- INTRODUCTION
Bilateral Investment Treaties (BITs) are typically concluded between two states with the aim of safeguarding and fostering foreign investors and investments within the host State. These treaties establish limits on the treatment of investors, protect the fundamental rights and interests of investors under international law, and most of the time provide mechanisms for dispute resolution.
A BIT typically includes provisions for:
- Fair and equitable treatment,
- Full protection and security,
- Protection against expropriation,
- Dispute resolution mechanisms.
However, in recent years, BITs have undergone many changes in terms of both investment protection and dispute settlement mechanisms, mainly because of today’s socioeconomic dynamics. In this article, which covers the first part of our study, we will address the underlying reasons behind the revision of BITs and what kind of reforms the new generation BITs bring in terms of investment protection provisions, while in the second part, we will analyze the dispute settlement mechanism provisions of the new generation BITs.
- THE UNDERLYING REASONS BEHIND THE EVOLUTION OF BITS
Over the past few decades, the surge in international trade and the expansion of the global economy have narrowed the divide between countries importing and exporting foreign investments. This transformation encourages developing countries to actively engage in the negotiation process of BITs, fostering a more balanced and equitable approach between developed and developing nations. Additionally, BITs are no longer exclusively concluded between developed and developing states. In the late 1980s, only 10 percent of BITs involved two developing states, but today, 23 percent of BITs are between developing countries, amounting to 519 agreements currently in force.
Another reason for states to review their BITs is the escalating number of investor-state disputes, which expose them to significant compensation risks. As these disputes become more prevalent, states are compelled to reassess the provisions of their BITs to mitigate potential financial liabilities.
The Achmea Judgement has added another layer to the ongoing debate surrounding BITs, particularly those between European Union (EU) member states. This case has created controversy into the efficacy and validity of such treaties within the EU zone.
As a consequence, certain states have tendencies to terminate their BITs. Notably, countries such as Bolivia, Venezuela, and Ecuador have withdrawn from the ICSID Convention and terminated numerous BITs. Similarly, South Africa and India have taken a comparable stance by terminating 9 and 58 investment treaties, respectively.
Nevertheless, the prevailing approach among the majority of states is not outright termination but rather a thorough review of existing BITs. For instance, India has adopted this strategy for the BITs it has chosen not to terminate. In 2016, India drafted a new model investment treaty, which included redefined concepts of investment and investor. Additionally, its Article 15.2 introduced a requirement of exhaustion of domestic remedies for at least five years before initiating arbitration.
Australia is another country that has deliberately terminated of certain BITs. In place of these BITs, Australia has included revised investment provisions into free trade agreements or signed new-generation BITs. The renegotiation of the 2001/2002 Australia-Uruguay BIT is an example of how Australia’s BITs are being modified. The new agreement has detailed and demonstrative substantive protection criteria, supplemented with a progressive preamble that emphasizes states’ rights to “determine legislative and executive priorities.” Notably, the agreement covers public policy issues including public health, public order, natural resources, and taxes.
In short, from a policy standpoint, the termination of existing BITs and their replacement with the new generation of investment treaties aimed at striking a balance between the rights of foreign investors and the regulatory powers of host states minimizes foreign investors’ historically “privileged position”. These modifications ensure that BITs are concluded with greater clarity that expressly protect governments’ regulatory power and replace ambiguous and vague protection provisions that arbitral tribunals may interpret too liberally.
- INVESTMENT PROTECTION PROVISIONS IN NEW GENERATION BITS
- The Definitions of Investment and Investor
Traditional BITs broadly define investment as “any kind of asset,” leaving room for interpretation regarding its contribution to the host State’s economy. For instance, in Article 1.2 of Belgium-Luxembourg Model BIT (2002), investment is defined as “any kind of asset and any direct or indirect contribution in cash, in kind or in services, invested or reinvested in any sector of economic activity”. New-generation investment treaties seek to clarify this definition by establishing stricter criteria. For example, the 2019 model BIT proposed by the Netherlands defines investment as “any type of asset contingent upon significant commercial activity in the host State”. Some agreements go further by introducing criteria such as investment duration and the establishment of permanent economic relations. Emphasis is placed on characterizing investment as a continuous capital inflow rather than an immediate action.
An alternative approach involves refining the “any asset” criterion. For instance, the 2016 Indian Model BIT, defines “investment” as “an enterprise constituted, organised and operated in good faith by an investor in accordance with the law of the Party…taken together with the assets of the enterprise, has the characteristics of an investment…” Accordingly, solely enterprises owned and managed by investors, along with their assets, are considered investments; in other words, no other forms of assets are encompassed within the “investment” definition. This approach is mirrored in BITs between Congo-Morocco, Nigeria-Morocco, and Brazil-India, concluded in 2018.
- MFN Clauses
Most-favored Nation Clauses (MFN) are provisions allowing the contracting party to leverage other party to gain advantages from more favorable provisions in treaties benefiting a third state. In recent years, there has been ongoing discussion about excluding MFN clauses from investment treaties. The rationale behind this is that each BIT is concluded under unique circumstances, and the provisions adopted should not automatically extend to other agreements.
Adopting this perspective has led to a narrowing of the application scope of the MFN clause in some BITs, while in others, it is entirely excluded. For instance, in the EU-Vietnam Investment Protection Agreement, in Appendix 2-A-5, certain sectors such as telecommunication services, cultural and sporting activities, agriculture and fisheries, as well as gasoline, natural gas, and mining, are expressly excluded from the MFN clause.
Furthermore, in some instances, for example in the Czech Republic Model BIT in its Article 3, due to concerns about the MFN clause expanding the scope of dispute settlement provisions, agreements have been crafted to explicitly specify that the MFN clause does not apply to dispute settlement provisions.
- Provisions on Expropriation
A primary criticism of the concept of expropriation revolves around the broad interpretation of indirect expropriation. In cases of indirect expropriation, the state doesn’t directly interfere with the investment but rather constrains its scope of operations. Actions such as but not limited to license cancellations, contract terminations, and excessive taxation have, in certain instances, been deemed as forms of indirect expropriation.
The new-generation BITs aim to refine and limit the scope of indirect expropriation. For instance, the new Dutch Model BIT, in its Article 12.4, provides definitions for both direct and indirect expropriation and outlines criteria for categorizing a transaction as indirect expropriation. These criteria include assessing the adverse economic impact of the measures on the investment, the duration of the measure, and the scale and nature of the measure.
Additionally, in new-generation treaties, there is a common trend of explicitly excluding public interest regulations from the realm of expropriation. As exemplified by the Trans-Pacific Partnership (TPP) Agreement, actions involving non-discriminatory regulations, implemented to safeguard genuine public welfare objectives such as public health, safety, and environmental concerns, are expressly designated as not constituting indirect expropriation.
- Umbrella Clauses
Large-scale foreign investment projects often require contracts between investors and host states. While breaches of these contracts are typically handled by domestic courts and not considered violations of international law, host states can, and often do, agree through treaties to be held accountable under international law for any breaches of their contractual obligations to foreign investors through umbrella clauses in BITs.
However, in new-generation BITs, there is a tendency to either restrict or entirely eliminate the application scope of umbrella provisions. For example, the 2015 Indian Model BIT does not contain an umbrella clause. Article 13.3 of the treaty expressly excludes contractual breaches from the jurisdiction of the investment treaty tribunal. It provides:
“A Tribunal constituted under this Chapter shall only decide claims in respect of a breach of this Treaty as set out in Chapter II, except under Articles 9 and 10, and not disputes arising solely from an alleged breach of a contract between a Party and an investor. Such disputes shall only be resolved by the domestic courts or in accordance with the dispute resolution provisions set out in the relevant contract.”
In contrast, for example, the Dutch Model Investment Agreement (2019) contains an umbrella clause. However, the scope of the umbrella clause is more clearly defined than in the 2004 Dutch Model BIT, and the ambiguity regarding the scope of application of the provision is eliminated in Article 3.4 of the Agreement.
- Sustainable Development and New Generation BITs
The objective of sustainable development urges states to take new measures for the protection and enhancement of investments. In this context, 15 investment treaties concluded in 2019 include provisions related to sustainable development, with 11 of them incorporating provisions for environmental protection and the health and safety of workers. The Dutch Model BIT openly references the parties’ endorsement of the G20 Guiding Principles in its Article 3.3.
However, conventional BITs can restrict countries from acting in line with their sustainable development goals. For instance, Mongolia implemented a regulation requiring uranium companies operating in the country to renew their licenses due to environmental damage. A foreign investor’s license was not renewed on the grounds of inadequate safekeeping of radioactive materials. Subsequently, a Canadian company initiated an arbitration process against Mongolia, claiming indirect expropriation, and Mongolia was ordered to pay $80 million in compensation.
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