary international law norms that had emerged in the early stages of the development of international investment relations.

A clear example of this revision is the emergence of the “national treatment standard” doctrine, promoted by Latin American countries as a counterbalance to the international minimum standard of civilization (Brar, 2021) [4, с.235-270]. This doctrine emphasized the sovereign right of states to treat foreign investors in the same manner as domestic investors, thereby rejecting the application of external standards imposed through earlier international customs.

Another reason for the revision of the customary international legal norms under discussion was the wave of nationalization acts in the 20th century across Russia, Eastern European countries, as well as in parts of Asia, Africa, and Latin America. As a result of these nationalizations, many established customary international norms regulating foreign investments lost their relevance and practical significance.

Following these developments, states made multiple attempts to draft international conventions concerning the legal status of foreign investors. For instance, in 1929, the League of Nations convened a diplomatic conference on this issue, and in 1930, the Hague Conference on Private International Law examined the question of state responsibility for damage caused to foreigners and their property.

However, these initiatives ultimately failed, largely due to the position taken by Latin American countries, which opposed the imposition of international legal standards that might infringe on their sovereign right to regulate property and investment within their territories.

In contemporary international investment relations, there is a clear interaction between treaty law and customary law. The necessity of applying custom is affirmed in many international treaties and national legal acts. Customary norms often become part of treaty law through their codification in international agreements. A significant portion of modern treaty-based international law consists of norms that initially developed as customary rules.

The phrase "full and unconditional protection of rights and interests," which is widely used today in bilateral investment treaties (BITs), corresponds to the notion of "full protection and security" (Bodea, 2017) [3]. This concept was originally employed in customary international law and began to be formalized in treaties on friendship, commerce, and navigation as early as the 18th and 19th centuries. Thus, a customary norm of international law evolved into a treaty-based legal standard.

Customary international law continues to play an important role in defining the legal status of foreign investments. For example, customs have directly influenced the codification of fair and equitable treatment (FET) standards in international treaties, reinforcing the normative framework that governs the treatment of foreign investors across jurisdictions (Islam et al, 2018) [9].

Thus, it can be stated that customary international law continues to retain its significant importance today, despite the fact that intergovernmental treaties now play a central role in the international legal regulation of investment relations.

Despite the existence of customary international law and both bilateral and multilateral international treaties, there remain gaps in the international legal regulation of foreign investments. These gaps are largely filled by soft law instruments, which are adopted within the frameworks of various international organizations such as the United Nations, the World Bank, the United Nations Commission on International Trade Law (UNCITRAL), the Organisation for Economic Co-operation and Development (OECD), the International Labour Organization (ILO), and others.

Soft law norms, while not formally binding, often influence the interpretation of treaty provisions, shape investor expectations, and guide the behaviour of both states and investors. They serve as flexible tools for harmonizing investment standards, promoting responsible business conduct, and addressing emerging issues that may not yet be fully covered by binding legal frameworks (Kirton & Trebilcock, 2017) [11].

Resolutions of the United Nations General Assembly and other soft law instruments are an essential component of the system of international legal regulation of foreign investments. Many soft law acts contribute to the formation of customary international norms or serve as a basis for the development of international treaties.

Provisions contained in resolutions that have been adopted by a majority of states and are applied in practice as binding norms can, in fact, be regarded as sources of modern customary international law. Notable examples include the Universal Declaration of Human Rights, adopted by UN General Assembly Resolution 217 A (III) on December 10, 1948, and Resolution 626 (VII) of the UN General Assembly, dated December 21, 1952, titled “The Right to Freely Exploit Natural Wealth and Resources” (Assembly, 1948; Schrijver, 1995). [11, р.14-25]

The latter confirmed the right of all peoples to freely dispose of their natural wealth and resources. In essence, this resolution established the principle that all states have the sovereign right to nationalize foreign property within their territory, and such actions could not be challenged as violations of international law.

Soft law instruments may also evolve into binding norms of international law through treaty mechanisms, especially when their provisions are later incorporated into formal international agreements. Through this dynamic process, soft law serves as a bridge between legal innovation and formal codification, playing a crucial role in shaping the evolving framework of international investment law.

Conclusion

In conclusion, although treaty law continues to serve as the primary foundation of international investment regulation, customary international law and soft law instruments play an indispensable complementary role. Customary norms, developed through state practice and accepted as binding, have historically filled the legal vacuum in the absence of treaties, providing early standards for the treatment of foreign investors. Over time, many of these norms—such as the principles of fair and equitable treatment, full protection and security, and compensation for expropriation—have been codified into bilateral and multilateral investment treaties.

At the same time, the increasing complexity and diversification of global investment flows have exposed regulatory gaps that traditional treaty mechanisms are often too rigid or outdated to address. In this context, soft law instruments—including UN General Assembly resolutions, OECD guidelines, and World Bank frameworks—have emerged as flexible and responsive tools that influence state behavior, arbitral reasoning, and even treaty drafting. Despite their non-binding nature, these instruments often reflect a global consensus or evolving normative expectations, and in certain cases, they lay the groundwork for the development of new customary norms or future binding treaties.

Moreover, the role of developing countries in contesting and reshaping the early norms of international investment law underscores the dynamic and negotiated nature of the field. Doctrines such as the national treatment standard and the principle of permanent sovereignty over natural resources—first articulated through soft law—reflect a growing recognition of state sovereignty and developmental priorities.

Ultimately, the interaction between treaty law, custom, and soft law forms a pluralistic legal framework that enables the international community to adapt to changing realities in investment relations. Strengthening the coherence and legitimacy of this framework will require continued dialogue among states, international institutions, and legal scholars to ensure that the rights of investors and the regulatory autonomy of host states are balanced in a fair and sustainable manner.

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