Forji Amin George
LL.M (Helsinki), Maîtrise (Dschang), Licence (Dschang)
Helsinki, 16 October 2006
With the world fast becoming a global village, investors are more than ever before looking for new places to expand their investments.
Meanwhile the developed world affords them with significantly adequate protection; the same is not often true for the developing countries. In fact, one of the major concerns of foreign investors is usually on the potential risks of the institutions and the enforceability of the law in the Less
Developed Countries (LDCs). Bilateral Investment Treaties (BITs) which guarantee for certain standards of fair treatment that can be enforced through binding investor-to-state dispute settlement outside the domestic juridical system play a vital role, call it bridge, in that investors believe these give them the much needed assurances. The recent explosion of these bilateral investment and trade agreements and investor-state disputes
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is of growing concern. First and foremost, a bilateral investment treaty is an agreement between two States, designed to promote and protect international investments flowing between them.
1
BITs purport to have two related objectives to wit: a) That they protect the flow of foreign direct investment (FDI), by highlighting on a series of rights and guarantees, and b) By encouraging economic cooperation, thereby enhancing the flow of
FDI into developing states.
2
Less Developed Countries (LDCs) are known to be in desperate need of
Foreign Direct Investment (FDIs) for economic growth. They try to attract these in BITs agreements by accepting restrictions on their sovereignty,
3 and further agreeing to protect foreign investors’ investments from political and other risks. Some academic scholarship
4
has concluded that in concluding BITs, developing countries are ‘trading their sovereignty for credibility’ (Elkins, Guzman and Simmons 2004, p. 4).
Sornarajah, M opines that the starting point of a discussion of the law of foreign investment must be the abeyance to the general international legal norm, which is the right of a state to exercise complete control over the entry of foreign investment.
5
Reason being that irrespective of the protections that may be afforded to foreign capital, the host state continues
1 www.lw.com/resource/Publications/_pdf/pub1654_1.pdf
2
Luke Eric Peterson and Kevin R. Gray, International Human Rights in Bilateral Investment Treaties and in
Investment Treaty Arbitration A Research paper prepared by the International Institute for Sustainable Development
(IISD) for the Swiss Department of Foreign Affairs, (2003) 7.
3
Eric Neumayer
* and Laura Spess , Do bilateral investment treaties increase foreign direct investment to developing countries? (2005)- Elsevier Ltd, World Development Journal, 33 (10), PP. 1568
4
Elkins, Z., Guzman, A. & Simmons, B. (2004). Competing for Capital: The diffusion of bilateral investment treaties,
1960-2000 . Working paper. University of Illinois, University of California at Berkeley and Harvard University.
5 Sornarajah, M., The International Law on Foreign Investment, Cambridge: Cambridge University Press
(1994),83
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to retain the right to territorial sovereignty, and must as a result retain the right to elect whether to or not to exclude the investment.
6
The first bilateral investment treaty was signed between the Federal
Republic of Germany and Pakistan on November 25, 1959. It was however not until the 1990s that these agreements began to witness an unprecedented growth in their number, covering rules on foreign direct investment. Countries have signed bilateral investment treaties, included investment chapters in their trade agreements, and negotiated investment protocols and decisions. It is during this decade that many developing countries have modified their investment codes to attract foreign investors, by blending the documents with all kinds of favorable protections and guarantees. The United Nations Conference on Trade and Development
(UNCTAD) in it’s BITs Database indicate that the number of BITs increased to 385 in 1989 and to 2,392 by 2004, involving some 176 countries, thus meaning that their number far outnumbers the membership of the WTO.
7
By embracing BITs, LDCs commit themselves protecting FDIs, especially against strife, government interference and expropriation. It hass been fashionable since the 1990s for LDCs to clearly spell out specific protection guarantees to FDIs in their domestic laws, with the most common being national treatment and most favoured nation clauses.
Sornarajah for example see BITs to be of unique importance to international law, in that they have by and large afforded a solution for the time-being of what was hitherto an essentially private international law issue; that is the problem of contracting between investors and the host
6 ibid
7 Luke Eric Peterson and Kevin R. Gray, International Human Rights in Bilateral Investment Treaties and in
Investment Treaty Arbitration A Research paper prepared by the International Institute for Sustainable Development
(IISD) for the Swiss Department of Foreign Affairs, (2003) 7
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state. Treaties between home states of importing capital and host states has meant that the problem of international personality is being overcome making the relationship to hence be subject to international law.
8
In an article published by The American Journal of International Law
(AJIL) - The Political Economy of BITs , Kenneth J. Vandevelde
(Professor) of Thomas Jefferson school of Law, argues that the astonishing explosion of BITs agreements concluded during the 1990s appears to signal the emergence of a liberal International investment regime.
9
His reasoning may have been based on the fact that the protections afforded in a BIT are often a supplementary offer provided to the signatory countries other than those specified in the national laws. This is one of the things that make BITs different anyhow.
In their substantive provisions, the treaties offer a form of lex specialisn to supplement the under-developed rules of customary international law related to the treatment of aliens and alien property.
10
The provisions are intended to secure a legal environment for foreign investors. That is, the
BITs provisions typically guarantee certain standards of treatment for the foreign investor (Dolzer and Stevens 1995; UNCTAD 1998).
11
The scope of application of investment treaties is determined by the definition of investments and investors which are covered by their provisions and thus enjoy the protection accorded by them. Recent BITs
8 Sornarajah (supra), p. 225
9 See AJIL, Vol. 92, No. 4 (October 1998), PP 621-641.
10
Luke Eric Peterson and Kevin R. Gray, International Human Rights in Bilateral Investment Treaties and in
Investment Treaty Arbitration A Research paper prepared by the International Institute for Sustainable Development
(IISD) for the Swiss Department of Foreign Affairs, (2003), 6- 7.
11
Cf:
Eric Neumayer
* and Laura Spess , Do bilateral investment treaties increase foreign direct investment to developing countries? (2005)- Elsevier Ltd, World Development Journal, 33 (10), PP. 1575
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and the investment chapters of the trade and integration arrangements have a broader scope of application than other traditional investment agreements.
12
These new instruments have expanded their definition of covered investments to include new forms of transactions and are being applied to a more diverse group of investors. There is an important degree of uniformity in the type of language used to that effect.
13
In addition to determining the scope of application of the treaty, that is, the investments and investors covered by it, virtually all bilateral investment treaties cover four substantive areas: admission, treatment, expropriation and the settlement of disputes.
They typically include provisions requiring investing nationals of the BIT partner to be treated as well as national firms or as well as the most favored foreign firms (MFN treatment); establish limits on expropriations of investments and require compensation when it occurs; and guarantee investors’ right to transfer funds into and out of the country using a market rate of exchange.
14
In sum, Bilateral Investment treaties cover four main areas to wit: Foreign
Direct Investment (FDI) admission, treatment, expropriation, and the settlement of disputes.
15
Are BITs therefore playing a significant role in the inflow of foreign investments? Opinion remains divided on the subject. Investment agreements have been regarded by developing countries as an instrument to attract foreign investors.
12 See http://www.sice.oas.org/cp_bits/english/bit_inte.asp
13 ibid
14 Zachary Elkins, Andrew Guzman,Beth Simmons, Competing For Capital: The Diffusion of BITs,1960-
2000 (August 2004) SSRN
15 Zachary Elkins, Andrew Guzman,Beth Simmons,Competing For Capital:The Diffusion of BITs,1960-
2000 (August 2004) SSRN
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One author (Hallward-Driemeier, 2003), argues that despite expectations about the impact of BITs on FDI, there is no evidence indicating that the adoption of BITs has actually encouraged FDI flows to signing developing countries. She continues that while half of OECD (Organisation for
Economic Co-operation and Development) FDI into developing countries was covered by a BIT by 2000, the increase in FDI flows to those countries over the previous two decades were accounted for by additional country pairs entering into agreements rather than signatory hosts gaining significant additional foreign direct investment.
Soranajah on his part is confident that although BITs may not attract much
FDIs in the short-run, a good reputation of honouring foreign investments will nevertheless do the trick in the long-run.
16
The first ever modern bilateral investment treaty has been traced to the agreement between Germany and Pakistan way back in 1959. Ever since then, capital exporting countries, mostly developed nations have negotiated and concluded such agreements with capital importing countries, mostly LDCs. M. Sornarajah (1998) attributes the origin of
16 See Soranajah supra, p. 228-36
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these treaties to the deep disagreement as to the customary international law
Standards of treatment owed to foreign investors before 1959, as well as the failure of diplomatic efforts to conclude a broader multilateral agreement.
17 It has been widely accepted that customary law provides only very weak legal standards for foreign investment. BITs emerged as a solution to the complexities of multilateral agreements, as no multilateral treaty showed any good signs of supplanting the uncertainties of customary international law. Western investors had enormous concerns and fears at the time (many still have) of the likelihood of expropriation or nationalization and arbitrary treatment in the hands by the authorities in the LDCs.
The number of these agreements soared from 385 to 1,857 between 1980 and 1990, according to UNCTAD index.
18
The UNCTAD index of 2000 showed that there were 2100 known BITs, between 173 countries. There were 2,392 at the end of 2004 between 176 countries,
19
thus meaning that the number of countries that have entered into these treaties far surpass the membership of WTO.
17
M. Sornarajah, The International Law on Foreign Investment , Cambridge University Press, 1994, 231-6; United
Nations Conference on Trade and Development, Bilateral Investment Treaties in the Mid-1990s , New York and
Geneva, 1998 , 1-9
18 UNCTAD (2000), Bilateral Investment Treaties 1959-1999, UNCTAD/ITE/IIA/2.
19 UNCTAD 2005
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To begin with, we have to be realistic-The developing world is per se a vulnerable and risky place to do business, because there will always be political, social, security, economic, upheavals and constraints along the way of business. No realistic investor, irrespective of the nationality goes into business to make losses or do charity. In fact, investors and states have one thing in common-they do not have friends-they have interests.
The above notwithstanding, the task of enhancing the supply of both foreign and domestic investment capital remains a fundamental and durable feature of humane development policy for LDCs.
In the midst of potential risks, BITs offer perhaps the “most practical and effective means of affording treaty protection to alien investors in the
Third World.
20
They do this by providing for an effective form of guarantees, emphasizing mutuality and respect for the legitimate interests of the states that are parties to them,
21
thereby creating a more stable and predictable legal environment for investment. That is, reliance on the BIT gives foreign investors credible assurances that host states will not violate their contractual undertakings and violate investors’ property, and importantly the assurance they will pay compensation in the event of breach, and will remit disputes arising from the contract to resolution through international commercial arbitration.
22
In sharp contrast, domestic investors do not enjoy such protection under such treaties, and as a result rely on domestic law and legal institutions for protection. In this way, domestic investors are more of captives in their own market.
20 Adeoye Akinsanya, “International Protection of Direct Foreign Investments in the
Third World” (1987) 36
21 Marion Nash, “U.S. Practice: Bilateral Investment Treaties” 87 AJIL 43
22 ibid
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Comparing the above two situation (foreign and domestic investors), the importance and significance of the BIT regime is that they provide an enclave against the risks of legal, socio-economic and political failures that domestic investors traditionally face. BITs act to either substantially lessen these or eradicate this altogether for foreign investors. The security and guarantees provided by a BIT are considered to be primordial to encourage the inflow of supposedly much-needed FDIs to LDCs. In fact many developing countries are constantly reminded that it is only by providing such assurances that foreign investors will be persuaded to venture into potentially risky markets.
BITs have thus been lauded for the discipline they impose on developing states (hitherto seen to be very risky terrains to do business) in their dealings with foreign investors.
Hence they become a substitute for risks- that is a substitute for the quality of poor institutions and political risks that are common with LDCs.
In this way, BITs are helping to positively shape the economies of LDCs-
An instititution of a good investment regime today will surely pay off more than two-fold for the future. They are functioning as substitutes for good domestic institutional quality, and this can only be good news to
LDCs and to investment.
Despite efforts by many LDCs to come up with sound investment codes, some scholars remain skeptical. Sornarajah (1986, p. 82), for example, suggests that ‘in reality attracting foreign investment depends more on the political and economic climate for its existence rather than on the creation of a legal structure for its protection’ 23 .
23 Sornarajah. M. State Responsibility and Bilateral Investment Treaties. Journal of
World Trade Law , (1986), 82
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Some scholars, such as Kim Sokchea (2006) argue that only countries with higher risk tend to rush to sign BITs in order to signal their commitment to provide protection for private foreign investment. He continues that it will be absolutely unnecessary for countries such as Hong Kong, Singapore,
South Korea and Taiwan to use BITs to signal foreign investors.
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BITs have become the dominant means through which investment in low and middle income countries is regulated under international law.
(Walker 1956; Schwarzenberger 1969; Kishoiyian,1994). The preambles of the thousands of existing BITs state that the purpose of BITs is to promote the flow of FDI and, undoubtedly, BITs are so popular because policy makers in developing countries believe that signing them will increase FDI.
Again, in their substantive provisions, the treaties offer a form of lex specialis to supplement the under-developed rules of customary international law related to the treatment of aliens and alien property.
24
The provisions are intended to secure a legal environment for foreign investors. That is, the BITs provisions typically guarantee certain standards of treatment for the foreign investor (Dolzer and Stevens 1995;
UNCTAD 1998). 25
Typically, developed countries prepare a model treaty based on the 1967
Draft Convention on the Protection of Foreign Property and on already existing BITs. These model treaties are then modified for use in a variety of situations.
BITs and related instruments covering both trade and investment, such as NAFTA, are currently the dominant means through which investment in low- and middle-income countries is regulated under international law.
24
Luke Eric Peterson and Kevin R. Gray, International Human Rights in Bilateral Investment Treaties and in
Investment Treaty Arbitration A Research paper prepared by the International Institute for Sustainable Development
(IISD) for the Swiss Department of Foreign Affairs, (2003), 6- 7.
25
Cf:
Eric Neumayer
* and Laura Spess , Do bilateral investment treaties increase foreign direct investment to developing countries? (2005)- Elsevier Ltd, World Development Journal, 33 (10), PP. 1575
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26
The treaties are a response to the weaknesses and ambiguities of customary international law as applied to investments by international firms in countries at low levels of development.
"Treatment is a broad term which...refers to the legal regime that applies to investments once they have been admitted by the host State."
27
Almost all modern BITs include provisions dealing with disputes between one of the parties and investors having the nationality of the other party. In this respect most provide for arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of
Other States (the ICSID Convention) which entered into force in 1966.
28
Policies welcoming foreign investments have become a common feature in developing countries in the last fifteen years, after the failure of attempts to impose some forms of control over the activities of transnational corporations and the flows of foreign direct investment (FDI) and technology.
29
26
Susan Rose-Ackerman, Bilateral Investment Treaties: Do They Stimulate Foreign Direct Investment?, Yale
University law scool e-publications, June 2006
27 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (1995).
, 58.
28 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (1995) 58.
29
Negotiations on a UN Code of Conduct on Transnational Corporations and on an International Code on Transfer of
Technology were launched during the late 1970s, but collapsed due to the resistance of developed countries. See Correa and Kumar, 2003, Chapter 3.
Cf: http://www.grain.org/briefings/?id=186#_ftn2
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BITs have to be understood as a part of the broader neo- liberal project to encourage the free flow of goods, services, capital, and ideas across national borders.
30
They typically include provisions requiring investing nationals of the BIT partner to be treated as well as national firms or as well as the most favored foreign firms (MFN treatment); establish limits on expropriations of investments and require compensation when it occurs; and guarantee investors’ right to transfer funds into and out of the country using a market rate of exchange.
31
However, most BITs equally contain clauses that exclude investments in particular areas such as national security, telecommunications, and finance.
Key questions are often on the protection or non-protection of certain types of investment and further on whether or not the treaties’ apply as soon as a contract has been signed or whether funds must actually have been invested.
Since there is no unified document governing BITs, it goes without saying that each of these agreements is different in its own way. Nevertheless, every BIT contains certain substantive provisions.
The most important of these substantial issues includes: National
Treatment (NT) clause, Most-Favoured Nation treatment (MFN), Right of
Establishment (RE), Fair and equitable treatment and full protection and security, Expropriation and Nationalization, and the last but not the least, a provision for the Settlement of Disputes. In sum, Bilateral Investment
30 Zachary Elkins, Andrew Guzman,Beth Simmons, Competing For Capital: The Diffusion of BITs,1960-
2000 (August 2004) SSRN
31 ibid
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treaties cover four main areas to wit: Foreign Direct Investment (FDI) admission, treatment, expropriation, and the settlement of disputes.
32
BITs generally provide for resolution of both country-country and investor-host country disputes by an international body such as the World Bank Group's
International Center for the Settlement of International Disputes (ICSID), or other arbitration systems, such as those operated by the International
Chamber of Commerce (ICC). The United Nations Commission on
International Trade Law (UNCITRAL) has a framework document that can govern arbitrations but does not operate an arbitration institution
(UNCTAD 1998).
33
Numerous BITs contain a provision requiring a state to observe any obligation it may have entered into with regard to investments. Such provisions are termed
“umbrella clauses”.
34
The meaning of umbrella clauses has been the subject of some debate.
35
There is a very powerful argument that a host state breaches a BIT’s umbrella clause simply by breaching any obligation in an investment contract between the host state and a foreign investor (assuming that there is an applicable BIT containing an umbrella clause). For example, if a
United States investor enters into an investment contract with Argentina and Argentina breaches any term of the investment contract, then
32 Zachary Elkins, Andrew Guzman,Beth Simmons,Competing For Capital:The Diffusion of BITs,1960-
2000 (August 2004) SSRN
33
See www.worldbank.org/icsid
34 Deborah Ruff & Thomas Geuther, International Disputes Practice UpdateBilateral Investment Treaties — Recent
Developments, . Le Beouf Lamb, March 2006 newsletter.
35 ibid
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Argentina’s breach of the contract would automatically mean that
Argentina has breached the United States-Argentina BIT, which contains an umbrella clause.
36
A typical BIT or foreign investment law provides broader protections for the investor than are available under customary international law.
These provisions are discussed below:
The concept of National treatment is of vital importance in treaty regimes. National treatment means that the foreign investors will not be treated any worse than national investors. In other words, National treatment affords foreign individuals and firms the same competitive opportunities, including market access, as are available to domestic parties.
37
In the context of international agreements, a state must provide equal treatment to those citizens of other states which are participating in the agreement.
The National Treatment Instrument addresses the treatment of foreigncontrolled enterprises after establishment.
Paradoxically however, it could also means that they may be treated better and in fact often are, than the national investors.
Most treaties state that each Contracting Party shall grant treatment no less favorable than that it accords to investments of its own nationals or companies, or those of third States (e.g., Argentina-Bolivia, Argentina-
Chile, Argentina-Ecuador, Argentina-Jamaica, Argentina-Venezuela,
36
Article II(2)(c) of the United States-Argentina BIT
(http://www.unctad.org/sections/dite/iia/docs/bits/argentina_us.pdf).
37
Philippe De (EDT) Lombaerde , Assessment and Measurement of Regional Interfration, Routledge (UK), 2006, 118-
9
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Barbados-Venezuela, Bolivia-Ecuador, Brazil-Venezuela, Canada-
Trinidad and Tobago, Chile-Ecuador, Colombia-Peru, Ecuador-El
Salvador, Ecuador-Paraguay, Ecuador-Venezuela).
38
The importance of the National Treatment provision is that it gives the investor the assurance that he will not face a less favourable treatment than a domestic investor in like circumstances.
39 The scope of a national treatment obligation spans the establishment, operational and winding-up stages of an investment. It also encompasses the pre-establishment phase of the investment (UNCTAD, 1999c).
The protection afforded an investor under the umbrella of National
Treatment are not limited to de jure legal or administrative discriminations. They encompass every treatment that is discriminatory, so to speak. That is, any treatment that leads to discriminatory impacts will be deemed as such. For instance, in the case of Marvin Roy Feldman v. The
United Mexican State’s, 40 the tribunal ruled that since the principle of
National Treatment is intended to protect the foreign investor from discrimination, it goes without saying that the de facto difference in treatment could stand on its own, “at least in the absence of any evidence to the contrary”. In other words, de facto differences in treatment were sufficient to create a presumption of discrimination. The tribunal ruled that:
“ The assessment of like circumstances must also take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest”.
41
38 See http://www.sice.oas.org/cp_bits/english/bit_inte.asp#26
39 Jeffrey J Schott , The World Trading System, challenges ahead, Institute for International Economics (1996) 195
40
Marvin Roy Feldman v. The United Mexican States , ICSID Case No. ARB(AF)/99/1, Award on Merits, 16
December 2002 (NAFTA). See paragraphs 1-5
41
Marvin Roy Feldman v. The United Mexican States , ICSID Case No. ARB(AF)/99/1, Award on Merits, 16
December 2002 (NAFTA), Paragraph 50
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The most favoured-Nation (MFN) clause means that the privileges granted to one foreign investor must be granted to all other foreign investors.
That is, that the each contracting state accord to investors of the other contracting state treatment that is no less favourable than that accorded to the investors of third states.
42
This means that that a foreign investor be accorded the highest standard of treatment available to an investor from any foreign country.
In doing so, they link BITs by requiring state parties to one treaty to provide investors with treatment that is no less favourable than the treatment provided by them to other investors under other treaties.
To say the least, the Most-Favoured-Nation (MFN) clauses link investment agreements by ensuring that the parties to one treaty provide treatment no less favourable than the treatment they provide under other treaties in areas covered by the clause. MFN clauses have thus become a significant instrument of economic liberalization in the investment area.
43
Moreover, by giving the Investors of all the parties benefiting from a country’s MFN clause the right, in similar circumstances, to treatment no less favourable than a country’s closest or most influential partners can negotiate on the matters the clause covers, MFN avoids economic
42 See Stephen Fietta, Most favoured nation treatment and dispute resolution under BITs: A turningf point?
(2005), Int. ALR,2
43
Working Papers on International Investment- Number 2004/2
See also: www.oecd.org/dataoecd/21/37/33773085.pdf
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distortions that would occur through more selective country-by-country liberalization. Such a treatment may result from the implementation of treaties, legislative or administrative acts of the country and also by mere practice.
The clause has been useful in establishing equality of trading opportunity among states by making originally bilateral agreements multilateral. As a principle of public international law, it establishes the sovereign equality of states with respect to trading policy. As an instrument of economic policy, it provides a treaty basis for competitive international transactions.
44
The idea of Most-Favoured-Nation treatment in and of itself has a long history. Prior to the GATT, an MFN clause was often included in bilateral trade agreements, and as such it contributed greatly to the liberalization of trade. However, in the 1930s, several measures that limited the functioning of the Most-Favoured-Nation principle were taken. It is said that these measures led to the division of the world economy into trade blocs.
45
Having learned from this mistake, after World War II, the unconditional Most-Favoured-Nation clause was then included in the
GATT, on a multilateral basis, and has contributed to the stability of trade around the world. It is within this backdrop that BITs have generally adhered to the clause. Against this background, the MFN principle in particular must be observed as a fundamental principle for sustaining the multilateral free trading system in general and BITs in particular.
The function of the MFN standard is two-fold; it removes economic distortions by treating all investments in the same way and strengthens the liberalization process by automatically extending the most liberal
44 " Most-favoured-nation treatment." Encyclopædia Britannica. 2006. Britannica Concise Encyclopedia.
Assessed: 16 Sept. 2006.
45 http://www.meti.go.jp/english/report/data/gCT9901e.html
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treatment to foreign investments covered by agreements containing the
MFN clause.
46
The MFN clauses guarantee that treaty-protected investments will receive treatment at least as favourable as the instrument the host country grants to investments by nationals and companies from any third state. A typical formulation is found in The Netherlands-Philippines BIT. It states thus:
“Each contracting party shall extend to investments, in its terrirtory, of nationals of the other contracting party treatment no less favourable than that granted to investment by any third state.” 47
Firstly, the importance of this clause is that it broadens the scope of the investor’s procedural and substantive rights. That the clause is problematic can be justified by using two important cases, notably the Maffezini
Salini
48 and the Plama
49
cases . One thing to re-iterate is that like all the other clauses of every typical BIT, the wordings normally vary from treaty to treaty, with the attendant result that the scope and extent of the protection that is offered in the clauses, can be very different when compared with another treaty.
The problem that was addressed both the Maffezini Salini and the Plama cases was one of finding out in what circumstances is it permissible for an
46 OECD Trade Policy Working paper No. 36, 11 July 2006.
47 Article 3 of Netherlands-Philippines Treaty, note 46.
48
ICSID Case No.ARB/97/7, decision of January 25, 2000.
49
ICSID Case No.ARB/03/24, decision of February 8,
2005.
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investor to use the MFN provision in a BIT applicable to its dispute as a means of establishing jurisdiction for an arbitral.
In addressing this issue, as the tribunal stated in the Maffezini case , a clear distinction must be drawn between the:
‘‘legitimate extension of rights and benefits by means of the operation of the MFN clause, on the one hand, and disruptive treaty-shopping that would play havoc with the policy objectives of underlying specific treaty provisions, on the other hand’’.
50
A summary of the facts in the Maffezini case is thus: The case involved an investment dispute between an Argentine claimant and the kingdom of Spain, submitted to arbitration by the claimant under the Argentine-Spain BIT. By the terms of the treaty, disputes arising had to be submitted to ‘‘the competent tribunal’’ in Spain following the failure of amicable settlement procedures
(Art.X.2). It added that the dispute could only be submitted to international arbitration if the competent domestic tribunal rendered a decision on the merits that failed to resolve the dispute, or if no decision on the merits had been rendered within 18 months of the initiation of the domestic proceedings, whichever was the sooner
(Art.X.3). The claimant failed to meet this condition precedent to international arbitration, but argued before the ICSID tribunal that jurisdiction could be based upon the MFN provision contained at Art.IV of the Argentina- Spain BIT. After guaranteeing fair and equitable treatment for investors, Art.IV, para.2 read as follows:
‘‘In all matters subject to this agreement, this treatment shall not be less favourable than that extended by each Party to the investments made in its territory by investors of a third country’’.
50 Maffezini case supra, paragrapgh 63
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The Chile-Spain BIT on the other hand did not contain any condition precedent to international arbitration equivalent to that contained at
Art.X.3 of the Argentina-Spain BIT. The claimant therefore argued that
Chilean investors in Spain were treated more favourably than Argentine investors in Spain and that, accordingly, the MFN provision in the
Argentina-Spain BIT gave him the option of submitting the dispute to the
ICSID tribunal without prior referral to the Spanish domestic courts.
The tribunal accepted this as an application of the MFN principle, subject to the limitation that it did not override public policy considerations of the parties to the negotiations. On this basis, the more favourable procedural treatment was applied.
A careful examination at the Maffezini case raises the question as to whether substantive protections that are greater in a BIT with another country can now be relied upon in any BIT arbitration by any foreign investor Summarily put,, the tribunal ruled that the MFN clause means that any third party provision should not be of such a nature as to impact the underlying “bargain” in the BIT that is the basis of the claim.
51
As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.
52
However, as MFN rules may conflict with other objectives such as regional economic integration (e.g. in NAFTA or the EU), trade agreements usually allow for certain exceptions.
51 Ibid
52
W. J. Davey / J. Pauwelyn, MFN-Unconditionality, in: T. Cottier / P. C. Mavroidis (eds.), Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law: Past, Present, and Future, 2000
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The “Fair and Equitable treatment” clause is generally aimed at providing a basic and general standard which is detached from the host state’s domestic law.
Nearly all recent BITS traditionally require that investments and investors covered under the treaty receive fair and equitable treatment, in spite of the fact that there is no general agreement on the precise meaning of the phrase.
53
Although some references to the standard can be found in the first negotiating attempts of multilateral trade and investment instruments, it became established as a principle mainly through the increasing network of bilateral investment treaties.
54
The scope of fair and equitable treatment, however, generally is not clearly defined in the BITs.
Under customary international law, foreign investors are entitled to a certain level of treatment, and any treatment which falls short of this level, gives rise to responsibility on
55 the part of the State.
56
In fact, the protection of foreign property is considered to be the international minimum standard.
53
See UNCTAD, Bilateral Investment Treaties in the Mid 1990s, 1998. Also see A. A. Fatouros,
“Government Guarantees to Foreign Investors”, Columbia University Press (1962), pp. 135-141, 214-
215.
54
OECD Working paper on International Investment- No 2004/3
55 para, 69.
56 G. Roha “Is the Law of Responsibility of States for Injuries to Aliens a Part of Universal
International Law? American Journal of International Law, 1961, pp. 863 ff.
See also: P. Juillard ,
“ L’évolution des sources du droit des investissements”, Recueil des Cours, Tome 250, 1994, p. 83
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The 2004 US Model BIT in its article 5 defines the minimum standard of treatment thus:
“
Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.
For greater certainty [the previous paragraph] prescribes the customary international minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments …”.
The article further provides that the obligation to provide “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world…” 57
The threshold for this standard was articulated in S.D. Myers v.
Canada , where the tribunal held that a breach of the fair and equitable treatment standard, in Article 1105 of NAFTA, occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective” 58
57 ibid
58
S.D. Myers Inc. v. Canada, paragrapgh 263
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The principal debate among scholars and practitioners is whether fair and equitable treatment is limited to the international minimum standard in international law, whether it is an independent and objective standard based on the plain meaning approach of statutory interpretation, or whether it has evolved into an independent norm of customary international law.
59
Writing on the United States Investment treaties: policies and practice, Kenneth J. Vandelvelde (1992) wrote that that fair and equitable treatment provision provided a "baseline of protection which will be useful principally in situations where other substantive provisions of international law and national law provide no protection. It provides a basic principle of equitable treatment to guide interpretation of other BIT provisions."
60
His view , which in essence seeks to limit the liability of foreign investors can be considered to be a restrictive one. A more expansive view seeks for greater investment protection. Quoting F.A.
Mann, British Treaties for the Promotion and Protection of Investments,
52 BRIT. Y.B. INT'L L. 242, 244 (1981), DOLZER & STEVENS
61
wrote about the expansive view that:
"The terms 'fair and equitable treatment' envisage conduct which goes far beyond the minimum standard and afford protection to a greater extent and according to a much more objective standard than any previously employed form of words."
62
59
See DOLZER & STEVENS, supra note 13, at 58-60; Stephen Vasciannie, The Fair and Equitable Treatment
Standard in International Investment Law and Practice, 70 BRIT. Y.B. INT'L L. 99, 102-05 (2000).
60
KENNETH J. VANDEVELDE
,
United States Investment Treaties: Policy and Practice , (1992), 76-77.
61 See DOLZER & STEVENS, supra note 13, at 58-60; Stephen Vasciannie, The Fair and Equitable Treatment
Standard in International Investment Law and Practice, 70 BRIT. Y.B. INT'L L. 99, 102-05 (2000), 59.
62 ibid
- 24 -

Governmental officials, arbitrators and scholars have given various interpretations to the parties’ obligation to investment agreements to provide to each other’s investments
“fair and equitable treatment”. The debate has been centered mainly on whether the standard of treatment required is measured against the customary international law minimum standard, a broader international law standard including other sources such as investment protection obligations generally found in treaties and general principles or whether the standard is an autonomous self-contained concept in treaties which do not explicitly link it to international law. The implications of this discussion could be very broad, in particular given the growing number of arbitral awards which examine claims of denial of fair and equitable treatment.
One of the primary functions of any BIT treaty is to protect foreign investment against interference on property rights by the governmental authorities in the host countries. Interference on property rights is traditionally in the form of nationalisation and expropriation.
Provisions protecting an individual’s investment from the consequences of an expropriation or nationalization are of particular importance— especially unstable regimes of developing countries. Even with a develop country such as Russia, such a clause is necessary to diminish political risks. For example: Article III of the U.S.-Russia BIT limits Russia’s right to expropriate U.S. investments in Russia and provides for compensation when expropriation does occur.
- 25 -

The Article provides that investments shall not be expropriated, directly or indirectly, unless performed: (1) for a public purpose; (2) in a non discriminatory manner; (3) upon payment of prompt, ad equate, and effective compensation; and (4) In accordance with due process of law and the “absolute” standards of treatment.
63
Thus the provision of Article III requiring “payment of prompt, adequate and effective compensation” is one of the most potentially useful to an investor. Such a requirement is likely to be one of the most effective in terms of protecting the value of the investment because other nations are more willing to enforce a damages award based on this obligation and be cause Russia would be less willing to expropriate in the first place if it would have to pay for the property it confiscates.
In Tecmed v. Mexico, the tribunal stated its view that regulatory measures were covered by the same rules on expropriation as other types of government measures. The effect on the investor was considered to be the primary test to apply, much as in the other recent cases. This included the economic impact and a test that considered the loss of rights of the investor.
64
The tribunal then stated that it was not for it to look at the legitimacy of a measure under the domestic law or regime, but solely under the applicable international law. The Tecmed award also considered that part of the analysis should be a proportionality test: there must be a reasonable relationship of proportionality between the charge or weight imposed upon the foreign investor and the aim sought to
63
Russian Federation-United States: Treaty Concerning the Encouragement and Reciprocal
Protection of In vestment , 31 I.L.M. 794 (1992).
64
Tecnicas Medioambientales Tecmed S.A. v. United Mexican States , ICSID Case No. ARB(AF)/00/2, Award, 29
May 2003 (Spain/Mexico BIT), bParagrapghs 121 et seq
- 26 -

be realized by any expropriatory measure. A related question was whether the foreign investor was asked to carry too much of the burden for the protection of the local municipality, without compensation.
65
At the dawn of this century , the world's leading nations reached a broad consensus regarding the appropriate level of protection for foreign investment. These countries were unanimous that investors were entitled to have their property protected by international law and that the taking of an alien's property by a host nation required compensation that was
"prompt and adequate", in what was termed the Hull Rule .
66 67
In fact, it was considered to be the minimum standard of treatment. This view could not be any surprising because the nations forming this rule were, by and large, wealthy, European countries, whose nationals were engaged in investment abroad but which faced relatively little inward foreign direct investment. So, how did the so-called Hull Rule come about? It grew out of a dispute between Mexico and the USA in the 1930s over property expropriated by the government of Mexico. In one of a series of diplomatic notes to the Mexican Minister of Foreign Affairs, the US
Secretary of State, Cordell Hull stated that "No government is entitled to expropriate private property, for whatever purpose, without provision for prompt, adequate and effective payment therefore".
68
The rule of prompt,
65 ibid, Paragrapghs 122 & 123
66 See, e.g., Gann, 'Compensation Standard for Expropriation', 23 Colum.J. Trans.L. (1985) 615, 616;
Mendelson, 'Compensation for Expropriation: The Case Law', 79 AJIL (1985) 414.
67
See Rudolph Dolzer, New Foundations of the Law of Expropriation of Alien Property, 75 AJIL 553 (1981).
68 Guzman (1998) P. 641.
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adequate and effective compensation subsequently became the standard--known as the Hull Rule.
69
Customary international law and it's practice came under attack by developing country hosts in the 1950s. The nationalisation of British oil assets by Iran in 1951, the expropriation of Liamco's concessions in Libya in 1955, the nationalization of the Suez canal by Egypt a year later and the nationalization of sugar interests by cuba in the 1960s served notice of a new militancy on the part of investment hosts…,amongst others were very worrying situations. To cut the long story short, developed countries began to sense that there was no more security in international investments. At the same time, collective resistance to the Hull Rule was on the rise in the
UN, such that in 1962, it passed Resolution 1803
70
providing for merely
"appropriate compensation" along with a string of under-compensated expropriations around the world.
The various elements of the traditional rule have taken different formulations in different treaties, some more and some less protective of investors’ interests. The greatest variation of the traditional rule, and the most difficult negociations, arise with respect to the standard of compensation. Many, if not most BITs have adopted the traditional rule, expressed in the so called “Hull formula” that such compensation must be
“prompt, adequate and effective”.
69
Eric Neumayer & Laura Spess, Do bilateral investment treaties increase foreign direct investment to developing countries?, World development , 33 (10). pp. 1567-1585
70 Ginsburg supra 111
- 28 -

In addition to the substantive rights explained above, which are focused very narrowly upon investment protection and liberalization, BITs also typically provide provisions for dispute settlement.
There are two possibilities of bringing disputes under a BIT agreement, notably either through a state-to-state arbitration or the new innovation in most BITs , that is, the so-called investor-state arbitration.
71 This crucial innovation distinguishes BITs from the earlier investment institutions such as GATT and the WTO, which both had only state-to-state arbitration.
72
At the same time, this new innovation has open the way to heated litigations between investors and host states.
Unlike in GATT and the WTO, the investor in a BIT agreement must not have exhausted local remedies before carrying his case before an international arbitration body.
Foreign investors and their governments need satisfactory legal guarantees before they sign bilateral investment treaties. One serious deficiency of customary international law is that it doesn’t afford an effective and binding mechanism for the resolution of emerging investment disputes. The major innovation with the settlement of investment disputes with BITs is that they constitute the departure from traditional treaty practice in this field where no such mechanism was provided.
73
As a result, an aggrieved foreign investor was formerly limited to bringing claim against the host state in a domestic court or having its home state assume his claim against the host state (diplomatic protection).
71
Horacio A. Grigera Naon, “The Settlement of Investment Disputes Between States and Private Parties: An
Overview from the Perspective of the ICC”, 1 Journal of World Investment No. 1, July 2000
72 See Luke Eric Peterson and Kevin R. Gray, supra, 9
73 See http://www.sice.oas.org/cp_bits/english/bit_inte.asp#30#30
- 29 -

BITs on the other hand traditionally carry a provision that specifies dispute settlement mechanisms, both for state versus state and investor versus state.
A BIT gives investors the right to bring arbitral proceedings against a host state for breach of the BIT’s protection standards. In general terms, these arbitral awards are enforceable in the same way as ordinary arbitral awards between private parties.
74
Just as there has been a dramatic increase in the number of bilateral investment treaties in recent time, in a parallel manner, there is a sharp increase in the number of disputes between foreign investors and host governments.
The cumulative total of known cases brought under bilateral, regional agreements (e.g. NAFTA) that contain investment clauses is now approximately 174.
75
Well over half of the known claims were filed within the past three years. The cases brought to dispute settlement have become increasingly complex, attracting varying interpretations of their substantive and procedural provisions and generating lively discussions among governments, academics and practitioners.
Investment arbitration has raised public interest issues, calling for reconciliation of public international law doctrines and principles with the private legal principles of contract law. In addition, the cases have been
74
Deborah Ruff & Thomas Geuther, International Disputes Practice UpdateBilateral Investment Treaties — Recent
Developments, . Le Beouf Lamb, March 2006 newsletter.
75
Symposium Report: Making the most of international investment agreements: a common agendaSymposium coorganised by ISCID; OECD and UNCTAD, on International Settlement of Investment disputes, Paris, 12 December
2005.
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eroding the traditional division between so-called capital exporting and importing countries.
76
In many bilateral agreements where a dispute cannot be settled amicably and procedures for settlement have not been agreed within a specified period, it can be referred to a body like the World Bank's private arbitration body for investment disputes, the International Centre for
Settlement of Investment Disputes (ICSID) or the UN Commission on
International Trade Law (UNCITRAL). NAFTA for example lets unhappy investors choose between the two. Either way, they represent the privatization of commercial justice.
77
Znet Commentary
78
In it’s July 21 st
, 2003 online edition
79
quoted
Eloïse Obadia, an ICSID lawyer as telling the Swiss Arbitration
Association Conference on Investment Treaties and Arbitration in Zurich in January 2002 that:
"In a way…bilateral and multilateral investment treaties are to ICSID what Prince Charming was to Sleeping Beauty, having stirred the activities of the Centre,"
80
"During the first 30 years of its existence, ICSID was somewhat of a
"Sleeping Beauty," with an average of one or two cases being registered each year. It is with the widespread development of bilateral and multilateral investment treaties that the activities of ICSID have awakened", she was quoted as saying.
81
76 ibid
77 Aziz Choudry, Bilateral Investment And Trade Deals No Fairytale, Znet commentaries, June 21st 2003.
See: http://www.zmag.org/sustainers/content/2003-06/21choudry.cfm
78 Znet commentaries, June 21st 2003. See: http://www.zmag.org/sustainers/content/2003-06/21choudry.cfm
79 ibid
80 ibid
81 ibid.
- 31 -

Domestic courts and national legal systems are completely marginalised by investors' recourse to these international arbitration panels. ICSID and
UNCITRAL only allow for the investor and government parties to the dispute to have legal standing.
82
The public has no right to listen to proceedings or to view evidence and submissions. Both bodies require only minimal disclosure of the names of the parties and a brief indication of the subject matter, which prevents public scrutiny or popular opposition. These bodies are thus given the responsibility to adjudicate virtually all investment disputes without democratic structures or transparency, despite the fact that they are not serving private goals but an international judicial function governed by treaty and international law.
83
These two arbitration bodies have developed rules for both conciliation and arbitration that are based completely on legal systems of the north, especially the US, and ignore much of the world's wealth of experience in settling disputes, such as Asian rules of arbitration. The record of these bodies thus far has been very investor-friendly, in awarding substantial damages and compensation to multinational corporations for
''transgressions'' of developing country governments.
Under these conditions, there is clearly little incentive or need for international investors to settle disputes amicably, given the highly favourable outcomes for corporations which have initiated proceedings under such agreements. So BITs have become potent weapons of multinational companies against not only governments but also the societies of countries that have signed these treaties.
Clearly, in this context, it is critical for civil society across the developing world to demand that the signing of BITs be subject to public scrutiny, and that the proceedings disputes arising from BITs be open and publicly accessible for the common good.
82 C.P. Chandrasekhar & Jayati Ghosh, Protecting Foreign Investors, http://www.networkideas.org/news/aug2006/news11_Foreign_Investors.htm
83 ibid
- 32 -

By December 2005, there were 113 cases, with an aggregate value exceeding US$30 billion, pending before the International Centre for the
Settlement of Investment
Disputes (“ICSID”) in Washington, D.C. ICSID is an international body established under the ICSID Convention and is closely connected with the World
Bank.
International investors in a wide range of sectors have recognized that
BITs can provide effective protection against prejudice to their investments caused by the governments of a host state. Recent ICSID cases have involved investors in the oil and gas, insurance, construction, electricity, gaming, hotel, water, and food-stuffs sectors.
The bilateral investment treaty (BIT) with Argentina represents one very important milestone in the BIT programme. Argentina, like many Latin
American countries, has long subscribed to the Calvo Doctrine, which requires that aliens submit disputes arising in a country to that country's local courts. By concluding BITs, foreign investors in Argentina were exhonerated from the Calvo doctrine restrictions. US investors in
Argentina for example have as result not only enjoyed a stable business synario but also been able to predict the legal investment framework. (See
CMS case below).
Customary International has traditionally sought to protect investment treaties both in the past and in our present modern times, the extent to
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which has remained controversial. For instance: Concerning substantive law, the question arises as to what extent is domestic law relevant for the application of international law? Concerning procedural law, the question also arises as to what is the relationship between treaty-based international arbitration and other jurisdiction based on domestic law and specific contractual jurisdictional provisions?
84
Governments, tribunals and scholars have been much divided on what scope of such protection should be offered. For instance: F. A. Mann in State contracts and State responsibility.
85
The World Bank tribunal on 12 May 2005 gave ruling to the landmark case between the government of Argentina and CMS Gas Transmission
Company (CMS).In her verdict, the tribunal ruled in favour of CMS, awarding her damages of approximately US $150m, including interest.
The award has set an important precedent to companies operating in LDCs as a result of BITs.
84 The Umbrella (or Sanctity of Contract/Pacta sunt Servanda) Clause in Investment Arbitration: A Comment on
Original Intentions and Recent Cases, Volume I, issue #04 - October 2004
85 F. A. Mann , State contracts and State responsibility AJIL 572 (1960), 54
- 34 -

It is of particular significance for the many western companies with investments in not only in Argentina, but also of their investments in other countries around the world where there is a BIT in place.
Legal proceedings were brought against Argentina before the World
Bank’s International Centre for the Settlement of investment dispute
(ICSID) in July 2001 by CMS, which is a subsidiary of CMS Energy (a
US company) regarding its investment in the gas transportation sector. At the time, CMS had a share of 29.42 per cent in one of the two privatised Argentine gas transportation companies, that is: Transportadora de Gas del Norte
(TGN),.
CMS brought the claim for breaches of the US- Argentina BIT (the
Treaty) arising from adverse measures that were later taken by Argentina regarding CMS’s investment as from August 2000. Argentina questioned the jurisdiction of the court, but on 17 July 2003, the tribunal unanimously dismissed Argentina’s objections to its jurisdiction, including the standing of CMS to claim as a minority shareholder, and ruled that it was competent to hear the merits of the dispute.
The drama started in 2001, when Argentina began facing economic crises, forcing the country to sink into economic crises. As a result, she defaulted in paying much of its foreign debt. Bank deposits and all credit/obligations denominated in foreign currency under local law were converted into pesos. Public services’ tariffs as a result were frozen. These measures had serious implications not only for investors awarded with concession contracts but also for all investors that trusted in an economic stability and a legal framework that was later substantially changed. Many of these investments were made under the umbrella of Bilateral
- 35 -

Investment Treaties (BITs) which provided arbitration as the valid mechanism to solve any arising dispute.
Upon cross-examination, the court unanimously came to a conclusion that
Argentina had violated the Treaty by failing to treat CMS’s investment fairly and equitably, and its failure to observe obligations entered into regarding that investment. Argentina’s illegal measures consisted of its unilateral modification of the legal and regulatory framework (including the tariff regime) governing TGN. As part of its energy privatisation incentives, Argentina granted TGN the right to calculate tariffs in US dollars and then convert them to pesos at the prevailing exchange rate, and to adjust tariffs every six months to reflect changes in inflation. Starting in
August 2000, Argentina unilaterally suspended the inflation adjustments.
In January 2002, under the so-called Emergency Law, Argentina unilaterally terminated both TGN’s right to calculate tariffs in US dollars and its right to make inflation adjustments. TGN’s tariffs were ‘pesified’ at an artificial rate of one to one,
While the peso/dollar exchange rate soared to four to one, and was frozen at that value for more than three years.
Although the tribunal found that Argentina’s measures reduced the value of CMS’s Argentina in
TGN by approximately 95 per cent, it seemed not to base the award decision on a finding of expropriation. The tribunal considered an
International arbitration: BIT (US/ Argentina)
The court rejected Argentina’s constitutional arguments and found that the
Argentine constitution expressly requires it to comply with its international treaty obligations. The tribunal also examined Argentina’s claim that its actions were justified by necessity and economic emergency, and concluded that Argentina was not excused from liability on this basis.
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B) SIGNIFICANCE OF THE CASE
Although there were at the time over 45 treaty claims brought by foreign investors against Argentina with ICSID, the CMS award happens to be the very first final award to be issued by the tribunal. These several claims were estimated to total US $28bn. All the claims objected to the Argentina emergency laws of 2002.A good question to begin with will be to know whether Argentina did not know of the impact of her according property rights to foreign investors. Well, examining the language and growing legal nuances, it is clear that rights in BITs agreements are generally more substantial than were anticipated. For instance, one common clause gives the investors the right to sue the host governments if actions undertaken by the government are deemed to substantially expropriate the business of the firm. In effect, the right to sue governments is an expansion of investors' rights.
1) PRECEDENCE
The first significance of the award is that it has undoubtedly set an important precedence that similar cases have followed, notwithstanding the provision that the decision of one ICSID tribunal is not binding on another. The claims in the case are large enough to serve as a precedent for future situations. For instance, already after that case, two parallel investment treaty arbitrations against the Czech Republic have reached corresponding conclusions. With the case ruled against Argentina, it goes without saying that the enforcement of these awards may affect what otherwise would apparently be a successful renegotiation of both the
- 37 -

bond-holders debt and the debt with the IMF. It would create economic uncertainty and affect the rebound of the economy at a crucial moment.
Considering that the countries at the defensive end are LDCs,it means that the promises of BITs may end up entailing even more obstacles to economic development.
The case will undoubtedly serve as guideline to lawyers and policymakers.
2) LEGAL ATTRACTIONS
One likely consequence of the Argentina case is that firms will be attracted to legal locations than economic reasons. That is, if investors believe there is a chance for successful litigation against the host government and that they are then protected from substantial amount of risk, firms may work less hard to make their firm a success or may be attracted to locations where their legal case could be made most strongly rather than for economic reasons, which they are contracted for.
If this is the case, then reliance on BITs to boast the economies of LDCs will all be a tale wrapped in shadows of misery.
3) LOSS OF LEGAL SOVEREIGNTY?
Should the domestic courts of every country not have ultimate jurisdiction to rule on issues directly affecting that nation? To cut the long story short,under BITs treaties, it is all together a different story. As the
Argentina case demonstrates, on entering a BIT, you consent to surrender that decision power to an outside tribunal (such as ICSID). A good lesson from the case in question is that domestic courts and national legal systems are completely marginalised by investors' recourse to these
- 38 -

international arbitration panels. ICSID and UNCITRAL only allow for the investor and government parties to the dispute to have legal standing.
These bodies are thus given the responsibility to adjudicate virtually all investment disputes without democratic structures or transparency, despite the fact that they are not serving private goals but an international judicial function governed by treaty and international law.
These arbitration bodies have developed their own set of rules for both conciliation and arbitration that are based completely on legal systems of the North, especially the US, and ignore much of the world's wealth of experience in settling disputes, such as Asian, Caribbean or African rules of arbitration.
The record of these bodies thus far has been very investor-friendly, in awarding substantial damages and compensation to multinational corporations for "transgressions" of developing country governments.
Under these conditions, there is clearly little incentive or need for international investors to settle disputes amicably, given the highly favourable outcomes for corporations which have initiated proceedings under such agreements.
Are BITs therefore instruments of economic hegemony? Well, my submission is that BITs have become potent weapons of multinational companies against not only governments but also the societies of countries that have signed these treaties.
- 39 -

The so-called reference to fair and equitable treatment as the case illustrates has now given arbitral tribunals ample room to judge the state's conduct. What is the extent to which a change in legislation that is disadvantageous for FDIs can constitute a breach to that state's duty to ensure the minimum standard of treatment guaranteed by the BIT agreement? Do regulatory measures of a state amount to a violation of the host state's duty to ensure the "fair and equitable treatment" of FDIs?
An examination of the CMS case seems to suggest that a breach of "fair and equitable treatment" standard only occurs when it is shown that the foreign investor has been treated in such an unjust, specific and arbitrary manner that the treatment is considered unacceptable from an international perspective. In other words, there is a fair balance of rights and equity.
Almost every state appearing as respondent before the ISCID tribunals have raise a challenge to the jurisdiction of the court. In sum, the challenges have been on the the following issues:
1) Whether the claimant has first exhausted the available local remedies,
2) Whether the state is in fact liable or just the companies and agencies with whom the investors negotiated the BIT contract.
- 40 -

3) Whether the state gave consent to arbitration, and
4) Whether an investment in question was made within the meaning of the
Convention
Vandevelde (1998)
86
has pointed out and rightly too that not all BITs are identical in their provisions. For example, Some developed country investors like the United States insist on some limited rights of its investors to establish investment in host countries in the first place, whereas investor’s rights in most BITs are restricted to fair and equitable treatment after the investment has already taken place and provide no right of entrance. United States BITs often prohibit certain performance requirements such as local content, export and employment requirements beyond the requirements contained in the WTO’s TRIMs .
87
86
Vandevelde, K (1998). The Political Economy of a Bilateral Investment Treaty The American Journal of
International Law , 92 (4), 621-641.
87 See Eric Neumayer
* and Laura Spess, supra, 1574
- 41 -

The US BIT with Cameroon of April 6 1989 provides in it’s preamble that:
“… foreign investors are to be accorded treatment in accordance with international law and are to be treated no less favorably than investors of the host country or no less favorably than investors of third countries, whichever is the most favorable treatment ("national" or "most-favorednation" treatment) subject to certain specified exceptions…” 88
In fact, BITs are not intended to be create hardship to host countries. It is for this reason that a reasonable degree of fairness is maintained for both contracting parties. One way of doing this is to include specific exceptions to the BITs clauses, the most important of which am going to highlight:
The first of such kinds of special exceptions provides that privileges which either Contracting Party accords to investors of a third State because of its membership in, or association with, a free trade area, customs union, common market or regional agreement will be excluded from the entire BIT contract.For example: The Buenos Aires Protocol, and the Bolivia-Mexico and Costa Rica-Mexico FTAs all contain this clause.
A second common exception is usually on preferences or privileges resulting from an international agreement which is either wholly or substantially related to taxation. For exmple: The Canada-Trinidad and
Tobago BIT, the Brazil-Chile BIT and the Colombia-Peru BIT, which all carry this clause as an exception to both national treatment and MFN provisions.
88 Available online: www.state.gov/documents/organization/43543.pdf
- 42 -

Moreover, many BITs agreements as an exception allows countries to exempt strategic sphres such as defence and the maintainance of the national security, public order, as well as international peace. For instance, the Honduras-United States BIT states that:
"This Treaty shall not preclude a Party from applying measures necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests." 89 The Nicaragua-United States BIT adds that:
"whether a measure is undertaken by a Party to protect its national security interests is self-judging,"
90
What the above exceptions surely imply is that obligations with respect to the maintenance or restoration of international peace or security shall fall under the meaning of obligations under the Charter of the United
Nations, meaning that by the nature of the BITs agreement, these wouldnot be appropriate for review before an international trade tribunal.
Some other exceptions are unique only to specific BITs. For example, the
USA- Trinidad and Tobago, Honduras and Nicaragua BIT provides in it’s
Article XII. that :
"Each Party reserves the right to deny to a company of the other Party the benefits of this Treaty if nationals of a third country own or control the company and: a) the denying Party does not maintain normal economic relations with the third country; or b) the company has no substantial
89 See Honduras-U.S. BIT, Article XIV (1).
90 See Nicaragua-U.S. BIT, Paragraph 1 of the Protocol
- 43 -

business activities in the territory of the Party under whose laws it is constituted or organized."
91
The protection of foreign investment under international law has been a very controversial issue since the 1970s, provoking varying scholarship on the subject. Some of the scholars who have written extensively and comprehensively too on the subject includes: Sornarajah, 1994; Hallward-
Driemeier (2003), Tobin and Rose-Ackerman (2005), Muchlinski 1995, and of course, Robert Pritchard, 1996. Others who have written on a relative in-depth includes: Paul Comeaux and Stephen Kinsella (1997),
Rudolf Dolzer and Margaret Stevens (1995), Andreas Lowenfeld (2003). I will briefly discuss some of the thesis and propositions so far by some of these writers in the following section.
Sornarajah, M is one of the greatest writers so far on the subject. He has detailed out a good number of arguments in his book, The
International Law on Foreign Investment, Cambridge: Cambridge
University Press (1994) xx + 428 pages + Index.
He begins with the pronouncement that international law has to face its own negligence, in that by not developing a body of law to deal with investment by multinationals, the law of nations by so doing failed to
91 op. cit
- 44 -

check pace with the ever changing needs of subjects of international law.
The consequence has turn out to be a clash between the developed and
LDCs with respect to the state of customary law.
“In the second half of the twentieth century, apart from the international law on the use of armed force, no area of international law has generated as much controversy a, the law relating to foreign investment” 92
It is as a result of the uncertainty with customary international law that states have turned to bilateral treaties to encourage and attract FDIs.
The book can be divided into three main parts. Chapters 1 to 4 examines the rights and responsibilities of host and home states, chapters 5 and 6, which are the boiling spot of the book elaborates on bilateral treaties, emerging from the failure of multilateral agreements as a positive attempt to deal with the problems facing foreign investment. The final part, comprising of Chapters 7-9 is focused on expropriation and compensation.
He makes a few critics about certain assumptions on BITS, in a bit to show the weakness of customary international law. In the first of such critics on state territorial sovereignty, he opines that the starting point of a discussion of the law of foreign investment must be the abeyance to the general international legal norm, which is the right of a state to exercise complete control over the entry of foreign investment.
93 Reason being that irrespective of the protections that may be afforded to foreign capital, the host state continues to retain the right to territorial sovereignty, and must
92 The International Law on Foreign Investment, Cambridge: Cambridge University Press (1994), 1
93 Sornarajah, M., The International Law on Foreign Investment, Cambridge: Cambridge University Press
(1994),P. 83
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as a result retain the right to elect whether to or not to exclude the investment.
94
“The principle of sovereignty over economic activity that takes place within the state has not been eroded despite the efforts on the part of developed states to create an external standard with which the exercise of such sovereignty must conform…” 95
His second critic is on the basic provisions of BITs. For instance, it is now a general assumption that a state must provide foreign investors with national treatment and most favoured nation (MFN). Sornarajah is of the view that charity must begin at home. He questions whether there is a similar external international standard of treatment for foreign investors, for which they can benefit (in the absence of domestic protections for example).
96
He identifies two closely related regimes, which are the Hull
Rule doctrine of prompt, adequate and effective protection, and the principle of partial compensation.
97
He concludes that these remedies fall short of that required from host states under BITs agreements. His greatest worry is that there ought to be a more correct standard of compensation, which in his opinion remains shallow and perhaps very unreliable too.
Sornarajah adds that BITs are of unique importance to international law, in that they have by and large afforded a solution for the time-being of what was hitherto an essentially private international law issue; that is the problem of contracting between investors and the host state. Treaties between home states of importing capital and host states has meant that
94 ibid
95 ibid, P. 142
96 ibid, P. 81-2
97 To this effect, See, e.g., Amerasinghe, 'Issues of Compensation for the Taking of Alien property in the
Light of Recent Cases and Practice', 41 ICLQ (1992) 22, 62
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the problem of international personality is being overcome making the relationship to hence be subject to international law.
98
One other importance of these treaties highlighted by Sornarajah is that these agreements are establishing investment frameworks, not just for the present, but future subsequent investors-that is true international law in the making. He is confident that although BITs may not attract much FDIs in the short-run, a good reputation of honouring foreign investments will nevertheless do the trick in the long-run.
Andreas Lowenfeld (2003), in International Economic Law , (NEW
YORK: OXFORD UNIVERSITY PRESS, 2003) 824 PAGES, ISBN: 0
199264112, addresses a number of key issues in International Economic
Law, and every stage demonstrating the evolution of the subject, as well as tracing the development of regulatory ideas and desires, placing them in their historical and political settings, and presenting the resulting international agreement. BITs are discussed but in the last chapter of the book, under the topic, ‘Evolving Standards of International Law on
International Investment’. Lowenfeld in this chapter quaslifies BITs as the
‘new devices’ for regulating international investment. He points out that the provision of investor-state arbitration has aroused much sentiment.
Lowenfeld continues his findings on the subject by examining the case law dealing with the concept of expropriation, the difference between expropriation and the mere exercise of regulatory or police powers, and the vexing issue of the amount of compensation due following an expropriation. Given the current fragmented state of the law, it is understandable that Lowenfeld does not reach any firm conclusions on these questions, although his guidance and analysis of the jurisprudence is
98 Sornarajah (supra), p. 225
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invaluable. However, in one of the book’s highlights, Lowenfeld outlines a fairly convincing case for bilateral investment treaties having reached the status of customary international law. He writes that a fair inference might be drawn that, taken together, the Bilateral Investment Treaties are now evidence of customary international law, applicable even when a given situation or controversy is not explicitly governed by a treaty.
Lowenfeld states his controversial case tentatively, finishing with the remark that ‘the debate need not be answered conclusively.’
Another propountment of Lowenfeld is his assessment that the BIT movement has now moved beyond lex specialis to the level of customary law effective even for non-signatories. This conclusion may be inconsistent with the traditional definition of customary law.
In sum, International Economic Law is a valuable book. Its strength lies in its ability to present complicated and dense political, historical and legal detail in an informative and easily digestible form. Lowenfeld notes in the
‘Afterword’ that he has chosen not to approach the subject normatively, but rather to emphasise the process of international economic law, believing that ‘the answers cannot be understood without the questions’.
This lack of ‘black letter’ content may, however, prevent the book from reaching the reading lists of law school classes. This would be a shame.
For Lowenfeld’s book belongs, to borrow a phrase, in the ‘innermost circle of books’,[23] in addition to conveying its message it is a pleasure to read.
Hallward-Driemeier (2003) has written elaborately on BITs and their location on FDI. In her study, she examined the bilateral flow of FDIs to
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31 LDCs from 20 countries of the OECD between the periods 1980 to
2000. Having paired the countries concerned, and analysing the emerging effects, she deduces that the mere existence of a BIT between these pair of countries doesn’t necessarily increase the flow of FDIs from the developed countries to the LDCs. She finds little evidence of any correlations between BITs and FDI flows on both a bilateral and a general basis.
But she adds that BITs are inevitable complements to good institutional quality. The one assertion of her that many scholars will be quick to disagree with is that BITs do not end up providing the guarantees to foreign investors, for which they are initially intended. In her opinion, these guarantees are only possible in the event of sound domestic institutional quality. In other words, her proposition is that the two are in fact inseparable-go hand in hand. They complement each other meaning that the absence of one will certainly impede the proper functioning of the other.
A major shortcoming in her thesis is that it is modelled on the presumption that a BIT will only have an effect on the flow of FDI from the developed and developing country engaged in the BIT in question. It ignores what
Elkins, Guzman and Simmons 2004, p. 21 refer to as the signaling effect of BITs.
Signaling effect simply means that a LDC in committing herself to concluding a BIT with a developed country is by so doing signaling her willingness to protect that and all other foreign investments in her national territory. These are the positive spill-over effects from signing a BIT.
Tobin and Rose-Ackerman (2005), on their part used data from 63 countries to cross-examine the impact of BITs on FDI inflows. With much of their data gotten from the Country Risk Guide (ICRG), the
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authors arrive at a result that each additional BIT lowers rather than raises the flow of FDI to developing countries with high political risk.
Moreover, they also found that such a country. One major limitation of their study is that although the used the US as a case study, in the final analysis, they failed to establish any significant effect of BITs that were signed by the US on the flows of the FDIs from the US to developing countries.
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Investment, Cambridge: Cambridge University Press
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P. Juillard ,“ L’évolution des sources du droit des investissements”, Recueil des Cours, Tome 250,
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Hallward-Driemeier, M. (2003). Do Bilateral
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Philippe De (EDT) Lombaerde , Assessment and
Measurement of Regional Interfration, Routledge
(UK), 2006
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European Journal of International Law (EJIL) ;(
Varying useful volumes)
American Journal of International law (AJIL);
(Varying useful volumes) www.worldbank.org/icsid www.state.gov/documents/organization/43543.pdf
© Amin George Forji, 2006
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