Implications of Key BIT Provisions
The aim of this paper is to review all the protective provisions found mostly in all BITs, whether coming from customary international law or enunciated through the BIT itself in order to illustrate the implications of those provisions so that a proper understanding of the obligations imposed therein on the host States can be illustrated.
Bilateral Investment Treaties
The Bilateral Investment Treaties (BITs) are international agreements between States inter se that commonly provide for a framework in which investment from one State (home State) is to be received and managed within the other State (host State). BITs typically impose obligations on the host States to provide for the basic standards of treatment and investment protection as enunciated in customary international law, including the Most Favored Nation Treatment, National Treatment and the Fair and Equitable Standard of Treatment. In addition to the codification of the customary principles, the BITs contain provisions that are much more detailed and innovative, for instance, the provisions containing the definition of key terms such as ‘investment’, ‘investor’, ‘expropriation’ etc. They usually last for a period of about 20 years, covering an additional stated period after the expiry of the agreement and in any event are mostly terminable by notice by either Contracting Party, at least one year in advance.
Bilateral Investment Treaties first came to be negotiated in the latter half of the 20th century between Germany and Pakistan and since then, BITs have emerged as a cornerstone of investment protection for foreign investors because they grant them the regulatory protection and safeguard against political risks in foreign lands. In the absence of a global investment treaty, BITs have emerged as the single most influential instruments of investment promotion and protection. This is because negotiations at a bilateral level have been much easier to achieve given the North-South divide on the content and scope of the key investment principles. States have generally been more willing to compromise under BITs keeping in view the fact that the BIT will eventually last for a certain number of years and not create a binding universal norm, the way a multilateral treaty would.
The advent of BITs however, ushered a new era of protection for investment in foreign lands, for not only did they codify the existing customary international law principles of protection of foreign investment, but also extended the scope of such rules to a great extent as well as added new provisions designed to offer as much protection as possible to foreign investors. In addition to that, International Arbitration Tribunals such as ICSID have gone even further by extending the scope and application of some of the BIT provisions when interpreting them.[1]
The aim of this paper is to review all the protective provisions found mostly in all BITs,[2] whether coming from customary international law or enunciated through the BIT itself in order to illustrate the implications of those provisions so that a proper understanding of the obligations imposed therein on the host States can be illustrated.
The Key BIT Provisions
Although, the BITs usually have a common structure; in that, they all begin with a preamble, followed by a section on definitions, then the general standards of treatment and protection followed by dispute resolution provisions and the entry into force of the agreement between the Parties, the degree to which these rights and obligations are drafted varies to a great extent depending upon the respective needs and bargaining position of the negotiating Parties.
We shall however, confine our analysis to the most common key terms found in almost all BITs to understand their implications for the purposes of this paper. These include: Preamble, Definition of Investment, Investor, Entry of Investments, Investment Promotion Provision, Absolute Standards of Treatment (International Minimum Standard, Fair & Equitable Standard, and Non-Discrimination etc), Relative Standards of Treatment (MFN, National Treatment etc), Expropriation, Umbrella Clauses, Stabilization Clauses and Investor-State Dispute Resolution Clauses.
i. Preamble
A preamble is the opening paragraph in a treaty within which the Contracting Parties lay down the pretext of their agreement. Under Article 31 of the Vienna Convention on the Law of Treaties (1969), a preamble constitutes part of the context of the agreement. Although, a preamble is generally non-binding, its importance lies in the fact that it could be used as an intrinsic aid to interpretation of the agreement in event of a dispute and which is why it is important that it be consistent with the substantive provisions of the treaty.
There are mainly two kinds of preambles found in BITs;
- The ones that are more common and what are known as the ‘traditional’ preambles are found in almost all BITs. In such preambles, the entire focus of the Parties entering into the agreement is to foster economic growth, technological transfer and human resource development as the overriding objective of the investment treaty.[3]In that, only economic pursuits and gains is the governing philosophy under these types of preambles (hereafter referred to as ‘Category A’).
- The ones that are relatively new are those in which the economic objectives as envisaged under ‘Category A’ type of preambles are to be realized subject however, to the overall public policy, health, environment and labor standards as the overriding objective of admitting investment in the State.[4]In that, there is no need to compromise on these standards (health etc) to attract investment (hereafter referred to as ‘Category B’).
Thus, the implication of adhering to ‘Category B’ type of preambles may be more advisable for host States. This is because it allows more freedom to host States by not limiting their regulatory freedom and makes it clear that investment promotion and protection is subject to the democratic responsibility of the State.
ii. Section on Definitions in BITs
In general the purpose of this section is to determine the objects to which the rules contained therein apply and their scope.
Whether the agreement applies to investors post entry and establishment of the agreement or does it have a retrospective effect; who all will be considered ‘investors’ within the meaning of the BIT; and whether the MFN provision will be extended to dispute resolution or not are all very potent questions that the section on definition can provide answers to. Therefore, this section of a BIT is by far the most significant (and often the most overlooked section until the time of the dispute), because it is eventually the definitions in a BIT that determine the scope and applicability of the principles in the treaty. This section should therefore be drafted with great care and caution.
The term ‘investment’ for instance, is a term that ought to be drafted very carefully because only those economic transactions that qualifies as ‘investment’ as per the definition in the BIT will merit protection under its terms. No other economic transaction would. The term ‘investment’ can be defined in no less than three broad ways; (i) the traditional asset based definition of investment that covers ‘any and every kind of asset’ followed by a list of examples such as shares, real estate etc;[5] (ii) the closed definition that provides an ample but finite list of ventures/transactions that would amount to an investment for the purposes of the BIT;[6] and finally, (iii) the one that envisages express exclusion of certain transactions from qualifying as investment under the agreement.[7]
The important point to note is that the more broadly you go on defining ‘investment’, the more the kind of transactions will have protection of the BIT. In addition to that, the broad asset based definitions of investment that envisage a ‘control element’ as follows, “any kind of asset owned or controlled by an investor of a contracting party”, are usually interpreted to allow and extend protection of the BIT to those investments that are being ‘controlled’ as opposed to being ‘owned’ by the investors of the other Contracting Party. In that, the investment of an Indian company that is being controlled by the British would be allowed protection of the BIT in Pakistan by virtue of Pakistan-UK BIT if the definition of investment in Pakistan-UK BIT envisages the ‘control element’ as highlighted above.
The term ‘investor’ ought to be drafted with equal care and attention because even here, as in the case of definition of investment, the ‘control element’ may easily be inserted by virtue of the words that an investor is someone who “directly or indirectly owns or controls the investment…” Thus, the assets controlled indirectly by investors of Contracting Parties will be covered regardless of the country in which the company directly owning the assets has been incorporated.[8]
iii. Entry of Investments
There exist two models upon which the entry and establishment of the investments is based. There is first, the traditional ‘Admission Clause Model’ preferred to date by the European States and second, the ‘Right of Establishment Model’ preferred mostly by the US, Canada and Japan for the BITs they sign.
The Admission Clause Model allows host States to apply admission and screening mechanism and to determine the conditions on which foreign investment will be accepted in their territory. This allows the States to include the list of industries/activities/laws/regulations to which MFN and National Treatment will not apply in pre-establishment stage. In addition to that, this particular model imposes no obligation on the host State to eliminate discriminatory legislation affecting the establishment of foreign investment. It thus, caters to the customary right of States to regulate entry of aliens for eco-socio-political or national security grounds.
On the other hand, the Right of Establishment Model calls for MFN and National Treatment even at the establishment stage i.e. pre entry stage. In that, prospective investors are to receive treatment no less favorable with regard to investing than domestic investors and investors from third countries. The idea is to liberalize investment flows but as such, it curbs the right of States to regulate the entry of aliens in their territory.
It is submitted therefore, that the State should seek protection of its own interests and adhere to the Admission Clause Model. In any event, if it must comply with the Right of Establishment Model, it should ensure that it seeks to secure certain sectors and industries by express reservations to extend the MFN or National Treatment to them.[9]
iv. Investment Promotion Provisions
Investment promotion provisions usually pronounce the obligation of the State to ‘promote’ investment within their territories. This is also a new innovative provision which now forms part of the substance of the BIT. Previously, such proclamations used to form part of the preambles and not the actual binding text of the treaty. Therefore, it is very important that this clause is drafted carefully so that a State does not incur an obligation more than is necessary and reasonable. For instance, the BIT between Hungary-India (2003) provided that each Contracting Party “shall encourage and create favorable conditions for investors to make investments in its territory.” The use of the word ‘shall’ makes it an absolute obligation of the Contracting Parties to do so.
However, on the other hand, the BIT between Spain-Uzbekistan (2003) states that each Contracting Party, “shall in its territory promote investments as far as is possible…” In this way, the States have allowed themselves a margin of appreciation and have committed to a reasonable obligation as opposed to an absolute one. It is advisable that such softer proclamations be followed in interest of the State.
v. Absolute Standards of Treatment
- International Minimum Standard of Protection
The International Minimum Standard of Protection is a customary legal standard of protection that is to be accorded to foreign investors and their investments. This standard was developed in response to the assertion of the Latin American States to accord to aliens treatment no greater than that accorded to the nationals in the host State.[10] However, early western scholars were of the view that there was an International Minimum Standard of justice in international law which called for a certain standard of decent treatment to be accorded to foreign investors. For instance, Schwarzenberger stated that, “The national standard cannot be used as a means of evading international obligations under the minimum standard of international law…”[11]
Furthermore, scholars from some developing countries such as S.K.B. Asante also asserted that, according to the doctrine of State responsibility, “Host States are enjoined by international law to observe an international minimum standard in the treatment of aliens and alien property. The duty to observe this standard – objective international standard, is not necessarily discharged by according to aliens and alien property the same treatment available to nationals. Where national standards fall below the international minimum standard, the latter prevails.”[12]
Moreover, Elihu Root, an American international lawyer argued that, “there was a standard of justice which formed part of international law [and that] if any country’s system of law does not conform to that standard, although the people of the country may be content or compelled to live under it, no other country can be compelled to accept it as furnishing a satisfactory measure of treatment to its citizens.”[13]
Accordingly, it may be concluded from the above that the International Minimum Standard of Treatment called for the basic standards of justice, non-discrimination, due-process, fairness, equity and basic human rights including right to property to be accorded to foreign investors. This ensured investors protection against political risk of expropriation i.e. taking of property or other assets by host States for a public purpose on a non-discriminatory basis in accordance with due process of law, with prompt, adequate and effective compensation.
- Fair and Equitable Standard of Treatment
It is a general principle of Customary International Law that foreign investors are to be met with ‘Fair and Equitable Treatment’ in pursuance of their investment in the host State territory. The obligation usually rests with the host State to treat foreign investors and their investments in accordance with due process of law and principles of fairness, equity and non-discrimination.
The breach of this principle is one of the most common allegations that foreign investors levy on the host State in event of a dispute primarily because the concepts of fairness, justice and equity are not capable of any precise definition.[14] On the one hand, if ‘Fair and Equitable Standard’ is considered to be an elaboration of the ‘International Minimum Standard’ itself; then the test as to whether a country has breached its obligation under this principle is ‘objective’, in that, the standard is based on the existing body of Customary International Law of State Responsibility for injury to aliens. In the Neer case for example, it was held that the treatment of aliens, in order to constitute an international delinquency “should amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would recognize its insufficiency.”[15] The threshold as envisaged in this case, for governmental treatment of foreign investors so as to amount to an unfair treatment under international law is therefore very high and hence it is not capable of being easily breached.
On the other hand however, if the words ‘fairness’ and ‘equity’ are given their plain and ordinary meaning, then the test is more ‘subjective’ such that it will suffice that a country either commits an action found to be ‘unfair’ and ‘inequitable’, or one that ‘unreasonably interferes’ or ‘impairs’ the investments of foreign investors.[16] The threshold for governmental treatment of foreign investors so as to amount to an unfair treatment under international law is therefore much lower in this case with the result that numerous governmental regulatory actions may be held to be inconsistent with this standard. Moreover, there is chance that any violation of any other obligation in a BIT could in effect be treated as a violation of ‘Fair and Equitable Standard’ if the plain and ordinary meaning is adopted.
Accordingly, while this principle often surfaces as a cardinal issue in international investment disputes, nonetheless the tribunals have not been able to denote a settled meaning to the phrase. The standard that therefore, ought to be exercised by the host State remains unclear and may vary on a case to case basis, depending upon the actual words used in the BIT or upon the context within which the tribunal is interpreting it.
One way to overcome this issue is to define it clearly, and expressly link it to international minimum standard. For instance, the NAFTA Free Trade Commission which is composed of the trade ministers of the three contracting parties, issued a Note of Interpretation on 31 July 2001 stating, among other aspects, that the fair and equitable treatment standard as set out in NAFTA’s Article 1105 did not entail any treatment beyond that established by customary international law.[17] In this way, proper guidance and light may be thrown by the Contracting Parties on the meaning and scope of this principle as used in their BIT.
vi. Relative Standards of Treatment
- National Treatment
National Treatment can be defined as a principle whereby a host country extends to foreign investors treatment that is at least as favorable as the treatment that it accords to national investors in like circumstances.[18]
The two important questions that have to be addressed by negotiators of the BIT are (i) whether the Contracting Parties wish to extend the National Treatment standard to the pre entry stage of investment or restrict it to post entry of investments in the territory (i.e. a choice between admission clause model and the right of establishment model),[19] (ii) the Contracting Parties also have to specify whether they wish to apply National Treatment standard to investments alone or whether they wish to extend it to the investors as well.[20]
Carlos Calvo asserted that, “it is certain that aliens who establish themselves in a country have the same right to protection as nationals, but they ought not to lay claim to a protection more extended. If they suffer any wrong, they ought to count on the government of the country prosecuting the delinquents, and not claim from the state to which the authors of the violence belong, any pecuniary indemnity.”[21]
In other words, as per Verwey and Schrijver, the Calvo Doctrine basically stipulates that the principle of territorial sovereignty of the state entails:
“i) The principle of absolute equality before the law between nationals and foreigners;
- ii) The exclusive subjection of foreigners and their property to the laws and juridical regimes of the State in which they reside or invest, and
iii) Strict abstention from interference by other governments, notably the governments of the States of which the foreigners are nationals, in disputes arising over the treatment of foreigners or their property (i.e. abstention from diplomatic protection).”[22]
However, the way international investment law has evolved the notion of National Treatment has not been embraced strictly in conjunction with the tenets of the Calvo Doctrine. In particular the notion of exclusive subjection of foreigners and their property to the laws and juridical regimes of the host State is in most cases substituted by the legal and juridical regime of the BITs and international investment tribunals such as ICSID.
Thus, the idea of national treatment as it stands today is more along the lines of securing a level playing field and equality of competitive opportunity amongst domestic and foreign investors based on inveterate principles such as equity, justice and non-discrimination rather than as idealistically expounded by Calvo in his doctrine.
For instance, as mentioned earlier, the UNCTAD Report (1999) states that, “National Treatment can be defined as a principle whereby a host country extends to foreign investors treatment that is at least as favorable as the treatment that it accords to national investors in like circumstances…”[23]
Hence, the notion of ‘National Treatment’ has been reduced to a mere ‘standard of treatment’ instead of a ‘standard of subjection’ under international investment law.
Some of the advisable ways of expressing National Treatment in line with the State’s regulatory powers could entail, (i) making the National Treatment standard contingent on domestic legislation of host country as in India-Indonesia BIT (1999) or Hong Kong-New Zealand BIT (1995), (ii) by stating that existing non-consistent legislation to remain applicable, but no new non conforming measures that will increase degree of discrimination as in China-Netherlands BIT (2001), or (iii) by stating that Contracting Parties “shall accord to investors and investment treatment no less favorable than treatment it accords in like circumstances to its own investors…” as in Japan-Vietnam BIT (2003).
- Most Favored Nation Standard of Treatment
Most Favored Nation (MFN) treatment in the context of foreign investment means that, “a host country treats investors from one foreign country no less favorably than investors from any other foreign country.”[24] The idea is to promote equality of competitive opportunities between foreign investors and to provide a level playing field amongst them.
Although host countries may express reservations or exceptions in the application of the MFN treatment vis a vis different States,[25] nonetheless, the scope of this principle has been subject of much controversy ever since the expansive interpretation to this principle was adopted by an ICSID tribunal in the Maffezini case.
In Maffezini v Kingdom of Spain (2000),[26] the ICSID tribunal held that the MFN clause as expounded in the BIT between Argentina and Spain was broad enough to encompass not only the substantive rights but also dispute settlement procedures.[27] Accordingly, Mr. Maffezini was allowed to import the dispute settlement provision contained in the BIT between Spain and Chile as per which the dispute could directly be submitted to ICSID for arbitration without the need to exhaust any local remedies for 18 months as required by Article X(2) of the Argentina-Spain BIT.
This decision therefore has the potential to render the (technically) bilateral obligations of a BIT into obligations ‘erga omnes’ (i.e. binding against all). In that, while previously MFN was thought to be limited to substantive rights, this decision made it possible to extend the MFN treatment down to procedural provisions whereby, as correctly pointed out by Subedi (2008), it became possible for “foreign investors to resort to dispute settlement mechanisms that were not stipulated or envisaged in the BIT between home and host States concerned, but rather had been provided for in another BIT to which the host state was a Party.”[28]
Although, the approach of the ICSID tribunals has not been consistent in this regard and there have been cases in which ICSID tribunals have sought to retreat from the Maffezini approach,[29] nonetheless, a trend towards expansive interpretation has been established and States have begun to expressly extend the scope of MFN to procedural and dispute settlement provisions in the BITs they conclude.[30]
It is therefore advisable to make it expressly clear in the text of the BIT as to whether or not the MFN is to extend to (i) pre entry stage of investment or not (i.e. the choice between Right of Establishment Model vis a vis the Admission Clause Model),[31] and (ii) to dispute resolution provisions or not as in Jordan-US BIT (1997) as well as to make use of exceptions and reservations as envisaged in the Diplomatic Note (Nepal-UK) 1965 whereby, “Nepal was willing to accord to British goods entering Nepal the MFN treatment, save for the exceptional treatment given to India and Tibet… and likewise that… UK would continue to accord to imports from Nepal the MFN treatment, save for the special tariff reserved for the members of the Commonwealth Preference Area and the European Free Trade Association.”[32]
vii. Expropriation
Expropriation can be defined as a (limited) right of the host States to ‘nationalize’ or take away the property of investors provided that certain conditions are met, in that, expropriation must be for a public purpose, on a non-discriminatory basis, in accordance with due process of law, followed by prompt, adequate and effective compensation.[33]
The right appears to be based on the notion of Permanent Sovereignty of States over their Natural Resources as codified in the UN Resolution 1803[34]and acknowledged as representing the Customary International Law on the point by the arbitral tribunal in the Texaco v Libya case.[35]
The right is limited so that a basic level of protection may be secured for foreign investors against political risks, such that should they materialize, the investors will be in the least, entitled to full compensation of their investment.
However, owing to broad provisions in Free Trade Agreements such as Article 1110 of North American Free Trade Agreement (NAFTA) and expansive interpretations of international investment tribunals such as ICSID in cases like Metalclad,[36] the meaning and scope of ‘expropriation’ has been extended to new heights, wherein words or statements like ‘indirect expropriation’ or ‘measures that tantamount to expropriation’ or those which have ‘the effect equivalent to expropriation’, allow protection to be extended to foreign investors, not just against the actual takings of property by the government, but also against regulatory measures which may have the effect of undermining the profitability of an investment venture.
For instance, in the Metalclad case, the decision by a local government authority to ‘withhold planning permission’ to construct a facility by Metalclad for the disposal of hazardous waste in accordance with the agreement between the company and the Mexican government, was held to constitute indirect expropriation of the rights of the company.
The ICSID tribunal in the Metalclad case stated that, “expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favor of the host state, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be expected economic benefit of property even if not necessarily to the obvious benefit of the host State.”[37]
In an earlier case, the Iran-US Claims Tribunal had also held that, “a deprivation or taking of property may occur under international law through interference by a state in the use of that property or with the enjoyment of its benefits, even where legal title to the property is not affected.”[38]
International law therefore very clearly accommodates the concept of indirect expropriations which have the potential, as rightly pointed out by Subedi (2008), to give rise to challenges to any governmental regulatory measure, whether these are related to human rights or environmental protection for that matter, by foreign investors if such measures go against their interests, notwithstanding that international law recognizes rights of States to take regulatory measures relating to environment and essential development work.[39]
Subedi (2008) further asserts that, “the implication of the recent trend in jurisprudence could be that host states should do nothing that undermines the profitability of foreign business or undermines the ‘favorable conditions’ in the host States assured under the BITs. These are tendencies that are likely to undermine the sovereign powers of States to regulate their economy or to exploit their natural resources in accordance with their national development policies; and they may clash with other obligations of states under various international environmental or human rights treaties which require States to have more stringent regulatory regimes in favor of environmental or human rights protection.”[40]
Moreover, Lowe is of the opinion that the Metalclad decision has the potential to impose, “… a very significant limitation upon the right of the State.”[41]
On the other hand, an UNCITRAL Panel in Pope & Talbot case did not believe that the export control regime of Canada constituted an interference substantial enough to be characterized as expropriation under international law. The panel held that it did not regard the phrase “measure tantamount to nationalization or expropriation in Article 1110 of NAFTA to broaden the ordinary concept of expropriation under international law so as to require compensation.”[42]
In addition to that, a recent decision of an UNCITRAL tribunal in the Saluka Investments case held that in imposing forced administration over a Czech bank, the Czech government adopted a measure that was valid and permissible as within its regulatory powers, notwithstanding that the measure had the effect of undermining Saluka’s investment in that bank.[43]
The tribunal further asserted that, “it is now established in international law that states are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.”[44]
Some recent BITs and FTAs that have been concluded do accept the regulatory right of the States and expressly exclude non-discriminatory regulatory measures from the definition of indirect expropriation.[45] However, as noted by Subedi (2008), “the developed countries supported the investors as long as they were initiating legal proceedings against the regulatory powers of thedeveloping countries, but when the investors began to challenge the regulatory powers of the developed countries themselves, there was a shift in attitude in these countries.”[46]
Indeed, the provisions of the US Trade Act of 2002, clearly demonstrates that while the US will continue to seek greater protection for its investors abroad than the protection available to domestic investors in the host States, it would not accord any protection to foreign investors in the US greater than that available to US investors in the US.[47]
Hence, though some efforts have been made by international players to retreat from the expansive approach of the ICSID tribunal in the notorious Metalclad case,[48] nonetheless, it is clear that the developed countries are still lopsided in their approach in the level of protection they seek for themselves and in the level of protection they are willing to offer to others. Such a status quo is not healthy from a developing country’s point of view owing to their weaker bargaining position, as a result of which, the developed States may still be able to press for greater protection for their investors abroad and at the same time, absolve themselves from the responsibility to extend the same degree of protection to foreign investors in their own territory.
The customary principles of international law as discussed above depict clearly the stance of the economically and politically strong countries that have been able to negotiate, develop and assert the standards that are most favorable to their situation. The law of foreign investment as developed traditionally should be read as ‘the law ‘for’ foreign investment’. Clearly, the lopsidedness of the key principles in favor of foreign investors is quite manifest in the way the norms have been developed, interpreted and applied. The notion of economic strength continues to rule the arena of international investment law which caters to only very limited rights for the States, particularly those that are economically weak.
viii. Umbrella Clauses
Umbrella clauses require the Contracting Parties to observe ‘any other obligation’ it may have entered into with regard to investments. In that, the host State usually assumes the responsibility to respect other obligations, it has in relation to the investment, including potentially, contractual undertakings as in the SGS v Philippines case, in which the ICSID tribunal held that Article X(2) of the Swiss-Philippines BIT, which stated that, “each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party” had incorporated the contractual commitment and brought it within the framework of the BIT.[49]
The implication of this for the host State lies in the fact that such a clause has a broad scope of application and gives ample protection to foreign investors by protecting their contractual rights. Elevating a private law matter (i.e. contractual breaches) to breaches of international law can have very serious ramifications for a host State bound by investor-state international dispute resolution provisions. In that even a contractual breach, for which remedy is to be sought in local courts, would be akin to a breach of the BIT thereby attracting the provisions, norms and principles of international law. In other words, the local contractual dispute becomes an international investment law dispute, making it possible for international arbitral dispute resolution forums such as ICSID to have jurisdiction over the dispute in place of the domestic courts of the host country.
The approach towards this issue by ICSID tribunals has not been uniform and there have been cases where ICSID has taken a more cautious approach in elevating contractual disputes to BIT disputes.[50] However, the mere potential of a broad umbrella clause in a BIT to have such an effect is a major extension by BITs that has been further facilitated by the expansive interpretations of international arbitral forums such as ICSID.
ix. Stabilization Clauses
Stabilization clauses stipulate that the law prevailing at the time the decision was taken by foreign investors to invest in the host countries would be applicable to them, and such laws would not be altered to the detriment of such investors.[51] In other words, the stabilization clauses have the effect of ‘freezing’ the law in time in relation to those investors, as it prevents the host State from enacting new legislation which would have the effect of undermining the profitability of the investment venture of the relevant foreign investor(s).
Such a clause can be found in the investments contracts or concession agreements between the host State and the foreign investor. An example of such a clause may be found in the, ‘Petroleum Production Sharing Agreement of 10th November 1995 between The State Oil Company of Azerbaijan and a Consortium of Oil Companies’, which states that, “the rights and interests accruing to Contractor (or its assignees) under this Agreement and its sub-contractors under this Agreement shall not be amended, modified or reduced without the prior consent of Contractor. In the event that any Government authority invokes any present or future law, treaty, intergovernmental agreement, decree or administrative order which contravenes the provisions of this Agreement or adversely or positively affects the rights or interests of Contractor hereunder, including, but not limited to, any changes in tax legislation, regulations, or administrative practice, or jurisdictional changes pertaining to the Contract Area, the terms of this Agreement shall be adjusted to re-establish the economic equilibrium of the Parties, and if the rights or interests of Contractor have been adversely affected, then the State entity shall indemnify the Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom. The State entity shall within the full limits of its authority use its reasonable lawful endeavors to ensure that the appropriate Governmental Authorities will take appropriate measures to resolve promptly in accordance with the foregoing principles any conflict or anomaly between any such treaty, intergovernmental agreement, law decree or administrative order and this Agreement.”[52]
Such clauses are usually included for want of certainty and as the name suggests, for stability against political risks and regime changes in the host State which might have an effect on the laws in place.
This indicates that investment contracts containing such clauses offer even greater protection to foreign investors. While on the one hand, the right of the host State to take general non-discriminatory regulatory measures is now being preserved in the BITs, yet on the other hand, the device of stabilization clauses is being evolved that has the effect of rendering the limited right of host States to regulate their economies on human rights, environmental or other grounds almost null and void. In other words, the limited right of host States that had just started getting recognized, is being rendered almost futile through the incorporation of stabilization clauses in the investment agreements between host States and foreign investors.
Furthermore, given that umbrella clauses require the host States to fulfill “any other obligation” it may have entered into, the stabilization clause in the investment contract, owing to ICSID decision in cases such as SGS v Philippines, has the potential to be eventually elevated to the status of a BIT clause if viewed from the umbrella clause perspective.[53]
The international investment law, as it has evolved reflects the interests of capital exporting States at every phase of its development. The customary principles that focused heavily on the promotion and protection of investment, and the extensive and innovative protection under BITs and the utterly expansive decisions by ICSID in cases such as Metalclad, Maffezini and SGS v Philippines, make host States hostage to the foreign investors in a way that maximum protection is established for those investors at almost nil responsibility. The States are unable to fulfill their democratic mandate. In that, should any measure be taken by the host State that affects the economic equilibrium of the foreign investor, the host State is liable to pay compensation or to ‘indemnify’ the loss of the investor, even if the measure undertaken by the State in question is based on its economic necessity. In Enron v Argentine Republic for example, the ICSID tribunal was not prepared to accept the doctrine of necessity argument for the measure that Argentina had undertaken in wake of its recent economic crisis. The Tribunal held that, “these unfortunate events do not in themselves amount to a legal excuse.”[54] Thankfully however, Enron v. Argentina was later annulled in 2010 and that two other tribunals (LG&E v. Argentina[55] and Continental Casualty Co v. Argentina[56]) accepted the necessity plea (in part).
x. Investor State Dispute Resolution Clause
The investor-State dispute resolution clause allows a foreign investor to bring a claim directly against the host State in an agreed international arbitral forum in event of a dispute without having to resort to any diplomatic channels.
This is by far the most important clause from the foreign investor’s point of view as it entails and ensures the protection of his rights in an impartial and independent fashion. In particular, it acts as a certainty of enforcing rights against potential political risks that may materialize in a host State, as in the case of Tethyan Copper Company in the Reko Diq gold mine saga under which the Balochistan Government refused to grant a mining license to the company.[57] The investors regard foreign arbitral tribunals as being devoid of local political pressure and as a forum of ensuring and enforcing their infringed rights without having to resort to any diplomatic measure or protection that required significant political influence within the home State.
The important question for the Contracting Parties is to determine who would eventually have a legal standing to bring a claim under this provision. In that, the negotiators will have to decide whether or not they wish to include subsidiaries controlled directly or indirectly by investors within the catch all definition of investor or investment. If they do so, the implication of that would be that even domestically incorporated companies in the host State, which are subsidiaries of a parent company abroad, will have an international claim against their own State.
There are different ways of determining and defining the ‘dispute’ in the BIT and the exact words used will be of paramount importance to determine the jurisdiction of the international arbitral forum. For instance, in event of any dispute, the BIT may envisage rounds of amicable negotiations usually lasting up to a period of 6 months before which formal procedures cannot be resorted to, as in Chile-New Zealand BIT (1999). It may be so that the BIT is stated to be applicable to “disputes arising directly out of an investment.” Indeed, this is the most commonly used formulation in the BITs and is the one that is mentioned in Article 25(1) of ICSID Convention as well.[58] There is a wider option under which disputes “concerning an obligation under the BIT” are all justiciable in the foreign tribunals and not just the one arising directly from an investment.[59]
Alternatively, the BIT may provide that only disputes relating to interpretations or applications of the agreement may be submitted to the foreign tribunal as in Chile-Peru BIT (2000) or that disputes regarding amount of compensation will go to foreign tribunals as in Mauritius-Swaziland BIT (2000), which obviously are limited in scope. Lastly, the BIT may state that only if an investor incurs a loss or damage as a result of breach of the treaty should he resort to the dispute settlement mechanism of the treaty as in US-Uruguay BIT (2005). This necessarily is limited and restrictive in scope.
Nonetheless, it is a matter of policy for the State in question to decide whether it wishes to opt for the more limited and restrictive options or whether they want to continue with the popular and more liberal options that are available. It is however, advisable that the policy makers should adopt a more cautious than liberal approach towards the dispute settlement clause in a BIT in order to safeguard their interests.
Conclusion
The impacts of lopsided BITs coupled with the expansive interpretations of foreign arbitral forums that have further extended the scope of the BIT provisions have led to an outright revolt against not only the foreign arbitral forums but also against BITs themselves, in particular the dispute resolution provision. Some Latin American States such as Bolivia have denounced from ICSID on this basis and even the latest Australian Trade Policy excludes the investor-state dispute resolution clause from its future BITs.[60]
However, the importance and significance of BITs cannot and should not be shunned because of the ill-drafted and lopsided texts of BITs signed more under the political pressures rather than after proper deliberations and feedback from experts and stakeholders alike. When negotiated with care and caution the BITs can deliver the promised benefits of foreign direct investment and economic growth, but for that it is crucially important for the policy makers and negotiators of the BITs to be well informed of the implications of the obligations that they are entering into. It is hoped that the trend towards fostering and developing an understanding of these provisions will continue and secure the best possible deal for its adherents in future negotiations.
The article was first published at blogaila.com/2013/02/11/implications-of-key-bit-provisions-by-nida-mahmood/#more-352
[1] See for instance, Emilio Agustín Maffezini v Kingdom of Spain, ICSID Case No. ARB/97/7 of 25th January 2000; (2003) 124 ILR, where MFN provision was extended to procedural/dispute settlement provisions; Metalclad Corporation v United Mexican States, ICSID Case No. ARB (AF)/97/1 of 30 August 2000; (2001) 16 (1) ICSID Review-Foreign Investment Law Journal, where indirect expropriation and regulatory takings were extended to curb the police powers of the State; and SGS v Republic of Philippines, ICSID Case No. ARB/02/6 of 29th January 2004, ICSID website, where Contractual undertakings were elevated to breaches of International BIT.
[2] The text of all BITs used in this paper was obtained fromhttp://www.unctadxi.org/templates/DocSearch____779.aspx.
[3] See for example, Mongolia-Singapore BIT (1995), Australia-Egypt BIT (2001); in addition to that, almost all Pakistani BITs till date incorporate the ‘Category A’ type of preambles in their BITs.
[4] See for example, US-Uruguay BIT (2005) and Korea-Trinidad & Tobago BIT (2002).
[5] See for example, Article 1 of Azerbaijan-Finland BIT (2003).
[6] See for example, Article 1 of Canadian Model BIT (2004) in which ‘Investment’ means:
“(I) an enterprise;
(II) an equity security of an enterprise;
(III) a debt security of an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the debt security is at least three years, but does not include a debt security, regardless of original maturity, of a state enterprise;
(IV) a loan to an enterprise
(i) where the enterprise is an affiliate of the investor, or
(ii) where the original maturity of the loan is at least three years, but does not include a loan, regardless of original maturity, to a state enterprise;
(V) (i) notwithstanding subparagraph (III) and (IV) above, a loan to or debt security issued by a financial institution is an investment only where the loan or debt security is treated as regulatory capital by the Party in whose territory the financial institution is located, and (ii) a loan granted by or debt security owned by a financial institution, other than a loan to or debt security of a financial institution referred to in (i), is not an investment; for greater certainty: (iii) a loan to, or debt security issued by, a Party or a state enterprise thereof is not an investment; and (iv) a loan granted by or debt security owned by a cross-border financial service provider, other than a loan to or debt security issued by a financial institution, is an investment if such loan or debt security meets the criteria for investments set out elsewhere in this Article;
(VI) an interest in an enterprise that entitles the owner to share in income or profits of the enterprise;
(VII) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution, other than a debt security or a loan excluded from subparagraphs (III) (IV) or (V);
(VIII) real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes; and
(IX) interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory, such as under (i) contracts involving the presence of an investor’s property in the territory of the Party, including turnkey or construction contracts, or concessions, or (ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise; but investment does not mean, (X) claims to money that arise solely from (i) commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Party to an enterprise in the territory of the other Party, or (ii) the extension of credit in connection with a commercial transaction, such as trade financing, other than a loan covered by subparagraphs (IV) or (V); and (XI) any other claims to money, that do not involve the kinds of interests set out in subparagraphs (I) through (IX).”
[7] Ibid.
[8] This would potentially go against the landmark ICJ decision in the Barcelona Traction, Light and Power Company Limited (Belgium v Spain); Second Phase, International Court of Justice, ICJ Rep, 5 February (1970) para 101, in which Belgian shareholders who had a controlling interest in a Canadian company were denied the locus standi to bring a claim against Spain. Note however, that this case was not based on any BIT, but rather on customary international law principles, municipal laws and rules of diplomatic protection.
[9] See for instance, Article 3 of Canada-Costa Rica BIT (1998).
[10] See for instance, E Borchard, The Minimum Standard of Treatment of Aliens (1940) 38 Mich LR 445.
[11] G Schwarzenberger, International Law as Applied by International Courts and Tribunals (1957) 248.
[12] S.K.B Asante, International Law and Foreign Investment: A Reappraisal(1988) 37 ICLQ 588-628.
[13] E Root, The Basis of protection to Citizens Residing Abroad (1910) 4 AJIL517, 521-2.
[14] See for example, Enron v Argentina, ICSID Case No. ARB/01/3, Decision of 14 January 2004, para 260; and Azurix v Argentina, ICSID Case No. ARB/01/12, Decision of 8 December 2003, para 5.
[15] USA (LF Neer) v United Mexican States, 4 R.I.A.A. 60, 3 ILR (1927) 21AJIL 555, 556.
[16] See for example, Article 3 (1) of BIT between Netherlands and Czech Republic which states that, “Each Contracting Party shall ensure fair and equitable treatment to the investments of investors of other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those investors.”
[17] All information regarding NAFTA claims and cases was obtained fromhttp://naftaclaims.com/index.html. See also USA-Uruguay BIT (2005).
[18] UNCTAD, National Treatment, UNCTAD Series on Issues in International Investment Agreements (New York and Geneva, United Nations, 1999) 1.
[19] See for example, Article 6 of Japan-Vietnam BIT (2003).
[20] See for example, Article 4 of Mauritius-Zimbabwe BIT (2000) and Article 3 of Russia-Thailand BIT (2002).
[21] Translated and quoted from Calvo’s work in Spanish by D.R. Shea, The Calvo Clause (1955) 17-9.
[22] W.D. Verwey and N.J. Schrijver, The Taking of Foreign Property under International Law: A New Legal Perspective? (1984) XV Netherlands Yearbook of International Law, 3-96, 23.
[23] UNCTAD (1999) report, supra note 18, 1, 10.
[24] UNCTAD, Most-Favored-Nation Treatment, UNCTAD Series on Issues in International Investment Agreements (New York and Geneva, United Nations, 1999) 1.
[25] See diplomatic note between Nepal and UK, wherein “Nepal was willing to accord to British goods entering Nepal the MFN treatment, save for the exceptional treatment given to India and Tibet… and likewise that… UK would continue to accord to imports from Nepal the MFN treatment, save for the special tariff reserved for the members of the Commonwealth Preference Area and the European Free Trade Association.” Agreement on Most Favored Nation Treatment effected by exchange of notes signed at Kathmandu in 1965:www.tpcnepal.org.np/tagree/britain.htm.
[26] See supra note 1, 2.
[27] Article 4 (2) of Argentina-Spain BIT: “In all matters subject to this agreement, this treatment shall not be less favorable than that extended by each Party to the investments made in its territory by investors of a third country”, as cited in S.P. Subedi, International Investment law, Reconciling Policy and Principle (Hart Publications) 2008, 69.
[28] See, S.P. Subedi, supra note 27.
[29] See for example, Plama Construction v Bulgaria, ICSID Case No. ARB/03/24, Award of 8 February 2005, at paras 203 and 204.
[30] See for example, BIT between Austria and Saudi Arabia (2001) which explicitly extends the MFN to dispute resolution provisions: Article 3, “each Contracting Party shall accord the investors of the other Contracting Party in connection with the management, operations, maintenance, use, enjoyment, or disposal of investments or with the means to assure their rights to such investments like transfers or indemnification or with any other activity associated with this in its territory, treatment not less favorable than the treatment it accords to its investors or to investors of a third state, whichever is more favorable.”
[31] See for example, NAFTA Article 1103 and Article 10 (7) Energy Charter Treaty.
[32] Agreement on Most Favored Nation Treatment effected by exchange of notes signed at Kathmandu in 1965: www.tpcnepal.org.np/tagree/britain.htm.
[33] See, S.P. Subedi, supra note 27, 74, 13.
[34] See, UNGA Resolution 1803, on the ‘Permanent Sovereignty of States over their Natural Resources’, (1962), available athttp://www2.ohchr.org/english/law/resources.htm.
[35] See Texaco v Libya (1977) 53 ILR 389, para 87.
[36] See supra note 1, 2.
[37] Ibid, para 103.
[38] See Tippets v TAMS-AFFA, 6 Iran-USCTR 219 (1984).
[39] See, S.P. Subedi, supra note 27, 134, 13.
[40] Ibid.
[41] V Lowe, Regulation or Expropriation (2003) 1-21, 6, as cited by S.P. Subedi, supra note 27, 134-5, 13.
[42] See, Pope & Talbot Inc. v Government of Canada, Award (2002), 122 ILR 293.
[43] See, Saluka Investments (BV) v Czech Republic, (A partial award), of 17th March 2006, Permanent Court of Arbitration, para 276, available athttp://www.pca-cpa.org/showpage.asp?pag_id=1149.
[44] Ibid, para 255.
[45] See for example, Annex 10-C (4) of CAFTA, Article 10(2) of FTA between Chile and US, Article 12 of the 2004 Model US BIT and Article 15.10 of the Singapore-US FTA.
[46] S.P. Subedi, supra note 27, 144, 13.
[47] U.S Trade Act of 2002, Pub L107-210 (107th Cong, 2d Sess), s 2102 (b) (3), as cited by Subedi, supra note 27, 144-145, 13.
[48] See supra note 1, 2.
[49] SGS v Philippines, ICSID Case No. ARB/02/6, Decision of 29th January 2004, para 127.
[50] See for example, SGS v Pakistan, ICSID Case No. ARB/01/13, Decision of 6th August 2003, para 367.
[51] As explained by S.P. Subedi, supra note 27, 104.
[52] Barrows, Russia & NIS, Suppl 23, 1 (1993), as cited by Piero Bernardini, Annex 2, Journal of World Energy Law & Business, 2008, Vol. 1, No. 1, 102, available athttp://www.perpustakaan.depkeu.go.id/FOLDERJURNAL/98.full.pdf.
[53] See SGS v Philippines, ICSID Case No. ARB/02/6, Decision of 29th January 2004, para 127.
[54] Enron Corporation and Ponderosa, LP v Argentine Republic, ICSID Case No. ARB/01/3, Award of 22nd May 2007, para 232.
[55] LG&E v Argentina, ICSID Case No. ARB/02/1, Award of 3rd October 2006.
[56] Continental Casualty Co v. Argentina, ICSID Case No. ARB/03/9, Award of 23rd October 2009.
[57] CIVIL PETITION FOR LEAVE TO APPEAL NO. 796 OF 2007 & CMA NO. 4560 & 4561/2009 & CMA 116/2011, available athttp://www.supremecourt.gov.pk/web/page.asp?id=740.
[58] See also, Article 8 of Ethiopia-Russian Federation BIT (2000).
[59] See for instance, Article 9 of China-Guyana BIT (2003).
[60] Australian Government Department of Foreign Affairs & Trade, Gillard Government Trade Policy Statement: Trading Our Way to More Jobs and Prosperity 14 (Apr. 2011), available at:http://www.dfat.gov.au/publications/trade/trading-our-way-to-more-jobs-and-prosperity.html.
