Course 03: Comparative Public Law

MODULE V: INTERNATIONAL INVESTMENT TREATIES

SUMMARY DOCUMENT

Background and History of IIAs

Until the mid-20th century, the international legal framework for the protection of the rights of
foreign investors was circumscribed by customary international law. Due to various perceived
deficiencies, including vagueness and lack of consensus regarding the scope and meaning of
customary principles, foreign investors had no assurance that investment arrangements and
contracts made with host country governments would not be subject to unilateral change by
those governments at some later time. In fact, expropriations, nationalizations, and forced
renegotiation of contracts by states was a relatively common occurrence. Investments in
developing and newly-independent states were particularly susceptible to such “obsolescing
bargains” with host states (Raymond Vernon, Sovereignty at Bay, 1971). Increased incidents
of takings by states led to progressive undermining of the substance of agreements between
foreign investors and states. To change this dynamic, capital-exporting countries began a
process of negotiating international investment treaties that, to the extent possible, would be:
(1) complete, (2) clear and specific, (3) uncontestable, and (4) enforceable. This would
additionally facilitate the entry of investment into the territories of their treaty partners.
By the beginning of the 21st century, the process of treatification had moved at such a rapid
pace that investment treaties had become the primary legal instruments for the international
legal protection of foreign investors and their investments. Such investment treaties, also
referred to as international investment agreements (IIAs) are instruments of international law
by which states make commitments to other states with respect to the treatment they will
accord to investors and investments from those other states. States also agree on some
mechanism for the enforcement of those commitments. Three basic types of investment
agreements evolved during that period: (a) bilateral investment treaties, commonly known as
“BITs,” (b) bilateral economic agreements with investment provisions, and (c) other
investment-related agreements involving more than two states. Due to the similarities among

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treaties between various states in terms of concepts, language, rules, processes, and structure
among investment treaties they are said to form together a “regime” for global investment.

Early Developments

The current structure of IIAs comprising of various investment protection obligations on

states and mechanisms for enforcement by means of dispute settlement emerged out of long
historical process dating back to medieval and early modern era. Originating from the grant
of privileges and benefits by sovereign kings to foreign traders and merchants. Often these
assurances and grants of privilege would be embodied in a document that the sovereign
issued or agreed to with guilds and other forms of associations formed by merchants took the
form of a unilateral act by the sovereign, they were usually the product of some degree of
negotiation between the sovereign or his representatives and the foreign traders who were
their beneficiaries. Sovereigns were motivated to grant protection and privileges to foreign
traders out of a desire to secure certain advantages for themselves, such as the promotion of
foreign trade or the improvement of relations with groups in foreign territories.

Emergence of Treaty Frameworks

In the transition towards the early modern era and the emergence of nation states, sovereigns
took various measures for the protection of interests of their nationals engaged in economic
activities in the territories of other nations. Sovereigns would often negotiate with foreign
countries to obtain commercial and trading rights for their nationals. Consequence of these
negotiations was usually a written agreement between the two sovereigns. This historical
period witnessed an increase in the reliance on treaties between two sovereigns as an
important means of regulating transborder economic activity. Some of the key features of
treaties that were drawn in this period included protection and security of aliens and their
property; special means of protection for asset recovery and monetary transfers; most-
favored-nation treatment (which requires equality of treatment with other foreigners);
national treatment (which prohibits unfavorable discrimination in favor of nationals); and
guarantees of access to justice and safeguards against its denial. Thus, the sovereigns

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essentially laid the foundation during this period for the framework of investment treaties that
would emerge in the future.

Later Developments
Most foreign investments occurring during the 18th – early 20th centuries occurred in the
context of colonial expansion. Because imperial powers imposed their political and military
power on colonized territories and controlled the actions of colonial governments and their
legal systems, the European countries felt no need for commercial and investment treaties. A
blend of diplomacy and force was relied on to prevent adverse interference with the
investments and commercial activities of European nationals in the colonies and
protectorates. Western countries began to conclude commercial treaties among themselves on
a basis of greater equality than what they had negotiated with non‐western nations. These
treaties were largely aimed at facilitating trade, rather than investment. For example, United
States made large numbers of agreements known as treaties of friendship, commerce and
navigation (often called FCN treaties) as US foreign trade continued to expand. European
countries made similar treaties as well.

After the Second World War, foreign investment expanded greatly, led by reconstruction
efforts by the United States as well as European states that were themselves beneficiaries of
US investments. Some of the important innovations that were incorporated during this period
included dispute settlement provisions through commercial arbitration and by including a
clause providing for judicial enforcement of arbitration awards. Further, provisions requiring
state parties to submit to the jurisdiction of the International Court of Justice (ICJ) to settle all
disputes over the interpretation or application of its provisions were also included.
Formulations such as the “Hull Formula” requiring “prompt, adequate and effective”
compensation for the expropriation of property of nationals by host states also gained
prominence.

Development of BITs

The birth of modern BITs began on the eve of the 1960s when individual European countries
began to negotiate bilateral treaties. These new treaties dealt exclusively with foreign
investment and sought to create an international legal framework governing investments by

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the nationals of one country in the territory of another. The stated purpose of nearly all of
these treaties was to protect and promote foreign investment. The European BITs
incorporated many of the principles that had been elaborated in earlier bilateral commercial
agreements, as well as in the various unsuccessful multilateral efforts. To implement their
bilateral treaty programs, each capital-exporting state developed a model or prototype treaty
which it used in negotiations with other countries. BITs guaranteed investors of one treaty
partner in the territory of another treaty partner various standards of protection, including
protection from expropriation without just compensation, and the right to make monetary
transfers.

One of the most important developments of the BIT movement at an early stage was the
provision in the treaties for investors to bring claims against host states for violation of their
treaty rights directly to an international arbitration tribunal. With arbitration designated as the
primary means of dispute settlement, such investor–state arbitration proceedings became a
powerful enforcement tool to protect treaty standards. Prior to this time, unless an investor
had concluded a separate agreement with a host government calling for arbitration, an
aggrieved investor could only rely on its home country to press claims against the host
government, and it would be the option of the home state to negotiate or settle with the host
state on the claims of the investor.

Among institutional developments, the creation of the International Centre for Settlement of
Investment Disputes (ICSID) in 1965 can be considered to be most important, being a
dedicated institution created to administer investment disputes. ICSID sought to foster a
climate of mutual confidence between capital-importing and capital-exporting states by
providing basic rules to protect the legitimate interests of governments and foreign investors
alike. After the adoption of the Convention, investment treaties began to refer to it as a forum
for resolution of treaty disputes and signatory countries consented to ICSID jurisdiction in the
treaties themselves. Presently, the number of countries that are signatories to the ICSID
Convention is at 163, out of which 154 have so far ratified the Convention. ICSID continues
to be the top forum for settlement of investment disputes by means of arbitration, also
supplemented by conciliation facilities.

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The BIT movement

Objectives

There are three orders of objectives of the BIT movement: (1) primary objectives; (2)
secondary objectives, and (3) long-term objectives.

Primary Objectives

The protection and promotion of investment comprise of the dual primary objectives of
signing BITs. Proponents claim that such instruments allow foreign investors to invest safely
abroad and help create a stable international legal framework to facilitate and protect those
investments. It is also suggested that in the absence of an investment treaty, international
investors would be forced to rely on solely on the domestic law and domestic courts of the
host country for protection of their interests, which entails a variety of risks. Moreover, the
lack of co-operation or even active impediments might be created by host state officials may
lead to a situation where foreign investors are unable to find a neutral forum for resolution of
their disputes with the host state. Investor recourse to local courts for protection may prove to
be of little value in the face of prejudice against foreigners or governmental interference in
the judicial process. To increase legal certainty and counter the threat of adverse national law,
home countries of these investors attempted to conclude a series of treaties that would
provide clear rules and effective enforcement mechanisms.

The promotion of foreign investments forms the other aspect of the primary goals of BITs.
This objective is based on the assumption that increased investment will further a country’s
economic development and prosperity and that foreign sources of capital and technology can
usefully contribute to a country’s economic advancement. In the particular context of bilateral
relationships between capital-exporting and capital-importing states, the increasing the
amount of capital and associated technology that flows into the latter proves to be the chief

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source of motivation to sign BITs. While foreign investors from the capital-exporting state
enjoy the benefits of legal security provided by international legal protections in BITs, the
capital-importing state draws the benefits of increased capital flows, thereby creating a
situation of mutual benefit for both treaty parties.

Secondary Objectives

Countries often have various secondary objectives in concluding investment treaties. The
specific secondary objective pursued by a particular country may vary according to its
economic situation, policy goals, ideology, or the state of its international relations. These
objectives may not be stated in the investment treaty or even admitted to by negotiating
parties. Some of these ascertainable objectives are briefly summarised as follows –

1. Market Access: Some capital-exporting states have sought to use investment treaties
as a means to encourage or induce investment and market liberalization within their
negotiating partners, particularly those of capital-importing states. According to the
narrative of certain capital-exporting states, investment treaties can lead to the
liberalization of a country’s whole economy by facilitating the entry of investment
and creating conditions favoring their operation. Although the BITs themselves do not
specifically enunciate the goal of investment and market liberalization, it is clear
those goals are in the minds of developed country negotiators and are sometimes
reflected in background documents.

2. Relationship Building: Developing countries sign bilateral investment treaties with

developed capital-exporting countries to strengthen their relationship with those
countries and obtain the benefits and favors, including increased trade or foreign aid
that such a relationship may yield. Thus, even though a developing country may not
be certain of increased investment flows from its developed country treaty partner
after signing an investment treaty, there is a general expectation that such a treaty will

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result in closer ties and increased trade, foreign aid, security assistance, technology
transfers, or other benefits.

3. Domestic Investment Encouragement: An investment treaty can serve as a “signalling

device” to the domestic private sector that the government’s intentions toward private
capital, both foreign and domestic, are benign. Given the extensive commitments that
a host state undertakes to protect foreign capital and provide fair treatment under such
treaties, domestic investors may be encouraged by the expectation of general political,
economic and regulatory stability.
4. Improved governance and strengthened rule of law: It is suggested that investment
treaties may contribute to improved governance standards as well as enhancement of
the rule of law in states that sign such treaties. The underlying assumption improved
is that government authorities of the host state and its institutions who have been
prevented themselves from acting in arbitrary and abusive fashion toward foreign
investors will also be led to avoid arbitrary and abusive actions toward their own
nationals.

Long term goals

A careful reading of investment treaty preambles reveals some of the long-term objectives for
states that sign them. Some of these goals that are generally stated are intensification of
economic cooperation between treaty-partner states, stimulation of greater capital flow,
improved economic relations etc. It is also important to place treaty texts within the context
of their stated long-term objectives in order to interpret and understand fully their provisions.

Structure of Investment Treaties

The basic structure of most modern investment treaties encompasses ten topics:

1. Treaty Title and Statement of Purpose

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2. Definitions and Scope of Application

3. Investment Promotion, Admission, and Establishment
4. General Standards of Treatment of Foreign Investments
5. Monetary Transfers
6. Expropriation and Dispossession
7. Operational and Other Conditions
8. Losses from Armed Conflict or Internal Disorder
9. Dispute Settlement
10. Treaty Exceptions, Modifications, and Terminations

While these topics have been discussed in the video lectures, the topic are briefly summarised
below to aid the learner in navigating the issues involved.

Definitions and Scope

The definitions clause lays out the treaty’s terms and its scope of application, especially the
persons, organizations, and investments that may benefit from the treaty. Persons,
organizations, or investments that fall outside a treaty’s terms or scope of application are not
entitled to the benefit of its provisions. If a particular asset or enterprise in a host country lies
within the definition of “investment” in an investment treaty, that enterprise may take
advantage of the treaty’s privileges and benefits, as well as its enforcement mechanisms. If
not, then it may not take advantage of the treaty. Two key definitions in this section pertain to
what constitutes an “investor” and “investments”.

1. Investments – In defining covered ‘investments’, most investment treaties provide a

general definition of investments and then impose certain limitations such as the area
of the investment’s economic activity, the time when the investment is made, and
prescribed legal requirements. Most modern investment treaties adopt a broad asset-
based definition of investment. It recognizes the fact that investment forms are
constantly evolving in response to the creativity of investors and the rapidly changing
world of international finance, so a broad definition is necessary to cover the wide and

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potentially growing spectrum of investments. This is done by including a clause with

non-exhaustive list of asset types that qualify as investments.

The types of limitations on investments are also important, in order to enable states to
exercise control over the investments over which they consent to provide broad legal
protections under treaties. Such additional qualifications may require that an
investment:
(i) comply with certain laws of the host state,
(ii) meet certain temporal requirements as to the time when the investment must have
been made,
(iii) be made in specific sectors of the economy,
(iv) comply with specified territorial requirements, or
(v) be made in projects classified as “approved” by appropriate governmental
authorities.

2. Investors - A person or entity will not be able to claim treaty protection for an asset
that qualifies as an investment unless that person or entity is deemed to be an
“investor,” as that term is defined in the applicable treaty. The essential difficulty lies
in determining what links need to exist between an investor and a state party to a
treaty for the investor to receive the maximum benefit from the treaty’s provisions.
Most treaties distinguish between two types of investors: (a) natural persons and (b)
legal entities.

In the case of physical persons or individuals (natural persons), investment treaties

specify the necessary link between the individual and a contracting state primarily on
the basis of nationality or citizenship, and to a lesser extent by domicile, permanent
residence, or some combination thereof. But where a natural person has multiple
nationalities, this may prove to be a problem with respect to investment treaties. If the
treaty itself does not specify a solution, then concepts such as “dominant and effective
nationality” may be used. Alternatively, persons who are nationals of both home and
host states may be denied the benefit of investment treaties altogether.

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For legal entities like companies, most BITs require that a treaty partner which is the
home state of such a company be:

(A) the country of the company’s incorporation,

(B) the country of the company’s seat, registered office, or principal place of business,
or
(C) the country whose nationals have control over, or a substantial interest in, the
company making the investment.

Sometimes these requirements are combined so that an investing company must

satisfy two or more conditions to qualify for coverage under a particular investment
treaty.

Admission and Establishment

Most investment treaties make a distinction between the treatment to be accorded in making
an investment and the treatment to be given after that investment is made. The former is
referred to as “pre-entry” or “pre-establishment” treatment, while the latter is referred to as
“post-entry” or “post-establishment” treatment. While most investment treaties establish
similar and firm obligations with respect to the latter, that is “post-establishment” treatment,
they express more diverse and flexible commitments with respect to the “pre-establishment”
treatment. The three approaches that govern pre-entry treatment are:

(1) the admission of investment according to host country law, or the “controlled entry
model”;
(2) grants of a relative right of admission or establishment, or “liberalized entry model”; and,
in rare cases,

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(3) grants of an absolute right of admission or establishment, known as the “establishment

model”.

Where the entry of investment is governed exclusively by domestic law, investments from
other contracting parties are admitted only if they comply with the host country’s legislation.
This type of provision is normally referred to as an “admissions clause.” Under a treaty
containing such an admissions clause, a host country agrees to allow investments from a
treaty partner only to the extent that it decides they meet the requirements of its domestic
public law regime and its appurtenant regulations. Additionally, unless the treaty provides
otherwise, when considering the admission of investments from a treaty partner, the host state
is under no obligation to grant investors from treaty partners the same treatment that it grants
to its own nationals or to investors of third parties.

Under the right of establishment approach, a conditional or relative right is created regarding
the admission of investments, which provides for treatment no less favorable than that given
to investments made by the nationals of the host country, nationals of a third country, or both,
whichever is the more favorable.

Where a state provides an absolute right of establishment, investors from other treaty partners
to invest freely and unconditionally in a host state. The only significant international treaty
that grants such an absolute right is the European Union Treaty.

Performance Requirements

An issue related to entry or establishment of investment is the ability of the host country to
impose conditions on that entry. One type of condition that host countries often impose is a
“performance requirement” or “trade-related investment measure” which impose on an
investment project, as a condition of entry, such requirements as exporting a certain
proportion of its production, restricting its imports to a certain level, or purchasing a
minimum quantity of local goods and services.

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General Standards of Treatment of Foreign Investors

Investment treaties impose obligations on host countries regarding the “treatment” they must
accord to covered investments and investors to protect foreign investors against the political
risk resulting from placing their assets under a host country’s jurisdiction. Treaties define the
standard that host countries must conform to. State actions that fail to meet that defined
standard constitute a treaty violation, making the offending state internationally responsible
and potentially liable to pay compensation to the injured investor.

General standards of treatment apply to all facets of an investment’s activities in the host
country. These include host government commitments to grant investors and investments
“fair and equitable treatment,” “full protection and security,” and “treatment in accordance
with international law.” Specific treatment standards concern particular matters relating to an
investment, such as monetary transfers, expropriation, and investor rights in times of war,
revolution, or civil disturbance.

Further, general treatment standards consist of two types: (a) absolute standards, that are not
contingent upon specified factors, happenings, or government behavior toward other
investors or persons; and (b) relative standards, that are dependent upon the host
government’s treatment of other investments or investors.

Six general standards of treatment that appear commonly in investment treaties: (a) fair and
equitable treatment; (b) full protection and security; (c) protection from unreasonable or
discriminatory measures; (d) treatment no less than that accorded by international law; (e) the
requirement to respect obligations made to investors and investments; and (f) national and/or
most-favoured-nation treatment.

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1. Fair and Equitable Treatment -

The term ‘fair and equitable treatment’ is not defined in investment treaties even
though virtually all such treaties include it as a mandatory standard of treatment. The
term’s undefined and potentially elastic nature has made it a preferred ground for
aggrieved investors when seeking compensation for alleged injurious acts of host
country governments.

There are two different conceptions of the nature of the fair and equitable standard:
(1) That fair and equitable treatment merely reflects the international minimum
standard required by customary international law; or (2) That the standard is
autonomous and additional to general international law.

Western governments and commentators has been that states owe aliens and their
property a certain minimum level of treatment regardless of the treatment each state
gives to its nationals. Another way of looking at this is that it merely reflects a
minimum international standard and does not give investors any additional rights. On
the other hand, some scholars and other tribunals have held a different view and
concluded that FET, when expressed without qualification or condition, is an
autonomous, additional standard whose interpretation is not limited by the minimum
standards required by international law. According to this view, the FET clause
imposes a higher standard of treatment on host states than customary international law

The application of the fair and equitable standards in most cases is difficult. First,
investment treaties do not define the term. Thus, arbitrators, government officials,
investors’ legal counsel and others who would apply the term must begin
interpretation by confronting two words, “fair” and “equitable,” that because of their
vagueness and generality allow for great subjectivity. Second, as a result, the standard
created will be highly flexible and may result in a subjective decision-making process
that disappointed litigants may consider unprincipled. Third, the situations in cases

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when the term must be applied are highly complex and, in many instances, involve
troubled relationships between investors and host governments stretching over
significant periods of time and involving multiple interactions.

2. Full Protection and Security

A similar general standard of treatment found in investment treaties is the obligation

of the host country to accord “full protection and security” or “constant protection and
security” to investments made by nationals and companies of its treaty partners. The
precise meaning of the term may be open to widely varying interpretations in different
situations. Consequently, arbitration tribunals have struggled to determine the proper
scope of its protection.

One definition of due diligence that was cited favourably by an ICSID arbitral
tribunal is “reasonable measures of prevention which a well-administered government
could be expected to exercise under similar circumstances.” Consequently, the failure
by a host government to take reasonable measures to protect the investment against
threats such as brigands or violence by police and security officers renders that
government liable to compensate an investor for resulting injuries.

3. Contractual Obligations (Umbrella Clauses)

The breach of state contracts and other state obligations made to investors is not
ordinarily considered a breach of international law. Even if an investor is protected by
an investment treaty, usually the treatment provisions contained therein do not make
contractual breaches violations of the treaty unless the state has acted so flagrantly
toward its obligation that its actions constitute a denial of fair and equitable treatment,
full protection and security, or another treatment standard specified in the treaty.

To protect investor–state commitments and obligations from obsolescence, many

investment treaties contain a clause defining the treatment that the host state will give

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to obligations it has made to investors or investments covered by the treaty. Known

commonly as an “umbrella clause,” such provisions generally stipulate that: “Each
Contracting Party shall observe any obligation it may have entered into with regard to
the investments of investors of the other Contracting Party.”

The intention of an umbrella provision is to impose an international treaty obligation

on host countries that requires them to respect obligations they have entered into
regarding investments protected by the treaty. By virtue of the umbrella clause, a host
state has an international obligation to respect its obligations concerning foreign
investments despite the fact that those obligations remain subject to the law under
which they were originally made. The failure to respect such obligations, while
remaining subject to local courts or the contractually specified dispute settlement
procedures, also renders an offending state subject to the jurisdiction of investor–state
arbitration or whatever other dispute settlement mechanisms are provided for by
treaty.

4. National and/or Most Favoured Nation Treatment

There are relative standards, which correspond particularly to non-discrimination in

relation to both foreign and national investors. Pursuing increased foreign investment,
investment treaties often seek to remove the competitive disadvantage that may be
placed on foreigners by eliminating discriminatory treatment by host states against
foreign investors viz a viz their own domestic investors. Treaties do this by making
non-discrimination a standard that host countries must respect in their treatment of
investors and investment from other contracting states.

Non-discriminatory treatment has two dimensions. The first, known as national

treatment, requires host states to treat foreign investors and foreign investments no
less favorably than their own national investors and investments. The second, known
as most-favored-nation treatment, demands that host countries treat investments and
investors covered by the treaty no less favorably than other foreign investor and

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investments. The purpose of these treatment standards is to place all economic actors
in an equal position on the assumption that this will foster competition and economic
growth.

National treatment allows protected foreign investors to take advantage of any

benefits that a host country grants to its own nationals. Most-favored-nation
treatment, on the other hand, has the effect of granting to protected foreign investors
any benefit or advantage granted by the host country to investors from any other
country. They thus enable such investors to take advantage of the higher standards of
investor protection that may be contained in investment treaties to which the host
country is a party.

5. Monetary Transfers

The monetary transfers, or simply ‘transfers’ provisions of most investment treaties

deal with five basic issues: (1) the general nature of the investor’s rights to make
monetary transfers; (2) the types of payments that are covered by the right to make
transfers; (3) the currency with which the payment may be made; (4) the applicable
exchange rate; and (5) the time within which the host country must allow the investor
to make transfers. With the purpose of allowing investors the right to repatriate
income without any hindrances, capital-exporting countries generally press for
unrestricted freedom of transfers under such clauses.

6. Expropriation

One of the primary purposes of legal protections within investment treaties is the
prevention of state takings in the form of expropriation of the foreign investor’s
property. Virtually all investment treaties adopt some variation of the traditional
Western view of international law that a state may not expropriate an alien’s property
except: (1) for a public purpose, (2) in a non-discriminatory manner, (3) upon
payment of just compensation, and in most instances, (4) with provision for some

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form of judicial review. The various elements of the traditional rule have taken
different formulations in different treaties, some more and some less protective of
investor interests. Perhaps the greatest variations in treaty provisions and the most
difficult negotiations arise with respect to standards of compensation. Nonetheless
many, if not most, investment treaties have adopted the traditional rule, often
expressed in the so-called “Hull Formula” that compensation must be “prompt,
adequate and effective.”

Whereas outright expropriation through government seizure was common until the
1980s, it has become an increasingly rare phenomenon thereafter. In the twenty-first
century, governments dissatisfied with the original bargains made with foreign
investors rather use their legislative and regulatory power in more subtle ways to alter
the benefits flowing to the investor from the investment. Thus, a government may
impose new regulations on the way the investment is operated, raise taxes on the
investment substantially, or reduce the revenues flowing to the investor. The investor
remains in possession of the investment, but the amount and nature of the benefits
originally contemplated are significantly reduced.

In legal terms, these regulatory actions diminish the nature of the investor’s property
rights over the investment and, if sufficiently extreme, may constitute a form of
expropriation or dispossession. Such actions may rise to the level of an “indirect”
expropriation, sometimes referred to as “regulatory taking.” They have become the
most common type of intervention with foreign investments by host governments in
the twenty-first century. Treaty language has evolved to cover both direct and indirect
expropriations, as well as governmental measures that are equivalent to a direct or
indirect expropriation.

Consequences of Treaty Violations

Arbitral tribunals have uniformly held that states are liable to compensate investors for treaty
breaches that result in their injury. Tribunals have arrived at this conclusion by finding that

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customary international law applies to the question of liability and compensation. In

particular, they have relied on the Chorzów Factory case (1928), in which the Permanent
Court of International Justice stated that, according to customary international law, if a state
has committed a wrong it is liable to pay reparations. The amount of such reparations must be
sufficient to eliminate the consequences of the illegal act and to place the wronged party in
the situation it would have been had the illegal act not taken place. Thus, having determined
the liability of the host state for violating a treaty treatment standard, an arbitral tribunal will
next determine the compensation to be paid to the investor by comparing its actual situation
after the breach with the situation it would have been in had no breach taken place.

Dispute Settlement

Most investment treaties provide for two distinct dispute settlement mechanisms: one for
disputes between the two contracting states, and another for disputes between a host country
and an aggrieved foreign investor. With respect to the former, contemporary investment
treaties usually stipulate that in the event of a dispute over the interpretation or application of
the treaty, the states concerned will first seek to resolve their differences through negotiation
and then, if that fails, through ad hoc arbitration.

For investor-state disputes, the trend among more recent investment treaties is to provide a
separate international arbitration procedure, often under the auspices of the International
Centre for Settlement of Investment Disputes (ICSID), for disputes between an aggrieved
foreign investor and an offending host country government. By agreeing to an investment
treaty, a state often simultaneously gives the consent needed to establish ICSID or another
arbitration forum for any future dispute between one contracting state and a national of
another contracting state. Although the investor may be required to first try to resolve the
conflict through negotiation and may also have to exhaust remedies available locally, the
investor ultimately has the power to invoke arbitration in order to secure a binding award.

It is this dispute settlement mechanism between investors and states that gives important,
practical significance to an investment treaty, and which truly enables investment treaties to

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afford protection to foreign investment. As a result of this mechanism, foreign investors are
bringing increasing numbers of arbitration claims when they believe host countries have
denied them protection under a treaty. In many cases, arbitral tribunals have rendered
substantial awards against host countries, and it appears that host countries have generally
paid them. In the event that a state fails to pay an award, the ICSID Convention requires each
ICSID member state to recognize such “ … award … as binding and enforce the pecuniary
obligations imposed by that award within its territories as if it were a final judgment of a
court in that State.” Non-ICSID awards rendered under investment treaties are enforceable
under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Treaty Exceptions, Amendments, and Terminations

Most investment treaties have provisions that carve out exceptions to the general standards of
treatment, especially when a country’s important national interests are at stake. Such interests
include national security, the maintenance of public order, and the restoration of peace and
security. Some treaties also provide exceptions to pursue other objectives, including public
health, public morality, and emergency situations. Such exception clauses rarely refer
specifically to economic crises or economic interests as creating a basis for justifying an
exception to treaty obligations.

These general exception clauses have the goal of giving host countries the legislative and
regulatory latitude to deal with threats to important national interests. On the other hand, their
existence in treaties raises the risk that host countries will invoke them in unjustified
circumstances in order to avoid their legal obligations and thwart the justified expectations of
investors. The risk is particularly severe because of the vagueness and generality of key terms
such as “protection of essential security interests.”

To provide some safeguards against abusive invocation of exception clauses, many

investment treaties state conditions that must be met for a host country to legitimately invoke
the clauses and avoid treaty obligations. One example is a requirement that the invoking party
notify the other party of its intention to invoke the exception clause and provide pertinent

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information regarding the proposed measure. The treaty may also attempt to specify the
conditions that must be met to legitimately allow for the exception.

Most international agreements, including investment treaties, contain provisions describing

the process for modifying treaty provisions and, if necessary, terminating the agreement.
Investment treaties generally provide that they shall be in force for 10 or 15 years. Upon the
expiry of this initial period, the treaty may continue either for a fixed additional period or
until it is terminated by one of the parties. As a rule, a treaty may be terminated by the parties
only after the end of the initial period or after the submission of advance written notice;
however, the termination of a treaty usually does not result in the immediate denial of treaty
protection for investments made while it was in effect. Most treaty termination provisions
contain a continuing effects clause which provides that investments made, acquired, or
approved prior to the date of the termination of the treaty will remain in force with respect to
those investments for a further period of 10, 15, or even 20 years.

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