Bilateral Investment Treaties Analysis – Free Essay Examples

Bilateral Investment Treaties Analysis

The current debate on the purview and the content of the canons of international law pertaining to the treatment of corporate entities has mostly concentrated on the deprival of such property. Notable illustrations of diplomatic protection by home states for their nationals deal with the cases when the later are confronted with devastating illegal actions of the host state. Such attitude may stem from the transformation in the political regime or in the economic policy; rising tide of nationalism or it may be the outcome of retaliation in the context of bilateral relations. Bilateral investment treaties concentrate in the first instance on the fair treatment of the foreign investments which they incline to buck up during their time span.

The objective is that they may function commensurate with the economic and business context and particular merits free from host countries’ unjustified involvement that could have unhealthy effects. For this aim to be realized, BTIs outline general standards of treatment coined by international practice, true for all conditions whose content is not laid out specifically but is to be known by the allusion to certain endeared standards. “The treatment of foreign investors and of their investments on the territory of a host State is often subject to a bilateral investment treaty (BIT) signed by the national State of the investors and the host State. These BITs usually contain a clause in which the two States offer fair and equitable treatment (FET) to the foreign investors on their territory. Moreover, this clause has become a norm of customary law, implying that investors may rely on it even outside the context of the BIT. Foreign investors ,whose rights under this clause have not been respected may bring the State in front of an international tribunal” (Rudolf Dolzer and Christoph Schreuer (2008), p. 2).

Most favorite nation status and the fair and equitable treatment are the compelling examples of such contingent benchmarks. Bilateral investment treaties also enumerate the particular rights which are connected with the execution of investments “The fair and equitable treatment standard has become the center of discussion in various forums, and most of all among arbitrators who have applied it. It constitutes one of the most important elements available to a foreign investor to protect his investment in a foreign country because it provides him with a certain treatment that the host State must grant regardless of the treatment given to its own nationals” (Perry, A.J., 2002, “The Relationship Between Legal Systems and Economic Development: Integrating Economic and Cultural Approaches”). These specific standards first of all demark the boundary line between citizens and the aliens and the treatment that would be meted out to them. The states’ interference in the business is seen as a danger to the life of business and is regarded unacceptable.

The least international standard which was supported in past by capital exporting countries was separated from the treatment meted out to its own national benchmarks which might not conform to the needs of the international standards for the security of the property. Things seem to have undergone transformations in practice with swift transition to the ownership of the sources of production and the facilitation of the local business in the economy. As far as day to day operations are concerned, the national standard can be taken as sure way for fair and non discriminatory treatment as it guaranteed equal competitive opportunities for foreign investors. “National treatment should be taken as sufficient prima facie for the needs of the international minimum standard. Its invocation can still be called pertinent in case when international law does facilitate generally or in a specific instance for adequate guarantees of fair treatment in accordance with generally shared values of substantial and procedural fairness and justice in respect of the enjoyment and the normal conduct of business operations”(G. Sacerdoti,1997, 342).

The Mercosur protocol on regional and on the third party investors facilitate fair and equitable dealing of those investors and their investments and ordered the member states from defecting their operation, maintenance, exploitation, pleasure and disposal by unfair or discriminatory initiatives. Article 258 (b) of the fourth Lome convention articulates “fair and equitable treatment of the EEC investments’, on the other hand, 258 (c) devotes the host countries to evolve a certain and secure investment ambience. GATTS supplies national treatment in services that have entrenched themselves in other WTO members by means of mercantile presence. There are some guidelines too. “Each contracting party shall ensure fair and equitable treatment of the investments of nationals of the other contracting party and shall not impair, by unreasonable or discriminatory measures, the operations, management, maintenance, use, enjoyment or disposal thereof by those nationals.

Each contracting party shall accord to such investments full physical security and protection. more particularly, each contracting party shall accord to such investments treatment which in any case shall not be less favorable than that accorded either to the investments of its own nationals or to investments of third state, whichever is more favorable to the national concerned.”.(G. Sacerdoti,1997, 346). BITs of most countries provide for the ‘fair and equitable treatment’ in line with the canons of international law. “One of the main theories that exists to define the Fair and Equitable Treatment standard is the one that considers the standard to be a part of the international minimum standard required by international law, which, for many States, is a part of customary international law” (Peterson, L.E., and Gray, K.R., 2003, “International Human Rights”).

However, certain activities are the exclusive domain of the nationals like the cases of monopolies even if it is not manifest in the content of the treaty. “Local companies which are the result of a foreign investment should basically be entitled to national treatment as to the conduct of business operations open to them. This is by and large the case as mentioned in the European community in the NAFTA and under the GATTS(GATTs, Article V (6)).

Bilateral investment treaties are agreements between two states with the objective of enhancing investment flows between them. They realize this goal by making international obligations mandatory pertaining to the entry and dealing of nationals of one state in the jurisdiction of the other state. In doing so they may adopt the safe guards of foreign investment beyond the conditions of international law. “The obligation to provide “fair and equitable treatment” is often stated, together with other standards, as part of the protection due to foreign direct investment by host countries. It is an “absolute”, “non-contingent” standard of treatment, i.e. a standard that states the treatment to be accorded in terms whose exact meaning has to be determined, by reference to specific circumstances of application, as opposed to the “relative” standards embodied in “national treatment” and “most favored nation” principles which define the required treatment by reference to the treatment accorded to other investment.

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” (UNCTAD(2006), World Investment Report). Bilateral investment treaties are negotiated keeping in view the model BITs. They are promoted by capital exporting countries and developed as template for agreements. One of most significant of the provisions include, “ fair and equitable treatment, whereby host state must treat foreign investment according to a minimum standard of fairness, irrespective of the standards it applies to domestic investment under its national law”. Fair and equitable provisions have been relied by investors to claim standards of protection away from the least requirement under broad international law. The latter is polemical and is taken into account to cover extreme cases of arbitrary treatment. This has been laid down in Neer v Mexico. Extending ‘fair and equitable treatment’ beyond this minimum benchmark can unfairly limit the hosts states’ latitude for maneuvering in managing foreign investment in its territory particularly the vague wording of this standards may propel investors to claim violations against a broad range of host state imitative. The fair and equitable treatment provisions have led to sizeable debate within the domain of NAFTA where arbitrators have come to the conclusion that that the environmental initiatives taken by host states in the absence of least transparency needs the fair and equitable treatment standard included in the NAFTA treaty. It has been held in Metalclad v Mexico.

In 2001, the NAFTA free trade commission put forward a ‘note of interpretation’ making it clear that it does not need treatment away from the minimum benchmark of treatment already demanded by international law. It has been exemplified in the S.D. Myers and Methanex awards. However, the loose interpretation of this provision as demanding states have been treaded outside NAFTA such as in CMS Gas Transmission. Despite recent developments within NAFTA, uninterrupted civil society watch is required to make sure that it does not become the magnet for investors to confront the legality of the host state initiatives that impacts their interests in a retrogressive way. Apart from producing direct tensions with policy for sustainable development, investment treaty provisions can also have the result of maximizing tensions that are generated elsewhere in general international law, in contractual agreements, between foreign investors and host states or in other legal devices. “Recent treaties, such as Nafta (particularly in light of the Free Trade Commission’s interpretation that narrowed its meaning) and the United States-Chile Free Trade Agreement, have made important progress in narrowing the scope of the definition of its meaning in their investment Chapters. Nonetheless, this latest tendency has not sufficed for Tribunals to develop a uniform jurisprudence on the meaning of the term. Although Tribunals increasingly rely on other Tribunals’ findings, there are still important differences in the approach” (Mann, H., Moltke, K., Peterson, L., and Cosbey, A., 2005, “IISD Model International Agreement on investment for Sustainable Development Winnipeg”).

Out of the two claims, which have seen the final outcomes, Mr. Bogdanov won in one of them and is now in the position to seek for the enforcement of that award in Moldovan court. In an award, dated September 22, 2005, Mr. Bogdanov was given the right to claim damages by an arbitral tribunal for the states’ failure to treat him in fair and equitable way arising out of the terms of the Russia-Moldavia bilateral investment treaty. Moldavia did not take part in the proceedings to defend the claim of the Russian investor. The Moldovan

Department of Privatization, which was the state agency whose activities were the subject matter of the case also did not answer o the frequent inquiries from the tribunal the case against the department of privatization pertained to the workers’ hostel which had been given to the government by Mr. Bogdanov in return for shares in the state owned companies. Mr. Bogdanov later leveled allegations that Moldavia did the retroactive transformation of the laws by which compensation shares are issued and her such actions was in violations of its own domestic laws regulating foreign investment. Especially, he alleged that Moldavia was putting off shares whose real market value was lesser than their book price.

The Russian investor grounded his claim on the assumed non retroactivity of Moldovan law. The tribunal also called upon the parties to explain their respective positions and whether there was any breach of the contents of bilateral investment treaty. In fact the only arbitrator in the case, Prof. Giuditta Moss at last decided that the state was not in material violation of retroactivity found in Moldovan law. However, she did notice that it was the case of material breach of fair and equitable treatment which was to be essentially meted out to the investor. The arbitrator also observed that the objective of BIT was to enhance and protect foreign investments and that pertinent provision must be translated to cover the action that even if in commensurate with international law of the host country and not violating the equality has unjust or irrational results. By offering shares which did not succeed in compensating the investors’ fair hopes of attaining compensation, opposite to the fair and equitable treatment guarantee was unfair. A big sum amounting to 190,000 euros was given in favor of MR. Bogdanov. Government was considered liable to pay for all the money and cover the costs of the arbitration and it did happen because of the inconvenience resulting from the non cooperative attitude of the respondent.

In another case, Hungary was held responsible for expropriating the investors’ interests without payment for full market value compensation and also impinging the pledge to facilitate fair and equitable treatment and absolute protection and security to Cypriot investors. The investors were given the contract to construct a new terminal at the Budapest airport and to sum up the revenues from the diverse businesses flourishing at the terminal. However, all the agreements were declared null and void in the very beginning of 2002 after a decree was enforced on behalf of the government. Following this development, the claimants blamed that they were not in the position to operate the terminals or collect revenues. They initiated a series of arbitrations including the BIT claim against Hungary at ICSID. In its judgment, the tribunal turned down Hungary’s request that it had the right to operate its right to regulate and that the foreign investors making their way in the country should suppose the dangers of being regulated by the host state. In an answer to Hungary’s’ arguments, the tribunal found that a sovereign state will have privilege to right to regulate but this is not absolute and it a qualified concept with limited domain.

They include those canons stipulated by the rule of law and the hosts’ country’s international treaty responsibilities. The tribunal went on to add that foreign investors had the right to hope if governments were to expropriate their holdings, then they would be meted out fair and equitable treatment. The tribunals’ prescription of compensation is noticeable for exploring the re-institutionalization of the investors which means the same thing as if expropriation would not have happened. The tribunal considered the fact that the value of the lost investments had staggered in the ensuing years ands the tribunal estimated that the compensation would commence from the date of the award rather than the date of expropriation. In addition to all this the tribunal also ordered that Hungary would compensate the claimants fully. The government gave its consent to comply with the findings of the tribunal.

On its behalf, Hungary has objected to the tribunals’ jurisdiction over the investors’ claim on basis which questioned whether Cyprus-Hungary treaty should facilitate protection to only ‘shell companies’. “In the case of MTD Equity Sdn. Bhd. and MTD Chile S.A. vs. Republic of Chile (36), in which the only argument by which the State of Chile was charged was a violation of the fair and equitable treatment standard, the Tribunal recognized that the BIT between Malaysia and Chile does not establish the equivalent to the criteria of prompt, adequate and effective compensation for expropriation in the case of breaches of the BIT on other grounds. In this case, the parties agreed to apply the criteria of the Chorzow Factory case ruled by the Permanent Court of Justice that states “that compensation should wipe out all consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that had not been committed&quot” (Dolzer Rudolf and Magrete Stevens.2005, p. 23).

Bilateral investment treaties are being increasingly characterized with fair and equitable treatment clause. It protects the investments of investors in other countries and puts a semblance of confidence in them to advance their goals in the business environment of other countries. Nearly all the bilateral treaties involve this clause according to which if investors are not treated appropriately by the host state they can have the option to recourse to tribunal for arbitration proceedings. It has become the norm of international law.

 References

Mann, H., Moltke, K., Peterson, L., and Cosbey, A., 2005, “IISD Model International Agreement on investment for Sustainable Development”, Winnipeg, IISD.

Perry, A.J., 2002, “The Relationship between Legal Systems and Economic Development: Integrating Economic and Cultural Approaches”, Journal of Law and Society, 29(2): 282–307.

Peterson, L.E., and Gray, K.R., 2003, “International Human Rights G. Sacerdoti,(1997) ‘Bilateral treaties and multilateral instruments on investment protection’, in Hague Academy, Collected courses , Vol. 269.

Dolzer Rudolf and Magrete Stevens.(2005) In OECD Fair and Equitable Treatment Standard in International Investment Law, p. 23.

Rudolf Dolzer and Christoph Schreuer (2008), Principles of International Investment Law, Oxford, p. 2.

UNCTAD(2006), World Investment Report XVII, 26.

Jarrod Wong,(2007) “ umbrella clauses in bilateral investment treaties” , George Mason Law Review (14 Geo. Mason L. Rev. 135).

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