In the context of global economic integration, countries are increasingly focusing on protecting the lawful rights and interests of investors when conducting overseas investment activities. International investment protection mechanisms have been established to ensure a stable and transparent investment environment and to mitigate risks arising from adverse policies of host countries. Below, NPLaw respectfully invites our readers to explore the legal issues related to international investment protection mechanisms.

I. the role of international investment protection mechanisms

International investment protection mechanisms play a significant role in safeguarding the lawful rights and interests of investors when making investments aboard or attracting foreign investment into a host country. Through bilateral investment treaties, free trade agreements containing investment chapters, and dispute resolution mechanisms such as the International Centre for Settlement of Investment Disputes (ICSID) or international arbitration, investors are protected their lawful interests, including protection against arbitrary expropriation, non-discriminatory treatment, adequate compensation in the case of asset seizure, and benefits from transparent dispute resolution mechanisms.

For host countries, these mechanisms help strengthen investor confidence, attract foreign capital, and promote economic development, while still preserving the right to regulate policies in the public interest. However, the implementation of investment protection mechanisms also poses challenges related to economic sovereignty and the risk of international investment disputes, requiring States to formulate appropriate investment policies that balance investor protection with governmental regulatory authority.

II. Legal provisions on international investment protection mechanisms

1. Definition and fundamental principles of international investment protection mechanisms

An international investment protection mechanism refers to a system of rules, principles, and measures established to protect the rights and interests of foreign investors investing in another country. The primary objective of such a mechanism is to create a stable, transparent, and equitable investment environment, minimizing risks arising from policy changes in the host country.

In international investment agreements, investor protection principles generally revolve around two core groups:

  • The principle of non-discrimination;
  • The principle of minimum standard of treatment.

2. International investment protection policies of Vietnam

Vietnam has concluded more than 70 bilateral investment protection agreements with countries such as Japan, South Korea, the United States, Germany, and France. In addition, Vietnam is a party to several new-generation free trade agreements with significant investment protection commitments, including:

  • The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): Providing investor protection, guaranteeing the right to transfer capital, and establishing mechanisms for investor–State dispute settlement.
  • The Vietnam–EU Free Trade Agreement and Investment Protection Agreement: Establishing stronger investment protection commitments, including international investment dispute settlement mechanisms.
  • The Regional Comprehensive Economic Partnership (RCEP): Establishing general principles on investment protection within ASEAN and with major partners such as China, Japan, and South Korea.

3. International investment protection mechanisms in international trade agreements

  • Fair and equitable treatment (FET): Such a principle requires the host country to treat foreign investors fairly, transparently, and without discrimination.
  • National treatment and most-favored-nation treatment:
    + National treatment requires foreign investors to be treated no less favorably than domestic investors operating in the same investment sector;
    + Most-favored-nation treatment obliges the host country to accord foreign investors treatment no less favorable than that granted to investors from other countries with similar trade or investment agreements.
  • Prohibition of expropriation or nationalization without compensation: International trade agreements typically provide that host countries shall not expropriate or nationalize foreign investors’ assets unless such measures are taken for a public purpose, in accordance with law, without non-discriminatory basis, and accompanied by prompt, adequate, and effective compensation.
  • Investor-State dispute settlement mechanisms: Most international trade agreements include provisions allowing investors to bring claims against host governments before international arbitration if their rights are infringed, instead of being required to resolve disputes solely through domestic courts.
  • Investment protection in new-generation free trade agreements: In new-generation free trade agreements, investment protection mechanisms are further enhanced through clearer provisions on legal transparency, investment environment protection, and more modern dispute settlement mechanisms.

4. Characteristics of international investment protection mechanisms under Vietnamese Law

Foreign investors are guaranteed national treatment and most-favored-nation treatment and are not subject to discrimination compared to domestic investors or investors from other countries having agreements with Vietnam.

The State shall not expropriate or nationalize foreign investors’ assets, except in special cases for public interest purposes and subject to adequate compensation.

Disputes between investors and the State may be resolved through Vietnamese courts, domestic arbitration, or international arbitration in accordance with the investment agreements to which Vietnam is a member. 

III. Common questions on international investment protection mechanisms

1. How can investors use international investment protection mechanisms to claim compensation from host countries?

Investors may invoke international investment protection mechanisms to seek compensation from host countries when their rights are infringed under bilateral investment treaties or free trade agreements containing investment protection provisions. If the host government engages in acts such as unlawful expropriation, improper asset seizure, policy changes causing serious damage, or violations of investment protection obligations, investors are entitled to claim compensation through investor–State dispute settlement mechanisms.

Based on investment protection provisions under agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or bilateral investment treaties, investors may initiate claims against host governments before international arbitration bodies such as the International Centre for Settlement of Investment Disputes or under the UNCITRAL Arbitration Rules. During the proceedings, investors must demonstrate the damages caused by governmental actions and may seek compensation corresponding to the value of affected assets, lost profits, or incurred costs. If the investor prevails, the host government is obliged to compensate in accordance with the arbitral award, ensuring investor rights in line with international commitments.

2. What dispute resolution methods are provided under international investment protection mechanisms in the case of an investment dispute?

When investment disputes arise between foreign investors and host countries, international investment protection mechanisms provide multiple dispute resolution methods, including negotiation, mediation, domestic courts, and international arbitration, specifically:

  • Negotiation and Mediation: Prior to initiating legal proceedings, investors are typically required to engage in negotiation and mediation with the host government. If such efforts fail, the dispute may proceed to formal adjudicative mechanisms.
  • Proceedings in domestic Courts: Investors may choose to initiate proceedings before the courts of the host country if permitted under domestic law. However, in practice, many investors have concerns regarding the independence and impartiality of local courts and therefore they often choose international arbitration.
  • International Arbitration: It is a core mechanism in international investment protection, allowing investors to bring claims against host governments before international arbitration tribunals rather than domestic courts. Most bilateral investment treaties and free trade agreements contain investor–State dispute settlement provisions to safeguard investor interests.

3. If a host country changes its policies, does international investment protection provide a legal basis for investors to sue the government?

If policy changes by the host country negatively affect investors’ rights and interests, international investment protection mechanisms may provide a legal basis for investors to bring claims against the government under investment protection provisions in bilateral investment treaties or free trade agreements.

4. Why are international investment protection mechanisms important?

International investment protection mechanisms play a crucial role in safeguarding investor rights, creating a stable investment environment, and facilitating cross-border capital flows. Through bilateral investment treaties and free trade agreements, investors are protected by principles such as fair and equitable treatment, non-discrimination, guaranteed compensation in cases of expropriation, and benefits from international dispute resolution mechanisms such as international arbitration or the International Centre for Settlement of Investment Disputes.

5. What are the limitations of international investment protection mechanisms?

Despite their significant benefits to investors and the economy, international investment protection mechanisms also have certain limitations. One major concern is the imbalance between investor rights and the host country’s right to regulate. Investment protection agreements, particularly bilateral investment treaties and commitments under free trade agreements, often prioritize investor protection, making it more difficult for governments to adjust policies in the public interest, such as environmental protection, national security, or public health.

Furthermore, investor–State dispute settlement mechanisms can impose substantial legal and financial pressure on developing countries if they are sued before international arbitration tribunals, due to high litigation costs and the potential for large compensation awards. Additionally, investment protection mechanisms may be subject to abuse when certain corporations exploit legal loopholes to initiate claims against governments for profit-seeking purposes or to delay important policy measures. As a result, many countries are seeking to amend or renegotiate investment agreements to better balance investment attraction with the protection of national interests.

IV. Legal consulting services on international investment protection mechanisms

Above is NPLaw’s article on international investment protection mechanisms. With a team of experienced lawyers and legal consultants, NPLaw is always ready to accompany, advise, and support clients on legal matters related to international investment protection mechanisms. Should you require legal assistance, please contact NPLaw using the following details: