The aim of this chapter is to examine investment treaties from a state’s perspective. The chapter first analyses why states agree to investment treaties and the various considerations during treaty negotiations. It then turns to issues relating to compliance with investment treaties, and finally discusses how and why states modify or terminate their investment treaties.
The notion that foreign investments could receive certain assurances from the host state’s government is not new. In more recent times, however, there has been a huge proliferation of investment treaties, cumulating in approximately 2,270 bilateral investment treaties (BITs) and 324 treaties with investment provisions, globally, at the time of writing.
To add further complexity to the matter, it is not uncommon for states to have in force between themselves, BITs and other treaties with investment provisions. For example, on the multilateral level, among the members of the Association of Southeast Asian Nations (ASEAN), there is the ASEAN Comprehensive Investment Agreement, an intra-ASEAN agreement. The ASEAN states have also entered into free trade agreements (FTAs) that contain investment provisions with Japan, Korea, Australia and New Zealand, India and China (collectively, the ASEAN dialogue partners). On the bilateral level, some of these states also have BITs or other FTAs that contain investment provisions with each other. For instance, Singapore has various FTAs or BITs with each of the ASEAN dialogue partners and some ASEAN states.
These overlapping treaty obligations create a mesh of protections for foreign investors and their investments, but may also lead to increased complexity in a state’s policymaking because of the need to consider the full breadth of its treaty obligations before undertaking new measures.
Why states agree to enter into investment treaties
Promoting foreign direct investment and economic development
States hope that investment treaties will attract foreign investment inflows so that they can enjoy economic benefits such as an increased level of economic activity, technology transfer to enhance the productivity or competitiveness of local firms, and better employment opportunities. These reasons are particularly compelling for developing states, which tend to be capital importing. Capital-exporting states also hope to reap economic benefits with their investors able to expand into foreign markets under the protection of an investment treaty.
These objectives are expressly reflected in many investment treaties, often in the preamble. For instance, the preamble of the BIT between the United States and Bolivia recognises ‘that agreement upon the treatment to be accorded to such investment will stimulate the flow of private capital and the economic development of the Parties’.
Creating an investment-friendly climate
Investment treaties may attract foreign direct investment by ensuring that the host state maintains a regulatory regime that is friendly to foreign investment. From the perspective of capital-exporting countries, this aspect affords important safeguards to investors and their investments, and can help to manage some of the regulatory risks associated with investing in a foreign country. To this end, investment treaties generally contain a combination of commitments that are intended to create stability and predictability for foreign investors. These commitments relate to minimum standard of treatment, expropriation, transfers, treatment in case of armed conflict or civil strife, performance requirements, national treatment and most-favoured nation (MFN) treatment.
Providing investors with recourse to neutral third-party arbitration
Finally, states may enter into investment treaties with provisions on investor–state dispute settlement (ISDS). The establishment of an ISDS mechanism allows investors to submit investment disputes to a neutral third-party arbitrator. This helps to depoliticise the investment dispute and may reduce the level of uncertainty perceived by an investor when it seeks to enforce the investment treaties’ commitments against the host state.
Considerations during treaty negotiation
Should states enter into a BIT or an FTA?
There are two main forms of treaty with investment-related provisions: BITs and FTAs. There are a multitude of factors that states may consider when deciding whether to enter into a BIT or an FTA. Most obviously, for states whose primary objective is attracting investment, a BIT, with its focus on affording safeguards to investors and their investments, may be sufficient to achieve this outcome.
Where states wish to strengthen their overall economic ties, an FTA that covers trade in goods, services, investment and disciplines relating to electronic commerce, competition and intellectual property, may be more appropriate. To this end, other chapters in an FTA can also contribute to the development of an investment-friendly climate, thereby attracting foreign investment. For instance, a chapter on intellectual property can assist an investor in better protecting and enforcing their intellectual property rights. A trade facilitation chapter can benefit investments in goods by providing for more streamlined processes to transport goods across the borders of the treaty parties.
The importance of treaty language
The general counsel of a prominent multinational with whom I worked early in my career had framed on the wall in his office a piece of paper that simply said: ‘What does the contract say?’. He explained to me that he had been through multiple disputes where the contract language (or sometimes, absence of language) had been critical.
In the investment treaty world, that question becomes: ‘What does the treaty say?’. States, not private parties, negotiate and enter into treaties and therefore have the power to control what they say. Some of the concerns voiced today about the ISDS system arise, in my view, because a significant number of treaties – often, but not always, older treaties – are very general and imprecise with respect to the rights they confer and the prerequisites to investment protection. But even newer treaties can give rise to significant interpretive questions, through inconsistencies, errors, lack of clarity or silence.
This does not have to be so. While there is obviously a balance to be sought, investment treaties can clarify issues such as a margin of regulatory discretion, the corporate responsibility to be exercised by investors, and the like, in reasonable and appropriate ways. Improving treaty language may not be the only way forward, but it could be an important element of improving the current system.
– Lucinda A Low, Steptoe & Johnson LLP
Considerations when negotiating a BIT
States generally adopt two approaches when negotiating a BIT. Where the state has a model BIT text, it may decide to negotiate from this text. The model BIT could be formally developed by the state and made publicly available, or could be of a more informal nature for the state’s internal reference. In the absence of a model BIT, states may draw reference from their treaty practice, particularly where the negotiating parties already have agreements between them on similar subject matter. In either case, these approaches allow states to engage in negotiations more efficiently by drawing on past practice as opposed to negotiating a draft treaty from scratch. They also help states to draft text that is consistent with their existing obligations and their overall investment policy.
Considerations when negotiating FTAs with an investment chapter
FTA negotiations require a different approach from that of negotiating a BIT. These agreements are complex in nature and cover many facets of the state’s economic and regulatory regime, and negotiators will need to consider the many linkages between the investment chapter and other chapters of the agreement. For example, while investment chapters in FTAs generally contain similar provisions to BITs on investment protection, the negotiating parties will also need to decide on the nature of the interaction between the investment chapter and the trade in services chapter, and may expressly state this in either one or both chapters.
In some agreements, there is limited interaction between the two chapters. The investment chapter applies to all investments in both goods and services, whereas the services chapter applies to the modes of service identified in Article 1 of the General Agreement on Trade in Services, except for services supplied through commercial presence (commonly referred to as ‘mode 3’, where a service supplier establishes a local entity in the host state’s territory to supply services). The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is an example of such an agreement. Article 10.1 of the CPTPP’s ‘Cross-Border Trade in Services’ chapter defines ‘cross-border trade in services’ or ‘cross-border supply of services’ as, among other things, excluding ‘the supply of a service in the territory of a Party by a covered investment’. This definition excludes such services from the scope of the chapter.
In other agreements, the services chapter may govern the liberalisation of all supplies of service, including services supplied through commercial presence while the investment chapter may contain provisions regarding the protection of investments, and may specify the extent of its application to investments in service sectors. An example of this type of agreement is found in Article 38(2) and (3) of the agreement between the European Free Trade Association States and Singapore, which clarifies that the national treatment and MFN obligations in the investment chapter do not apply to measures affecting trade in services, and to investors of a party in service sectors and their investments in such sectors.
When considering the level and the nature of the interaction between the investment and services chapters, the negotiating parties may consider their past treaty practice, their existing level of liberalisation and their intended pace of future liberalisation. In either case, the negotiating parties will also engage in negotiations on their schedule of non-conforming measures (also commonly referred to as the schedule of reservations). This provides the host state with the policy flexibility to exclude certain sectors, sub-sectors or measures from the treaty’s obligations. By way of illustrative example, Article 9.12 of the CPTPP permits a party to schedule reservations against obligations regarding: (1) national treatment; (2) MFN; (3) performance requirements; and (4) senior management and board of directors, with respect to an existing non-conforming measure or any measure a party adopts or maintains with respect to specified sectors, sub-sectors or activities. To this end, Annex II of the Schedule of Singapore (which sets out Singapore’s reservations for future non-conforming measures under the CPTPP) states that ‘Singapore reserves the right to adopt or maintain any measure affecting the arms and explosives sector’. In other words, Singapore is permitted to implement measures affecting the arms and explosives sector that may otherwise be inconsistent with four of Singapore’s obligations as described above.
Negotiations on the investment chapter and its schedules can be very protracted, especially in the case of a multilateral agreement with many parties. In fact, it is not uncommon for the investment chapter to be one of the last chapters to be concluded in a negotiation. This is generally because investment is a highly sensitive area for many states. Particularly in the case of capital-importing states, this sensitivity may be compounded by the perceived higher risk of a dispute arising under an investment chapter, especially where the treaty contains provisions on ISDS.
An investment treaty or chapter negotiator will therefore need to have a good understanding of its state’s existing investment-related laws and regulations, plans for future liberalisation, areas of sensitivity, the needs of investors that want to invest in the treaty partner, and any existing investment agreements between the parties. Knowledge of all these areas is no small feat and a negotiator may also have to carry out a fair degree of crystal ball gazing to assess whether the future needs of its state will likely be met by the FTA. Such considerations will have to be balanced with the treaty partner’s interests.
Compliance with investment treaties when dealing with competing stakeholders
Compliance with investment treaties starts with ensuring that the text of the treaty is consistent with the state’s interests and the degree of protection it can provide to foreign investors. It is essential that government agencies are aware of the commitments that have been made by the state to a treaty partner, that the necessary policy space is preserved and that the state has not made commitments it cannot fulfil. Lack of careful consideration of what the state is truly prepared to commit to will cause greater difficulties with compliance.
Therefore, in an ideal scenario, a state negotiating an investment treaty would have considered its overall approach towards foreign direct investments, reflecting the balance that has been struck with respect to all of its relevant interests and that of any interested stakeholders. Further, a state would also have considered its specific approach to each investment treaty being negotiated and how this treaty would fit within its existing investment framework and approach. This would involve coordination between agencies, each of which would have to consider their respective portfolios and evaluate their policy approaches including whether they will be able to fulfil commitments that the state will ultimately make to its treaty partner. As investment treaties encompass many sectors and interests, this intra-government coordination could involve a wide plethora of agencies, such as those that deal with the economy and trade, telecommunications and technology, and intellectual property, as well as monetary authorities. Some states, such as Canada, conduct public consultations for specific investment treaties. Public consultations might also be held in the course of reviewing and updating a state’s model investment treaty. As explained by Global Affairs Canada, for its 2018–2019 Foreign Investment Promotion and Protection Agreement review, in addition to its own technical review, public consultations were held, which ‘sought ideas on how to update the treaty to reflect the innovations of the large FTAs, while also seeking input on incorporating provisions to ensure that all Canadians, including women, Indigenous peoples and small and medium-sized enterprise owners, benefit more from Canada’s investment agreements’.
Nonetheless, as noted above, investment treaties will necessarily reflect the balance struck between the varied and sometimes competing interests of the treaty partners. In reality, the interests of the state may not be perfectly preserved, at least from the perspective of an agency that may have found that more policy space has been ceded than desired. Other times, new areas of regulation may not be foreseen and so not pre-emptively preserved in a negotiated investment treaty. Furthermore, the sheer scale of intra-government coordination required means that agencies, local governments or organs within a state may not be fully apprised of the existence and scope of the obligations to which the state has committed. This may remain the case even after the investment treaty has been signed and made publicly available. Additionally, these entities may not be aware of the full implications of, for example, the international legal dimension to domestic or local measures or processes, and the potential international and monetary liability of the state as a result of these measures.
Another layer of complexity for states is the fact that many states have a network of investment treaties in place. Some states may have entered into investment treaties with treaty partners with whom they also have BITs or other FTAs with overlapping scopes but possibly differing obligations. A number of these treaties also have MFN clauses, which require the host state to accord foreign investors of one treaty partner the best treatment that it accords to foreign investors from any other treaty partner under its network of investment obligations. This further creates interlinkages between BITs and FTAs that had been separately negotiated, often at different times or even when different policy approaches existed. This means that, for most states, consideration of investment obligations for any measure often involves a complex and multi-dimensional analysis.
This points to the importance of capacity building across all levels of government. For example, post SGS v. Pakistan, Pakistan had in place an ‘education process’ where foreign experts would be brought in to speak to government stakeholders about the consequences of signing BITs. In 2006, Peru created the State Coordination and Response System for International Investment Disputes, which required continuous training for all relevant agency officials at all levels of government on its investment commitments. In Singapore, the Ministry of Trade and Industry Trade Academy helps build up capacity and expertise within the government. There are also various resources available to states, such as the United Nations Conference on Trade and Development’s investment advisory series, the Asia-Pacific Economic Cooperation Handbook on Obligations in International Investment Treaties, and the National University of Singapore Centre for International Law’s Singapore International Arbitration Academy.
In addition to raising awareness and expertise, states also have to ensure that their agencies have access to the full range of relevant information when formulating policies or measures affecting foreign investments. This could entail a multifaceted approach, which may include the following.
- Agencies should have easy access to treaties and negotiating records so that the full range of obligations can be considered. This may be achieved through an inter-agency coordination mechanism or through the maintenance of a central treaty depositary.
- States may have in place a formal or informal inter-agency coordination mechanism for consultation and coordination. This allows the agency in charge of developing and implementing new policies or measures to first seek input from other government agencies.
- States may obtain advice from their government’s legal adviser on the state’s investment (as well as other relevant international) obligations. Legal advice is especially important for states that have a complex network of investment treaties and obligations.
- Public consultations may be held to ensure that measures are formulated in a well-considered fashion. Some states also require that regulatory impact statements are prepared to ensure that agencies have conducted a full cost-benefit analysis in a transparent fashion when formulating and implementing new policies and measures.
- States may have in place some form of internal notification system so that investment agreements entered into directly with investors are notified (as these could also implicate treaty obligations) or potential disputes may be notified and then resolved (e.g., by the correction of measures that may have been taken in a manner that is inconsistent with the state’s investment treaty obligations).
How and why states modify or terminate investment treaties
A large number of BITs are earlier generation investment treaties. This means that the minimum standard of treatment, national treatment, full protection and security, and other investment protection obligations contained therein, are typically broadly formulated and vague. A number of these BITs contain very few provisions, or their existing provisions do not sufficiently safeguard the host state’s interests. These BITs were often concluded with little negotiation, minimal consideration of the treaty partner’s own interests or without proper negotiation records.
Given the broad formulations in earlier BITs, ISDS tribunals have been left to interpret and apply these obligations to the specific factual scenarios of the disputes before them. Often these tribunals do not have access to the negotiating records to clarify the treaty parties’ intentions. Respondent states typically do not provide these records because: (1) records often do not exist as the early BITs tended to not have been extensively negotiated, as described above; or (2) negotiating records were not kept or were otherwise lost over time. Further, most home states did not (and still generally do not) intervene as third parties in ISDS proceedings to confirm or deny the respondent state’s assertions on the mutual understanding of a particular treaty, even if it has been negotiated. Nonetheless, ISDS tribunals have had to give effect to these broadly formulated and vague obligations, which lent themselves to multiple interpretations. This has resulted in some level of unpredictability and divergence in approaches by tribunals. Thus, especially in the earlier days of ISDS, states (both the host state being sued and the home state of the investor) found that some tribunal interpretations were inconsistent with what they thought they had signed up to or what they thought the treaty had stated with sufficient clarity.
The shortfalls or unanticipated consequences stemming from BITs have become increasingly apparent with the rise in ISDS cases. This has been accompanied by a backlash against ISDS and criticism of foreign investors receiving enhanced protection under BITs. At the same time, it has also been noted that countries increasingly favour a regional approach over a bilateral one, and wish to recalibrate the balance struck between the protection of investors’ rights and the right of the state to regulate in the light of, for example, sustainable developmental elements or other considerations that may not have been articulated in these earlier investment treaties. By 2013, approximately 1,300 BITs had reached their ‘any time termination phase’ (i.e., where a treaty partner can opt to unilaterally terminate the treaty), which opened a window of opportunity to address these issues.
Thoughts to help those who negotiate treaties
Treaties are negotiated and drafted by very sophisticated individuals. As a result, it may seem presumptuous to give them advice on how they should negotiate or draft treaties. However, the following is not so much advice to negotiators on how to do their job. Rather, it aims to identify certain issues that could be clarified in the results. The goal is to avoid situations in which the parties, and sometimes, but more rarely, the arbitrators, seek to bend the language of the treaty when that language is not necessarily in accordance with the outcome they desire.
To the extent possible, negotiators should avoid any possibility of escaping the plain language of the treaty. Under the Vienna Convention, the starting point of treaty interpretation is the language of the treaty. As a result, particular attention should be given to the use of specific words; the same word should be used throughout the treaty when its meaning is the same throughout. This may sound obvious, but it is not always the case in practice.
A complicating factor arises when the treaty is drafted in more than one language. Perfect translations (with perfectly corresponding terms) are rarely feasible, and it is not uncommon to have two versions of the treaty with slightly different meanings (not to mention treaties that have authentic versions in multiple languages, such as the ECT). There is no avoiding discrepancies. One way to limit the risk of inconsistent interpretations is to use a defined term in order to convey the meaning that the parties want to achieve.
Four points of difficulty can be identified
Be clear on any conditions to jurisdiction
First, it is important to distinguish clearly conditions to the jurisdiction of the tribunal, which are generally found in the arbitration agreement itself, from other conditions that affect the substantive protection of the investment. There is currently a case pending before the French Supreme Court that will decide whether the temporal protection of investment falls within the jurisdiction of the tribunal, as one party contends, or the substantive protection of the investment, as the other party contends. The underlying treaty question does include a provision on the retroactive, temporal protection of the investment, which is not found in the arbitration agreement, but it is drafted in an ambiguous manner. It would therefore be helpful for treaty negotiators to indicate clearly that those conditions that govern the jurisdiction of the tribunal are found in the provision devoted to the arbitration agreement itself as opposed to other provisions of the treaty.
Can an investment just ‘arise’?
Another notorious difficulty is the definition of investment and the notion of the making of an investment. To the extent possible, negotiators should clarify whether the fact that an investment is merely ‘held’ passively, as opposed to actively ‘made’ as the result of a transfer of monies, is sufficient to qualify for the definition of protected investment. Some treaties indicate that the mere holding of an investment is sufficient, but most do not. This gives rise to endless disputes, both before arbitral tribunals and before the courts. A clarification on this aspect would be welcome
What does MFN cover?
Similarly, it would be helpful to clarify systematically whether the most-favoured nation provision does or does not extend beyond substantive protections to procedural aspects, such as jurisdiction. Again, some treaties do just that, but most do not.
Another hotly debated topic is dual nationality outside of the ICSID system. A clarification would once again be welcome, one way or another to avoid unnecessary discussions.
These are a few issues among many that arise relatively frequently where the content of the treaty could usefully be clarified to avoid money being spent on litigating them over and over again.
– Philippe Pinsolle, Quinn Emanuel Urquhart & Sullivan LLP
Modification of investment treaties
The amendment of an investment treaty will need to comply with any provisions within the treaty regulating amendment, otherwise the general rules of the Vienna Convention on the Law of Treaties (VCLT) will apply. Amendments may be appropriate where, for instance, the states wish to address specific issues in an investment treaty, but retain its general architecture. It may also be easier or more advantageous for states to reach agreement on a few amendments to introduce new provisions or amend existing ones, rather than engage in renegotiation of the treaty as a whole.
Thus, some of the perceived shortcomings of BITs have been addressed by modifying investment treaties. For example, the Czech Republic–Guatemala, Bulgaria–Israel and Lithuania–Kuwait BITs were amended to introduce balance-of-payments exceptions to provisions on the free transfer of funds. Other amendments have introduced exceptions to MFN clauses for regional economic integration organisations or inserted exceptions for national security reasons. States may also need to amend their BITs to address new developments. For example, in the European Union context, a number of Eastern European states had to amend their BITs to align them with EU law, in the context of their accession to the EU.
Some states have also addressed shortcomings through issuing authoritative joint interpretations to clarify ambiguity. The use of joint interpretations allows the treaty parties to clarify specific aspects of a treaty without engaging in the comparatively more intensive process of negotiating an amendment to the text or renegotiating a treaty, as no ratification is required to give effect to an interpretation. For example, the North American Free Trade Agreement (NAFTA) Free Trade Commission’s Notes of Interpretation of Certain Chapter 11 Provisions contains ‘interpretations’ to ‘clarify and reaffirm the meaning’ of, among other things, Article 1105(1) of the NAFTA regarding the minimum standard of treatment in accordance with international law. In respect of the India–Bangladesh BIT, there are joint interpretative notes signed between India and Bangladesh to ‘resolve certain questions regarding, and affirm their understanding of, the scope and meaning of several of the Agreement’s provisions’.
As for the effect of joint interpretations, some treaties may state that joint interpretative statements are binding on a tribunal. Even if the treaty does not contain such a provision, as a general rule of interpretation, the VCLT provides that there shall be taken into account, together with the context, ‘[a]ny subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions’. Nonetheless, it should be noted that there has been debate as to whether joint interpretations should constitute a clarification of the treaty obligation or an amendment of the treaty, and there have also been issues with tribunals or courts applying joint interpretations that have been issued after the alleged breach has occurred or in the course of proceedings.
Terminating investment treaties
Most BITs contain termination clauses that govern the circumstances and mode by which they can be terminated. The most common type of termination clause provides that, after the expiry of a certain period of time, either party may elect to terminate the treaty by giving notice to the other party. The treaty will then terminate after a specified period of time after notification, such as one year. Even where an investment treaty is terminated, most BITs contain ‘survival’ clauses, which provide that the BIT will, for a fixed period of time, such as 10, 15 or 20 years, continue to apply to investments established before its termination.
Some states, such as South Africa, have systematically terminated or renegotiated all of their BITs that they perceive to be no longer compatible with the government’s objectives. Termination may indeed be an appropriate tool where the states wish to fundamentally change the obligations they are willing to commit to under an investment treaty. Ecuador, for instance, established an investment treaties audit commission, CAITISA, to audit all its BITs and its foreign investment plan. In 2017, CAITISA recommended that Ecuador terminate its remaining 16 BITs and negotiate new instruments. States may also decide to terminate investment treaties where they have treaties with the same partners that overlap in terms of their coverage of investments. For example, Australia exchanged side letters with some CPTPP parties, in which they agreed to terminate the BITs between them upon the entry into force of the CPTPP. Some states have also terminated their investment treaties due to legal challenges or impediments. In the EU context, in 2020 EU Member States agreed to terminate intra-EU BITs via a termination agreement. The termination agreement implements a March 2018 European Court of Justice decision that investor–state arbitration clauses within intra-EU BITs were incompatible with the Treaty on the Functioning of the European Union.
As states continue to review their BITs, and in view of the ongoing reform and review efforts (for example, the discussions on ISDS reform undertaken under the auspices of the United Nations Commission on International Trade Law’s Working Group III), there will likely be new developments and innovative approaches to investment treaties moving forward.