Constraints on the State’s Right to Screen Foreign Investments Prior to Market Entry
Authors: Steffen Hindelang (Uppsala University; CELIS Institute), Helene Schramm (CELIS Institute) and Liam McGrath (CELIS Institute)
Introduction
As a starting point, a State enjoys broad authority to regulate the admission of foreign investment into its territory, including by reviewing, conditioning, or prohibiting a contemplated transaction before it is implemented. This can be motivated by national security considerations or may follow an economic needs test. This authority flows from territorial sovereignty and from the general proposition that restrictions on State freedom cannot simply be presumed (see PCIJ, The Case of the SS Lotus (France v Turkey), Judgment, 1927, paras. 44-47).
A State may, however, voluntarily choose to qualify the exercise of its screening powers by concluding international investment agreements (“IIAs”). IIAs typically protect covered investors and covered investments against discriminatory treatment, unfair or inequitable treatment, unlawful expropriation, arbitrary or unreasonable impairment, and, where applicable, denial of effective means, due process, or full protection and security. If the host State fails to comply with these obligations, and if the treaty contains a valid offer to arbitrate, investors may seek to bring claims through investor–State dispute settlement (“ISDS”).
The constellation of foreign direct investment screening prior to market entry raises particular questions regarding the scope of the relevant IIA. Ultimately, it is the treaty that determines the substantive protection and the jurisdiction of a tribunal to adjudicate a pre-establishment dispute.
For an arbitral tribunal to have jurisdiction, the relevant IIA must cover the dispute ratione personae, materiae, temporis, and ratione voluntatis. In practical terms, this means that there must be a qualifying investor, a qualifying investment or protected pre-establishment activity, a dispute falling within the temporal scope of the treaty, and consent to arbitration. Where arbitration is brought under the ICSID Convention, the dispute must also arise ‘directly out of an investment’ within the meaning of Article 25(1) of the ICSID Convention (see also Salini v. Morocco, Decision on Jurisdiction, 2001, para. 52; reiterated by several ICSID- and non-ICSID tribunals).
The pre-establishment screening context therefore gives rise to two fundamental questions.
First, can there already be an ‘investment’ in circumstances where the contemplated acquisition is blocked outright or approved only subject to conditions, i.e., before the transaction that triggered screening has been allowed to proceed? As will be shown, there are constellations in which the definition of an ‘investment’ under an IIA is broad enough to encompass activities, assets, rights, or contractual arrangements that precede the triggering of the screening procedure. In such cases, the dispute is not truly a ‘pre-establishment’ dispute: an investment has already been made, and the investor may invoke the full range of treaty protections in respect of that investment. (I).
Second, if no ‘investment’ has yet been made, can the IIA nevertheless protect an investor in the pre-establishment phase? Some modern IIAs, e.g., those concluded by the USA, Canada and Japan, expressly extend national treatment (“NT”) and most-favoured-nation (“MFN”) obligations to the establishment, acquisition, and expansion of investments. Others contain provisions on admission, promotion, or performance requirements that may, depending on their formulation, constrain the host State’s conduct before the investment has been established. These provisions can be highly relevant for investment screening because they may subject the screening process itself, and not merely the treatment of an already admitted investment, to treaty scrutiny (II).
At first glance, one might assume that an investor whose transaction is blocked prior to market entry is necessarily left without protection under international investment law, because there is not yet an investment to which treaty standards can attach. That assumption is too simple. In the following, we will show that international investment law has developed several doctrinal routes through which screening decisions may be reviewed during the ‘pre-establishment’ phase of an investment, thereby constraining the State’s inherent right to condition access of foreign investment.
I. Drawing the Line: Pre-Investment Activity or Established Investment?
In order for an investor to invoke the substantive protections of an IIA, it must show that an ‘investment’ has been made or established within the meaning of the relevant IIA and, where applicable, Article 25(1) of the ICSID Convention. If no protected investment exists, the tribunal will ordinarily decline jurisdiction. Only if an investment is found to exist will the investor normally benefit from the full range of post-establishment protections under the treaty.
The difficult question is when, in the screening context, an investment can be considered to have been made. A distinction must be drawn between two scenarios. The first concerns economic activity that remains merely preparatory: negotiations, exploratory expenditures, preliminary commercial contacts, or an intended transaction that has not yet crystallised into protected assets, rights, or commitments. The second concerns economic activity that precedes the screening but already constitutes an investment under the applicable IIA: for example, contractual rights, financing arrangements, local subsidiaries, management rights, or other legally protected assets connected to the contemplated transaction.
In practice, the line between these two scenarios is often difficult to draw. The factual circumstances regarding the commencement of investment activities vary considerably, as do the definitions of ‘investment’ across the IIAs.
Two grey areas are particularly important for investment screening: first, assets and contractual arrangements that may themselves constitute protected investments (1); and second, treaty language covering ‘activities associated with an investment’ (2). Both categories show that economic activity occurring before the initiation or completion of a screening process may, in appropriate circumstances, already trigger treaty protection.
1. Assets and Contractual Arrangements as ‘Investments’
Before the investor’s intended transaction triggers the screening procedure, the investor might have already made relevant economic commitments within the host State. These may include the acquisition of assets, the establishment of a local corporate vehicle, financing arrangements, contractual undertakings, preliminary shareholding rights, or other legally protected economic interests. Depending on the applicable IIA, such rights may fall within the definition of ‘investment’.
In general, tribunals have been reluctant to find a protected investment where the claimant has undertaken no binding commitment and possesses no asset or right of independent economic value (see Dolzer et al., 2022, p. 143). Some tribunals have refused to accept pre-investment expenditures or other preparatory activities lacking independent financial value as protected investments (see Mihaly v. Sri Lanka, Award, 2002, paras. 60-61; William Nagel v. The Czech Republic, Final Award, 2003, paras. 325-329).
However, other tribunals have accepted jurisdiction where the claimant’s activities went beyond mere preparation and involved legally or economically significant commitments connected to an investment project although it ultimately failed due to the host State’s interference (see Nordzucker v. Poland, First Partial Award, 2008, paras. 216-217; RSM Production v. Grenada, Award, 2009, paras. 253-257). Notably, the tribunal in Mason Capital v. Korea (Decision on Respondent’s Preliminary Objections, 2019, para. 216) held that commitments need not necessarily be financial in nature and accepted ‘investment decision-making, management and expertise’ as forms of the investor’s contribution.
Contractual rights are particularly important in this regard. Many IIAs, such as Art. 1(6)(c) of the ECT, define ‘investment’ broadly to include claims to money or claims to performance having economic value and associated with an investment. Recent case law also suggests that private-law arrangements between private parties may, where they go beyond ordinary commercial transactions, qualify as protected investments (see e.g., Joseph Houben v. Burundi, Award, 2016, paras. 127-130; Theodoros Adamakopoulos v. Cyprus, Decision on Jurisdiction, 2020, para. 300; Thomas Gosling v. Mauritius, Award, 2020, paras. 130-135, 144-146, 166(i)). These could include, among others, shareholding and associated management arrangements in a locally incorporated company, private-law contracts integral to operating the enterprise, private-law financial instruments with banks or contracts integral to a real estate or resort development. The tribunal in Mabco v. Kosovo (Decision on Jurisdiction, 2020, paras. 309-312) adopted a particularly wide notion of ‘investment’ and considered that the attempted purchase of shares constituted ‘a claim to a performance having an economic value’ under the IIA. Even though this approach was subject to criticism (see Dissent on Jurisdiction, Reinisch, 2020) and should therefore be relied upon with caution, it nevertheless illustrates the possibility that, in some treaty settings, even rights arising in the course of an attempted acquisition may be framed as protected economic interests.
Accordingly, where actions – other than the intended transaction subject to screening – involve the acquisition of assets, contractual relations, shareholding interests, financing commitments, or other legally protected economic positions, it is conceivable that they already constitute the protected ‘investment’, instead of being a mere ‘pre-investment’ issue. The investor may already possess a protected investment, even if the later transaction giving rise to the screening decision has not yet been completed.
This matters because investment projects are often economically integrated. If interrelated economic actions are treated as components of a single overall investment (see Inmaris v. Ukraine, Decision on Jurisdiction, 2010, para. 92), then a screening decision affecting one component may interfere with the investment as a whole. Therefore, the host State’s screening decision, although formally directed at a future acquisition, may have consequences for a part of an investment project that qualifies already as an established ‘investment’ within the meaning of an IIA and may, thus, have to comply with the State’s obligations under the applicable IIA.
2. ‘Activities Associated with an Investment’
A second grey area arises where treaties protect not only investments themselves but also ‘activities associated with an investment’ (see, e.g., Art. 1 of the Mongolia-US BIT (1994); Art. 1(1)(e) of the US-Ukraine BIT (1994); Art. 1(1)(a) of the Australia-Czech Republic BIT (1993)). Such a definition may provide protection where an investor already has ongoing business relations in the host State. Any intensification of these established relations requiring prior approval would qualify as an ‘associated activity’.
In Luigiterzo Bosca v. Lithuania (Award, 2013, paras. 165-178), the tribunal held that loose business relations within Lithuania, including a service agreement with a Lithuanian company, constituted the ‘investment’, while the subsequent participation in the tender was not itself an investment but rather an ‘associated activity.’ Thus, the broad definition in the Italy-Lithuania BIT (1994) including ‘activities associated with an investment’ provided the basis for the tribunal’s jurisdiction over the dispute, allowing it to examine the tender process in light of the fair and equitable treatment (“FET”) standard. This reasoning may be relevant for investment screening. Even if the contemplated transaction is economically more significant than the pre-existing activity, the latter may still provide the jurisdictional anchor necessary to bring the screening decision within the treaty’s scope.
II. Protection of the Investor in the Pre-Establishment Phase
Even where no investment has yet been made, and no ‘associated activity’ can be identified, some treaty may still protect investors in the pre-establishment phase. Three categories of provisions are especially relevant. First, some treaties expressly extend non-discrimination obligations to the pre-establishment phase (1). Second, broadly formulated provisions on admission and promotion carry potential to extend other standards of treatment, such as FET and full protection and security (“FPS”) standards to the pre-establishment phase of an investment (2). Third, some modern treaties prohibit specific entry barriers, including performance requirements imposed in connection with the establishment or acquisition of an investment (3). It should be noted that these provisions have repercussions not only on the substantive protection available to the investor, but also on the jurisdiction of an arbitral tribunal.
1. Explicit Coverage of the Pre-Establishment Phase in Non-Discrimination Obligations
The vast majority of IIAs do not cover the pre-establishment phase of an investment in its non-discrimination obligations. According to UNCTAD’s mapping of 2,808 treaties, only 265 contain a NT clause covering both pre- and post-establishment phases, and only 294 include a similar provision with respect to MFN clauses.
In particular, the IIAs concluded with the US, Australia, Canada, Japan and the EU introduce a ‘liberalised model’ and expressly extend NT and MFN obligations to the ‘admission’ or ‘establishment’ of investments. Art. 14.4(1) of the USMCA (2018) reads: ‘Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.’ (see also Arts. 14.4(2), 14.5(1)-(2) of the USMCA (2018); Arts. 9.4.(1)-(2), 9.5(1)-(2) of the CPTPP (2018); Arts. 2(1), 3(1) in conjunction with Art. 1(d) of the Kuwait-Japan BIT (2012); Arts. 8.6(1), 8.7(1) of the Canada-EU CETA (2016); Arts. 5(1)-(2), 6(1)-(2) of the ASEAN CIA (2009)).
The conclusion that these non-discrimination obligations extend to the pre-establishment stage is reinforced where such obligations protect ‘potential investors’. Art. 1 of the 2012 US Model BIT defines an investor as ‘a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of the other Party’. Several other States have decided to include the ‘potential investor’ in their IIAs (see, e.g., Art. 6.1 of the India-Singapore CECA (2005); Art. 8.1 of the Canada-EU CETA (2016); Art. 1.1 of the CPTPP (2018); Art. 1 of the 2021 Canada Model BIT; Art. 14.2(g) of the Australia-Japan EPA (2014)).
These provisions create what Salacuse describes as ‘relative’ or ‘conditional’ rights of establishment (Salacuse, 2021, pp. 266-267), in that they exist only when other parties have been treated more favourably. In contrast, an absolute right of establishment would allow investors from treaty partners to invest unconditionally in a host State (the only significant international treaty that grants such a right remains the Treaty on the Functioning of the European Union). Consequently, less favourable conditions or practices at the stage of the ‘establishment’ or ‘acquisition’ of an investment compared to nationals of the host State (NT standard) or investors from third States (MFN standard) can violate the IIA.
In the investment screening context, an extended NT clause may be relevant where the screening requirement itself applies only to foreign investors. The mere fact that foreign investors must undergo screening, while domestic investors are not subject to equivalent requirements, may constitute differential treatment at the establishment or acquisition stage. The sole requirement to make the foreign investor undergo screening, irrespective of the screening’s outcome, may therefore trigger a market access violation (Abel, 2026, p. 50). In cases where screening is applied to both national and foreign investors, for example in Sweden and Singapore, a de jure discrimination would be precluded. However, NT and MFN standards do also cover de facto discrimination. This means that, even where screening measures are formally neutral, a stricter application to certain nationalities without sufficient justification may constitute a breach of an IIA. In such cases, the host State might argue that the differential treatment arises from legitimate policy grounds (see, e.g., Pope & Talbot v. Canada, Award on the Merits of Phase 2, 2001, para. 78; Bilcon v Canada, Award on Jurisdiction and Liability, 2015, para. 723), such as national security or public welfare. The tribunal would then, for example, have to assess the adequacy of the invoked security grounds in vulnerable industries and sectors. However, following Voon and Merriman (2023, p. 94), it is plausible to argue that imposing additional approval requirements on all foreign investments, which do not apply to domestic investments, constitutes inherently ‘nationality-based’ discrimination (see, e.g., Total SA v. Argentina, Decision on Liability, 2010, para. 213; Merrill & Ring Forestry LP v. Canada, Award, 2010, para. 94; Cargill Inc v. Mexico, Award, 2009, para. 220), and therefore a potential violation of the NT obligation.
MFN clauses raise a different set of issues. An investor might seek to invoke a more favourable substantive protection found in another IIA, such as a broader FET clause, a more favourable expropriation provision, or a stabilisation-related commitment. Despite being traditionally accepted (see, e.g., EDF International SA v. Argentina, Annulment Decision, 2016, para. 237; MTD Equity v. Chile, Award, 2004, para. 104), this approach is highly debated today (see Batifort and Heath, 2017, pp. 873-913) and sometimes even explicitly excluded in IIAs (see, e.g., Art. 5(3)(b) of the Brazil-Colombia BIT (2015)). MFN may also be relevant where a screening law sets different thresholds for specific countries (consider, e.g., the US CFIUS regime, which ‘privileges’ certain States as ‘excepted foreign States’) – unless, again, such distinctions were justified by non-discriminatory policy considerations (see, e.g. Parkerings-Compagniet AS v. Lithuania, Award, 2007, para. 371(iii)).
We must, however, address a fundamental point that cuts against optimism regarding the potential to successfully invoke NT and MFN standards during the pre-establishment phase: treaties following the ‘liberalised model’, in the same breath, often include sector-specific carve-outs combined with either a ‘positive’ or ‘negative’ list approach (Salacuse, 2021, p. 268). Sectors deemed ‘sensitive’ or ‘critical’, such as defence, energy, telecommunications, transport, media, critical infrastructure, and dual-use technologies are frequently excluded from some or all liberalisation commitments (see e.g. Art. 8.15 in conjunction with Annex II of the Canada-EU CETA (2016), which furthermore, under Art. 8.2(4), excludes claims under the establishment section entirely, leaving only State-State dispute settlement available; Japan listed investment screening for several sectors among its non-conforming measures in Art. 10.8(2) in conjunction with Annex III of the RCEP (2020)). Ultimately, these exclusions considerably curtail the relevance of NT and MFN pre-establishment protections in precisely those sectors most likely to be subject to screening.
2. Broadly Formulated Provisions on Admission and Promotion
A second possible pathway arises from broadly formulated admission and promotion clauses. 441 out of 2,808 UNCTAD’s mapped treaties contain an investment promotion clause in the text of the agreement (not preamble). These clauses vary considerably. Many simply confirm that each State shall encourage or admit investments in accordance with its laws and regulations. Such language usually preserves, rather than limits, the host State’s discretion to determine which investments may enter its territory (see Dolzer et al., 2022, pp. 136-137; White Industries v. India, Final Award, 2001, paras. 9.2.1-9.2.13).
Some of these admission and promotion clauses however contain a wording that may suggest the extension of the application of certain substantive standards to ‘activities in the making’ of an investment. Some contain the obligation to grant FET ‘in every case’ (see, e.g., Art. 2(2) 2008 German Model BIT), others the obligation to grant FET and FPS ‘at all times’ (see, e.g., Art. 2(2) 2016 Czech Republic Model BIT; Art. 5(1) 2019 Slovakia Model BIT). Whether such language extends protection to investments in the making depends on the structure and wording of the treaty as a whole. It should not be assumed automatically.
Art. 2 of the Germany-Mexico BIT (1998) provides an instructive example:
(1) Each Contracting State shall encourage in its territory, as far as possible, the investments by nationals or companies of the other Contracting State and admit such investments in accordance with its laws and regulations in force.
(2) Each Contracting State shall grant to the investments made by nationals or companies of the other Contracting State under its laws and regulations, full protection and security.
(3) Each Contracting State shall in any case accord investments of the other Contracting State fair and equitable treatment. Neither Contracting State shall in any way impair by arbitrary or discriminatory measures the operation, management, maintenance, use, enjoyment or disposal of such investments.
Art. 2(3) first sentence regarding the FET standard combines ‘in any case’ with the term ‘investments’, so that it is not entirely clear from the wording, whether it also entails ‘pre-investment activities’. In alignment with Wagner’s interpretation (Wagner, 2024, pp. 130-131), from a contextual perspective, the expression ‘in any case’ can only be understood as extending the application of the FET standard, since restricting it to the post-establishment phase would render the wording meaningless. This interpretation is further supported by the object and purpose of the treaty, which is the mutual promotion and protection of investments. The absence of transparency or the implementation of arbitrary measures in the admission process can be particularly detrimental to the investment climate. A very similar formulation in Art. 2(1) of the Germany-Poland BIT (1989) led the tribunal in Nordzucker v. Poland (First Partial Award, 2008, paras. 182-185) to extend the phrase ‘in any case’ to investments in the making, while excluding investments that are merely intended.
The potential of such broadly drafted promotion and admission clauses should by no means be underestimated, as they could extend the FET and FPS standards to the admission process. In the screening context, they may provide a basis for arguing that arbitrary, discriminatory, opaque, or procedurally abusive conduct during the admission process breaches the treaty.
3. Elimination of Specific Entry Barriers
A third category consists of treaty clauses that prohibit specific entry barriers. Some modern treaties prohibit certain performance requirements ‘in connection with the establishment, acquisition […]’ of an investment such as export commitments, domestic content percentage or technology transfer (see, e.g., Art. 14.10 of the USMCA (2018); Art. 7 of the ASEAN CIA (2009)). Notably, the prohibition of such requirements at the establishment stage might interfere with any conditions that screening authorities seek to impose on conditionally approved investments in the form of mitigation decisions and agreements, an issue examined further in blog post (9) of the series.
Similarly, some treaties contain ‘market access’ provisions aimed at eliminating specific quantitative or structural barriers (see, e.g., Art. 8.4 of the Canada-EU CETA (2016), styled on Article XVI GATS). As noted above, however, Art. 8.2(4) of the Canada-EU CETA (2016) excludes such claims from ISDS. Thus, while market-access and establishment obligations may exist as treaty obligations, they may not necessarily be enforceable by investors through ISDS.
Conclusion
The considerations outlined above demonstrate that investors facing screening decisions are not necessarily without protection under international investment law at the pre-establishment phase (understood in a loose economic sense). Depending on subtle nuances in the wording of ‘investment’ definitions and substantive standards, it is indeed possible to identify avenues through which investors may challenge the screening decisions of States based on their protections as set out in IIAs.
The question of investor protection against screening decisions prior to market entry is not solely a matter of ‘pre-establishment’ protection in a strict legal sense. Rather, there are scenarios in which ‘investments’ or ‘activities associated with an investment’ are legally considered ‘established’ before the actual screening procedure is triggered, allowing the full range of protective rights under the treaty to be invoked. This is particularly relevant in the context of asset acquisitions, contractual rights, shareholdings, or financing arrangements.
Even in the absence of an ‘investment’, there are emerging – albeit still relatively rare – formulations of substantive standards, that potentially impose not only non-discrimination, but also FET and FPS obligations on the State vis-à-vis the potential investor aiming to enter the State’s market. These pre-establishment commitments – even though often accompanied by reservations and sectoral carve-outs – reflect outward investment interests. They are an expression of part of the architecture of international investment law, which aims to liberalise investment. Whether moving beyond protecting established positions to addressing barriers to market entry itself will remain on the political agenda in the current geopolitical environment remains to be seen.
