The evolution of substantive investment protections in recent trade and investment treaties

12 November 2018
  • Substantive standards in new international investment agreements converge, including between Europe and North America.
  • Typical features of convergence include market access commitments, broad most-favoured-nation and national treatment clauses, a narrowing of some substantive standards, and broad use of exceptions.
  • There is a clear trend towards the conclusion of new generation international investment agreements.


Over the years, the substantive content of international investment agreements (IIAs) has shifted to reflect political change and to respond to lessons learnt in investor-state dispute settlement (ISDS). An exploration of substantive standards in recent treaty practice finds that new IIAs converge to an astonishing degree.[1]

New IIAs converge on the definition of covered investment. While continuing with the tradition of open definitions, new IIAs require that covered assets have the characteristics of an investment, including commitment of capital or other resources, an expectation of profit or an assumption of risk. New IIAs further tend to exclude some types of assets from their scope, such as claims to payment resulting solely from the commercial sale of goods and services.

Another element present in recent IIAs is the requirement that the investor have substantial business activities in the territory of either the host state, or the home state or other states. This requirement is included either in the definition of covered investors – typically referring to business activities in the territory of the host state – or in a denial of benefits clause – often referring to business activities in the territory of the home state or other states. But a distinction needs to be drawn between including the requirement in the definition of the term investor or in the denial of benefits clause. The effect of the former will always be to exclude investors without substantial business activities from the treaty’s protection. By contrast, the effect of the latter is a lot more uncertain.

New generation IIAs also tend to extend the national treatment (NT) and the most-favoured-nation (MFN) treatment to the pre-establishment phase. Investment protection at the pre-establishment stage is also granted by inserting a provision in relation to the treaty’s scope – e.g. providing that a covered investor is a party, a national or an enterprise of a party that “seeks to make, is making, or has made an investment” in the territory of the other party.

A further feature of new IIAs is a tendency to exclude application of the MFN treatment to ISDS clauses. The EU-Canada Comprehensive Economic and Trade Agreement (CETA), for example, specifies that the MFN standard “does not include procedures for the resolution of investment disputes between investors and states provided for in other international investment treaties and other trade agreements” (Art. 8.7 para. 4). But it is also possible to disallow application of the MFN clause to ISDS provisions with a so-called “disappearing Maffezini footnote,” suppressed from the treaty text, but which the parties recognise as part of the agreement’s negotiating history and expressive of their understanding of the scope of the standard. Some new treaties further render the MFN clause inapplicable, unless the state has taken actual measures to give preferential treatment to other foreign investors.

Fair and equitable treatment (FET) and full protection and security are consistently narrowed in new IIAs, according to two approaches. The first is to tie the standards to the customary international law minimum standard of treatment, as has been habitual in North American treaty practice. The second is to describe the content of each standard. For FET, this consists in identifying in a quasi-exhaustive manner what situations are covered by the standard, such as if a measure constitutes denial of justice, a fundamental breach of due process, manifestly arbitrary conduct, harassment, coercion, abuse of power or similar conduct in bad faith. For full protection and security, the second approach is to limit the standard to the physical protection of investments, thus leaving outside its scope “legal protection.”

The inclusion of interpretative annexes on indirect expropriation has become standard practice in relation to expropriation provisions. The annexes provide guidance on how to determine if there has been an indirect expropriation, and they incorporate (a mitigated form of) the police powers doctrine. This is usually expressed in the following terms: except in rare circumstances, non-discriminatory regulatory measures designed and applied to protect legitimate public welfare objectives do not constitute indirect expropriations. Another common provision is an exclusion or exception for the issuance of compulsory licenses granted in relation to intellectual property rights. In addition, all IIAs examined include an exception to their provision on capital transfers for balance of payments’ difficulties.

Increasingly, new IIAs incorporate public policy concerns and draft exclusions and general exceptions applicable to the entire treaty. All IIAs in the research sample (see footnote 1) include an essential security interests exception. According to the CPTPP, nothing in the agreement shall be construed to “preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests” (Art. 29.2). This is a self-judging exception allowing the host state to be the sole judge of whether the exception is applicable. Most treaties also contain an exception or exclusion relating to subsidies. Three out of the new IIAs examined (CETA, PACER Plus, and the China-Hong Kong CEPA Investment Agreement) include general exceptions modelled on Article XX of the General Agreement on Tariffs and Trade (GATT).

Figure 1. A snapshot of recent international investment agreements (2014-2018)

Source: Author

In summary, based on an examination of new generation investment agreements, new IIAs converge to a large extent with respect to their substantive standards. This reveals that the persistence of the old generation model and its ability to convince are slackening. Old generation IIAs will probably remain dominant for some time as they form the bulk of existing agreements. But there is a clear trend towards displacing them with the conclusion of new generation international investment agreements with the attributes described in this post.


This post is derived from the paper The Evolution of Substantive Investment Protections in Recent Trade and Investment Treaties authored by Catharine Titi and commissioned by ICTSD under the RTA Exchange, jointly convened with the Inter-American Development Bank.

Catharine Titi is Research Associate Professor at the French National Centre for Scientific Research (CNRS)-CERSA, University Panthéon-Assas Paris II

[1] The research focuses on eight IIAs, selected with a view to geographical representativeness. These are the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (2018); the EU-Singapore Investment Protection Agreement (IPA) (2018); the Pacific Agreement on Closer Economic Relations (PACER) Plus (2017); the Intra-MERCOSUR Cooperation and Facilitation Investment Protocol (2017); the China-Hong Kong Closer Economic Partnership Arrangement (CEPA) Investment Agreement (2017); the EU-Canada Comprehensive Economic and Trade Agreement (CETA) (2016); the Pacific Alliance Additional Protocol (2014); and the ASEAN-India Investment Agreement (2014).