Establishing Effective Legal and Regulatory Frameworks: One Way to Assist Developing Host States in Negotiating Investment Contracts

By | November 10, 2022

Large-scale investment contracts, especially in extractive industries, infrastructure, and agriculture, often involve foreign direct investment (“FDI”). Due to their scale, complexity, and typical long-term horizons, these contracts can have a substantial and far-reaching impact on host States. They can affect host States’ public revenue, natural resources, economic growth, and environmental and social development for multiple generations. Therefore, there are benefits for negotiating parties to get the contracts right at the outset. However, compared to multinational enterprises (“MNE”), developing countries sometimes lack financial and human resources, multidisciplinary expertise, and access to information. These disadvantages are often amplified in complex, large-scale, and multidisciplinary contract negotiations. They may lead to ambiguous or unfavorable terms for developing host States, which can later result in contract renegotiation or breach of contract. 

As explained in my recent paper (co-authored by Vanessa Tsang), the obsolescing bargaining model, first coined by Raymond Vernon, conceptualizes situations where foreign investors hold the cards during initial contract negotiation; however, upon investment, host States may gradually gain the upper hand due to increasing alternative investments and investors’ sunk costs. Host States could then attempt to renegotiate more favorable terms or breach the original contracts. Although scholars have debated in recent years whether the obsolescing bargaining model has obsolesced, the way MNEs handle host States’ breach of contract has changed significantly. In the early 1990s, investor-State dispute settlement (“ISDS”) mechanisms started to provide foreign investors with a safe harbor in the event of host States’ alleged breach of contract. In the shadow of ISDS, if foreign investors refuse to renegotiate the original contract and resort to international dispute resolution instead, host States could face high legal fees and potential damages, as well as reputational damages that may cost them future investment opportunities. Studies have shown that host States can suffer losses when involved in ISDS cases and even more significant losses when they lose in investment dispute lawsuits. 

Therefore, these significant consequences of legal disputes involving large-scale investment contracts render it even more critical to arrive at the best possible deals for both parties from the very beginning. Given the disadvantages some host States may face during contract negotiation, some scholars and experts have advocated for expanding the international legal support network, ranging from indirect negotiation support to direct negotiation support. Some governmental and international organizations have offered developing host States indirect negotiation assistance through technical assistance, policy advice on setting legal framework, and capacity building. Generally, technical assistance involves short-term contracting with external experts to assist host States with specific functions during investment projects. Nowadays, many international organizations also provide technical assistance through building a just and accountable legal and regulatory framework. 

Legal and regulatory frameworks often impact various aspects of the contract negotiation process. For example, States may use statutory laws to determine the content of investment contracts and mandate the inclusion of certain terms that may arise in investment projects. Such predetermined issues include the procurement of local labor, goods, services, and community development and environmental protection requirements. During contract negotiations, host States should also consider their existing legal frameworks and how they can support the development of negotiation positions or strategies. Likewise, host States’ regulatory regime also plays a role in foreign investors’ decision-making. According to the World Bank, 86% of investors identified the legal and regulatory environment as important or critical when making investment decisions. 

Consequently, host States and foreign investors often contract within domestic law and international standards. For instance, in Urbaser v. Argentina, the Tribunal held that corporations could be subjects of international law after considering the corporations’ specific activities relating to human rights issues. Additionally, statutory requirements may also set important parameters for project-specific negations. A well-developed legal system largely incorporates investment agreements into the existing statutory regime. For instance, foreign investors may obtain various licenses in a host State per local laws rather than laying out every term in the investment contract. In other instances, contracting parties may select their preferred choice of law from another jurisdiction to avoid invoking the host State’s laws. 

Several international organizations provide policy advice on legal and regulatory frameworks. For example, the Oil for Development program of the Norwegian Agency for Development Cooperation provides legal support for developing host States through working sessions and seminars to help them establish a legal, policy, and regulatory regime related to petroleum. Similarly, the International Senior Lawyers Project (“ISLP”) helps develop relevant regulations on natural resources in developing host States. 

Indeed, improved national statutes often take topics off the negotiation table and simplify the negotiation process for both parties. However, they do not address or cover all issues that may arise during complex contract negotiations. Moreover, although statutory law can prescribe how parties address contract negotiations, they may still proceed differently in reality. Therefore, technical assistance cannot replace direct negotiation assistance in specific issues and detailed contractual terms that apply to a particular project. My co-author’s newly published perspective summarizes different types of direct negotiation support from specific international organizations such as the African Legal Support Facility, the International Senior Lawyers Project, and the CONNEX Support Unit. 

In conclusion, although international assistance does not and should not replace host States’ ultimate responsibility in contract negotiations, some institutional solutions are available for under-resourced developing host States. International assistance generally consists of indirect and direct negotiation support, among which we focused on establishing effective legal and regulatory frameworks in this blog post. While helpful, indirect assistance cannot completely meet the needs of developing host States; direct negotiation assistance may provide more immediate and effective assistance. Overall, international legal aid could help host States and international investors achieve good deals at the negotiation table. 


Wendy Shidi Wu is a recent J.D. graduate from Columbia Law School and currently working as a litigation law clerk at Simpson Thacher Bartlett LLP.  


This blog post is adapted from W. Wu and V. Tsang’s “Fair game, fair play: The advocacy of international assistance for developing host states in negotiating investment contracts,” published in the Journal of World Investment and Trade and available on SSRN. 

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