The reasons for foreign investment from the investor’s perspective can be categorized into three groups:
1. Capital accumulation and the lack of domestic need for the relevant capital in the investor’s home country
2. Disparity in the benefits of investment in the investor’s own country
3. Incentive policies and measures adopted by the host countryHowever, before initiating the process of capital transfer, the investor may, upon risk assessment, refrain from investing due to the absence of legal security for the investment.
One of the most controversial issues in this regard is the Calvo clauses in investment contracts, which were frequently seen in international petroleum agreements prior to the 1950s.
Simply put, the Calvo clause means that the investor waives the right to diplomatic protection by their home government and accepts the jurisdiction of the host country’s domestic courts for all disputes.
Diplomatic protection refers to all legal actions that a state may take against another state to seek redress for financial, physical, material, or moral harm caused to its nationals.Regarding the legal nature of the Calvo clause, two main views exist:
🔸First view (those who consider the Calvo clause valid): The essence of diplomatic protection is that the injured party, by request, effectively authorizes their home state to pursue the matter before international forums. Therefore, if someone contractually waives this right to authorize their home state, based on the principle of contractual obligation, they can no longer invoke diplomatic protection for that purpose.
🔸Second view (those who consider the Calvo clause invalid): Since diplomatic protection is recognized in international custom as an inherent right of states, the state may pursue such protection independently. This right is not contingent upon the request of the national or their contract with the host country.
🔹Historically, the 1907 Drago-Porter Convention restricted the use of force for debt recovery and introduced arbitration institutions into this domain. Prior to this, regional disputes were often sparked by non-repayment of investment returns and principal.
🔹Host countries, emboldened by the Drago-Porter Convention and the abolition of capitulation treaties, sought to include Calvo clauses in contracts. Beyond the presence of Calvo clauses in investment agreements, we also witnessed the emergence of “Calvo Treaties,” in which the investor’s home state committed not to provide diplomatic protection to its nationals against the host country. Such treaties were another step toward strengthening the sovereignty of the host state, though they were not widely welcomed by governments.
📚 Sources: ● R. Dolzer et al., Principles of International Investment Law, 3rd Edition, Oxford, 2022● Hasibi, Be-Azin; “Minimum International Standards and Protection of Foreign Investors,” Legal Research Quarterly, 2011 Jus Mundi Wikipedia Oxford Public International Law
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