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The Law of Investment Treaties, 2nd Edition by Salacuse, Jeswald W (1st May 2015)

1 A Global Regime for Investment

From: The Law of Investment Treaties (2nd Edition)

Jeswald W. Salacuse

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. date: 16 February 2019

BITs (Bilateral Investment Treaties) — Treaties, interpretation — Investment — NAFTA (North American Free Trade Agreement)

(p. 1) A Global Regime for Investment

1.1  Introduction to Investment Treaties

Since the end of World War II, the nations of the world have been engaged in building a global regime for investment through the negotiation of investment treaties. Investment treaties, often referred to as ‘international investment agreements’ (IIAs), are essentially instruments of international law by which states (1) make commitments to other states with respect to the treatment they will accord to investors and investments from those other states, and (2) agree to some mechanism for enforcement of those commitments. A fundamental purpose of investment treaties, as indicated by their titles, is to protect and promote investment.1

International investment treaties consist principally of three types: (1) bilateral investment treaties, commonly known as ‘BITs’; (2) bilateral economic agreements with investment provisions; and (3) other investment-related agreements involving more than two states. At the beginning of 2014, the total number of all investment treaties, according to the United Nations Conference on Trade and Development (UNCTAD), was 3,236, consisting of 2,902 BITs and 334 other types of international investment agreements.2 Approximately 180 countries had signed at least one of them.3

BITs, as their name indicates, exclusively govern investment relations between two signatory states. The degree to which individual countries have participated in concluding BITs has varied. For example, 41 per cent of all BITs concluded as of 2014 were between a developing and a developed country (ie ‘north-south agreements’), while only 9 per cent were between developed countries (ie ‘north-north agreements’).4 Agreements among developing (p. 2) countries (‘south-south agreements’) accounted for 27 per cent of the total. And while Germany, by the beginning of 2014, led the world in the number of signed investment treaties, having concluded 134 BITs and sixty-two other international investment agreements making a total of 196, with China having signed 130 BITs and seventeen other IIAs,5 certain other states, like Somalia and North Korea, had signed very few. Moreover, even if a state signs an international investment agreement, its governing authorities may refuse to ratify it or subject ratification to long delays. Brazil, for example, signed fourteen BITs during the 1990s but as of the beginning of 2014 had failed to ratify any of them.6

In addition to BITs, which concern investment only, various other bilateral agreements of an economic nature also contain investment provisions. Among the most important of these are modern free trade agreements, such as those pursued by the United States,7 and economic partnership and cooperation treaties, like those advanced by Japan,8 which contain chapters on investment that replicate many of the provisions in BITs. As of 2014, 334 such agreements were in existence. In addition, one must also consider earlier bilateral commercial and trade agreements, such as the Treaties of Friendship, Commerce, and Navigation negotiated by the United States with numerous countries, which often include provisions that affect foreign investments and can become the basis for international litigation to protect investor interests.9

Investment treaties as a group include more than strictly bilateral agreements. Numerous treaties with more than two state parties set down important enforceable international rules concerning foreign investment. These include the North American Free Trade Agreement (NAFTA),10 a treaty among the United States, Canada, and Mexico, in which one chapter, Chapter 11, is itself an investment treaty, and the Energy Charter Treaty (ECT),11 a multilateral convention among fifty-one countries, setting down rules for trade and investment in the energy sector. Also included in the group of multilateral treaties are various regional international arrangements such as the Unified Agreement for the Investment of Arab (p. 3) Capital in the Arab States,12 the Association of Southeast Asia Nations’ (ASEAN) Comprehensive Investment Agreement,13 and the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR),14 often referred to simply as ‘CAFTA’, a grouping of the United States and six central American states, which includes an investment chapter similar to that of the NAFTA. In addition, it is worth mentioning that the Treaty on the Functioning of the European Union,15 which governs the most economically important regional grouping in the world, also contains important provisions concerning investment within the European Union.

As a result of the surge in treaty-making undertaken by states since the end of World War II, the total number of treaties with meaningful provisions relating to foreign investment as of the beginning of 2014 probably exceeded 3,300. That number is certain to grow as states continue to negotiate significant numbers of investment treaties each year.16 An important support mechanism for this emerging international investment regime has been and will continue to be the International Centre for Settlement of Investment Disputes (ICSID), which was formally established in 1966 as an affiliate of the World Bank to resolve disputes between host countries and foreign private investors.17 Although ICSID did not hear its first case until 1972, it has become an important institution for international investment dispute resolution.18 It is through the dispute resolution process that substantive treaty commitments towards (p. 4) investments and investors from other treaty countries are given meaning and made a reality.

1.2  The Significance of Investment Treaties

The six decades since the end of World War II have thus witnessed a widespread treatification19 of international investment law. Today, unlike the situation that prevailed before World War II, foreign investors in many parts of the world are protected primarily by international treaties, rather than by customary international law alone. For all practical purposes, treaties have become the fundamental source of international law in the area of foreign investment.20 Indeed, in 2003, an arbitral tribunal that included a former president of the International Court of Justice suggested that the 2,000 BITs then in existence had shaped the customary international law with respect to the rights of investors.21

This shift from customary international law to treaty law in the domain of international investment has been anything but theoretical. For one thing, it has imposed a discipline on host country treatment of foreign investors. In those cases in which host governments have failed to abide by their commitments to investors, governments have found themselves involved in international arbitration proceedings (some 568 known cases involving ninety-eight countries, in both the developing and the developed world, at the beginning of 2014),22 and in many cases arbitral tribunals have held them liable to pay substantial damages awards to injured investors.23 The decisions in those investor–state arbitrations are becoming an increasingly important source of international jurisprudence on the respective rights of foreign investors and the states in which they invest.

(p. 5) In summary, international investment treaties are playing and will continue to play a growing role in international business and economic relations. An intensified knowledge of investment treaties is therefore vital for government officials who negotiate, interpret, and apply them, as well as for those who manage relations with actual and prospective foreign investors in their territories. Many officials and their governments have learned at significant cost that international investment treaties are not just ‘expressions of good will’ but are binding instruments of international law that impose enforceable legal obligations on host country governments.

Similarly, international business executives, bankers, and their lawyers must take account of relevant investment treaty provisions in planning, executing, and managing foreign investment projects. International investment treaties have become, and will remain, vital elements in evaluating political risk in any country in which investors hope to operate. And when, as a result of changes in circumstance or policy, conflict arises between investors and host countries, international investment treaties usually play a significant role in their resolution. The treaty enforcement provision whereby individual investors are given the right to initiate arbitration against host countries has led to the development of an increasingly important area of legal practice. Law firms and practising lawyers need to understand, interpret, and apply international investment treaties in order to effectively advise clients and represent them before arbitral tribunals, and in some cases, national courts. Thus, international investment agreements have a growing significance for the conduct of international business, finance, and legal practice.

But beyond the application of specific treaties to individual investors, one may well ask: What is the significance as a whole of all of this treaty-making over the last six decades? Just what does it all add up to? On the one hand, certain scholars have said that each of these approximately 3,300 treaties are lex specialis that do nothing more than define specific rules for regulating investments between individual pairs of countries that are parties to the treaties.24 According to this view, the whole is merely the sum of its parts. On the other hand, in view of the strong similarity among treaties and the common concepts, language, structure, and processes they employ, other scholars have argued that given the large number of countries involved in the movement to negotiate international investment agreements these treaties constitute customary international law.25 This debate is not new. Indeed, virtually since the beginning of the investment treaty movement, scholars have debated the extent to which such treaties constitute or form customary international law with respect to foreign investment. One argument is that investment treaties ‘establish and accept and thus enlarge the force of traditional (p. 6) conceptions’ of the law of state responsibility for foreign investment.26 Others have countered that, despite their prevalence, investment treaties have effect only between the parties to them and are not sufficiently uniform to establish custom accepted by the international community.27

1.3  A Regime for International Investment

Without resolving the debate as to whether or not investment treaties constitute customary international law, one may conceptualize the mass of investment treaties made over the last sixty years in yet another way. Borrowing from international relations theory, one can think of the existing body of investment treaties as constituting a regime.28 An international regime is essentially a system of governance in a particular area of international relations.29 Focusing on the elements of a regime, a leading scholar of international relations has defined an international regime as ‘principles, norms, rules and decision-making procedures around which actors’ expectations converge in a given area of international relations’.30 International regimes, according to two other scholars, ‘constrain and regularize the behavior of participants, affect which issues among protagonists are on and off the agenda, determine which activities are legitimized or condemned, and influence where, when, and how conflicts are resolved’.31 Thus, one may argue that international investment treaties as a group represent a convergence of expectations by states as to how host governments will behave towards investments from other regime members. The norms and rules embodied in investment treaties are intended to constrain and regularize such behaviour in order to fulfil those expectations.

One of the ways in which international law becomes a reality, in the sense of actually affecting the behaviour of both states and private parties, is through the creation of international regimes. For nearly three decades, international relations scholars have worked to develop a theory of regimes to explain the phenomenon of cooperation among states in an otherwise anarchic world.32 Although regime theory as a body of scholarly endeavour has been the almost exclusive province (p. 7) of political scientists rather than international lawyers, some of its insights and frameworks may be useful in explaining how and why international investment law works the way it does.

Although each of the 3,300 investment treaties is legally separate and distinct, thus binding only the states that have concluded it, investment treaties as a group are remarkably similar with respect to structure, purpose, and principles. In addition, the language used in expressing these principles is often identical, so that it is not uncommon, for example, to find that both counsel and arbitrators will refer to arbitral decisions in cases interpreting one type of investment treaty, such as the investment chapter of NAFTA, to interpret a similar provision in a totally separate and unrelated treaty, like a BIT between Chile and Malaysia.33 It is for this reason, among others, that one may view these agreements, despite individual differences in text, as constituting a single international regime for investment.

Two principal theoretical explanations have been advanced as to why states form regimes. For some scholars associated with the realist school, regimes are a means by which a hegemonic state asserts power in order to advance its own interests and thereby attain and preserve relative gains over other countries.34 According to this view, often referred to as the theory of hegemonic stability, a regime cannot exist without a hegemon.35 An initial problem with applying this theory to explain the existence of the investment regime is that it is difficult to identify the specific hegemon that has advanced and maintained the investment treaty system. Normally, a hegemon is a particular, dominant country, such as the United States, a country that, in the words of one scholar, ‘is powerful enough to maintain the essential rules governing interstate relations and willing to do so’.36 As will be seen in Chapter 4, which examines the history of investment treaties, no particular country has acted as a hegemon in its development and maintenance in order to advance its own particular interests and gain an advantage over all other countries. On the contrary, many capital-exporting countries, through their individual and largely uncoordinated actions, have been active in its creation.

One could argue, of course, that capital-exporting countries have acted as a collective hegemon to create and maintain the investment regime and thereby maintain their global economic advantage, particularly in relation to developing, capital-importing nations. However, given the number and diversity of capital-exporting states, designating them as a ‘hegemon’ would distort the usual meaning of that term, which traditionally has referred to a single state. On the other hand, the rhetoric of certain developing country leaders, particularly in Latin America, who have viewed the spread of bilateral treaties as a threat to their (p. 8) countries’ sovereignty, suggests that they do indeed view capital-exporting countries as a collective hegemon that has put in place a system of international investment rules designed to preserve their dominance in the global economy vis-à-vis developing countries.37 For these leaders and many of their followers, the investment treaty regime is a clear manifestation of an effort at hegemonic stability.

The debate over whether the investment regime is an act of hegemonic stability or an act of cooperation to advance the interests of all regime participants may grow sharper in the future. The ultimate resolution of that debate may have significant consequences for the legitimacy of the regime in the eyes of the world.

A second explanation for the creation of an investment regime is that countries build regimes because they believe that such a cooperative arrangement will advance their individual interests. Regimes, according to this explanation, are instances of international cooperation in an otherwise anarchic world of independent sovereign states.38 States form international regimes in order to deal with problems in a manner that advances their interests. Their stated aim in building a global investment regime has been to facilitate the flow of capital and related technology among states so as to promote economic development and prosperity,39 often by solving the problem of foreign investment insecurity due to the risk of adverse actions by governments in host countries.40 The basic building block for this emerging international investment regime has been the investment treaty.

According to the second theory, nations create and join regimes out of a desire to reduce the relative costs of desired transactions. Thus, capital-importing states have been led to sign investment treaties in the belief that the treaty commitments they make to protect foreign investment will reduce the perceived risks associated with investing in their territories and thereby lower their costs of obtaining needed foreign capital and technology. Capital-exporting countries, for their part, have (p. 9) joined the regime in the hope of reducing the foreign investment transaction costs associated with adverse actions by host country governments, such as expropriation without compensation and negative governmental interference with enterprises owned by their nationals.41 In a similar vein, international regimes, while lowering the costs of transactions that are considered legitimate, also raise the costs of those that are deemed illegitimate. Thus, the investment regime, through its dispute resolution mechanisms and particularly investor–state arbitration, secures compliance with regime norms and rules by imposing costly payments in the form of damage awards on regime members who engage in actions that violate regime norms and rules.42 The use of regime theory as a lens through which to examine the mass of investment treaties negotiated over the last sixty years would seem to have several potential advantages. First, it offers an analytical framework to understand and capture the essential, common elements of the approximately 3,300 legally separate and distinct treaties and to understand the systemic nature of what states have created through the treaty-making process. Second, it may enable observers and scholars to gain a better understanding of the dynamics of the relationships established by these treaties among states and between states and foreign investors. Examining the accumulated treaties through the lens of traditional treaty analysis alone, on the other hand, often yields a static picture that does not fully reflect the dynamism and fluidity of the system that such treaties have created. Traditional treaty analysis tends to concentrate on investor rights under individual treaties rather than on the international relationships that treaties have created among states. Third, regime theory may make more visible the political nature and dimensions of these treaties, for political issues are often at the heart of investment relationships between states and are also deeply imbedded in investor–state disputes, regardless of their applicable legal superstructures. An exclusively legal analysis of treaty provisions and investor–state disputes often overlooks this important dimension. And finally, one might also suggest that while lawyers and arbitrators do not normally use the term ‘regime’ in referring to investment treaties, they implicitly treat investment treaties as constituting a regime in that they regularly refer to prior decisions applying one treaty in order to interpret a wholly separate treaty.43 Regime analysis may make explicit what has heretofore been implicit.

(p. 10) 1.4  The Application of Regime Theory to Investment Treaties

(a)  Regime elements

Following the ‘consensus definition’ quoted earlier, a regime consists of four elements: (1) principles; (2) norms; (3) rules; and (4) decision-making processes.44 Each of these elements is examined later in connection with the regime created by investment treaties.

(b)  Regime principles

The first element of a regime is principles. By principles, regime theorists mean something different from what lawyers and legal scholars usually understand by that term. Within the context of international regimes, principles may be defined as ‘beliefs of fact, causation, and rectitude’.45 Regimes are based on a belief by their participants that cooperation in a particular area will lead to some desired outcome. Thus, for example, one may say that a regime for the prevention of nuclear proliferation is based on the principle that the proliferation of nuclear arms increases the likelihood of nuclear war and that a regime to control proliferation will achieve the desired outcome of reducing that likelihood.46 What then are the principles upon which the international investment regime is based? An examination of investment treaty texts indicates a set of more or less common principles that reflect the beliefs of the participating states negotiating them.

A first principle is the belief that increased investment between and among contracting states will increase their prosperity, economic development, and business activity, and will lead to heightened economic cooperation among them.47 Thus, the treaties’ ultimate goal, as envisioned by their contracting states, is not just to increase the flow of capital and to protect individual investors.

A second principle is that favourable conditions in host states will, all other things being equal, lead to increased investment. The reference to ‘favourable conditions’ does not merely mean the natural state of things; it refers in particular to conditions that can be affected by host government actions and recognizes that such actions can either encourage or discourage investment. Thus, the title of virtually all investment treaties states that the agreement is to ‘promote’ or ‘encourage’ investment, and the targets of that promotion are investors of the other contracting party.

(p. 11) A third principle of the investment regime is that the law and administrative decisions of host states can influence investment by giving increased predictability to rules under which investors make their investments and conduct their activities. Underlying this principle, one may cite the work of the great German sociologist Max Weber, who sought to understand why capitalism arose in Europe. He concluded that one of the reasons was the nature of European law, which allowed what he called the ‘calculability’ of transactions. Weber emphasizes the role that law plays in raising the probability that actions will take place. Calculability, according to Weber, encourages investment transactions. For Weber three conditions were necessary for law to be calculable: (1) the legal text must lend itself to prediction; (2) the administration and application of the legal text must not be arbitrary; and (3) contracts must be enforced.48 Similarly, the goal of investment treaties has been to increase the calculability of foreign investment transactions.

A fourth principle underlying the treaty regime is that the means to promote investment is to guarantee its protection. The promise of investment protection results in investment promotion. Thus, the titles of nearly all investment treaties state that their purpose is not only to promote investment but to protect it. The connection between promotion and protection lies in investor concepts of risk and predictability.

The general premise of investment treaties is that investment promotion is to be achieved by the host country’s creation of a stable legal environment that favours foreign investment. The basic working assumption upon which investment treaties rest is that clear and enforceable rules that protect foreign investors reduce investment risk, and a reduction in risk, all other things being equal, promotes investment. Investment treaties, on the other hand, do not generally bind a capital-exporting country to encourage its nationals and companies to invest in the territory of a treaty partner.

The risk for any foreign investor is that once the investment is made, the host state may change the rules. A sudden, unexpected change in the rules is a principal form of political risk, perhaps its very essence. In order to encourage investment within their territories, host states make various kinds of commitments to investors, including investment agreements, development contracts, public service concessions, and tax stabilization agreements, to mention only a few. Such agreements contain important commitments upon which investors rely in deciding to invest their capital in the host country. The continuing respect by the host government of such commitments is usually crucial for the profitability of the investment, and sometimes for its very survival. Since these arrangements are governed by the law of the host country and subject to the actions of its institutions, their continued stability faces the risk that the host government will unilaterally modify or terminate them at some later time, a phenomenon that has in fact taken place on numerous occasions. Such obligations made by host states to foreign investors are, in the oft-quoted words of the late Professor Raymond Vernon of (p. 12) the Harvard Business School, ‘obsolescing bargains’ between the investor and the host country.49 The cause of their obsolescence has much to do with the decline in bargaining power of the investor during the life of the investment. At the time that an investor is proposing an investment to a country, the investor has a certain amount of bargaining power with the host government to secure favourable treatment and conditions for its investment; however, once the investor makes the investment and thereby places its capital under the sovereignty of the host state, its bargaining power diminishes and the commitments received risk becoming obsolete in the eyes of the host government.

The fifth principle of the investment regime is that international rules with effective enforcement mechanisms will deal with the problem of the obsolescing bargain by restraining the actions of the host government towards foreign investment in its territory. Rules and enforcement mechanisms are seen as a basic means to protect investment.

Thus, one may summarize the structure of the principles underlying the investment treaty regime as follows:

  1. 1.  Increased international investment fosters economic development and prosperity.

  2. 2.  Favourable conditions in host countries lead to increased investment.

  3. 3.  Appropriate host country laws and institutions create favourable conditions for investment by increasing the predictability of economic transactions.

  4. 4.  Increasing the predictability (‘calculability’ in Weber’s terms) of transactions has the effect of reducing perceived risk and therefore promoting investment.

  5. 5.  Enforceable international rules that restrain host country governmental actions protect and therefore promote investment.

(c)  Regime norms

Norms are the second element of a regime. Norms in regime theory are defined as ‘standards of behaviour defined in terms of rights and obligations’. Investment treaties specify standards of ‘treatment’ (a term of art in all investment treaties) that host states are obliged to accord to investors and investments from their treaty partners.

In order to protect foreign investors against the political risk resulting from placing their assets under host country jurisdiction, investment treaties include obligations with respect to the ‘treatment’ that host countries must give to investors and their investments. Although the treaties do not usually define the meaning of ‘treatment’, that word in its ordinary dictionary sense includes the ‘actions (p. 13) and behaviour that one person takes towards another person’. By entering into an investment treaty, a state makes promises about the actions and behaviours—that is, the treatment—it will give to investments and investors of its treaty partners in the future.50 The treaty provisions on investor and investment treatment are intended to restrain host country government behaviour and to impose a discipline on governmental actions. They seek to achieve this goal by defining a standard to which host countries’ governments must conform in their treatment of investors and investments. State actions that fail to meet the defined standard constitute treaty violations that engage the offending state’s international responsibility and render it potentially liable to pay compensation for the injury it has caused.

The standards of treatment—that is, the norms of the regime—are remarkably similar in language and concept across investment treaties. Thus, host states are to respect the norms of ‘fair and equitable treatment’, ‘full protection and security’, ‘most-favoured-nation treatment’, ‘national treatment’, and ‘non-discriminatory treatment’ with respect to protected investors and their investments. At the same time, it should be emphasized that treatment standards in treaties are almost always expressed in general and even vague terms so as to render difficult the task of applying them to concrete, complex fact situations of the type that usually arise in investment disputes. Indeed, for many lawyers accustomed to interpreting domestic legislation, they are breathtaking in their generality, vagueness, and lack of specificity. The application of these vague norms in investment treaties has been the work of investor–state arbitration tribunals, primary decision-making bodies of the international investment regime.

(d)  Regime rules

Rules are the third element of a regime. For purposes of regime theory, rules are defined as ‘specific prescriptions or proscriptions for actions’. The difference between a ‘norm’ and a ‘rule’ is not always clear. But one finds rules, in the form of prescriptions for action, in the investment regime in two places. First, the treaty texts contain many specific prescriptions for action. Thus, in addition to norms, the treaties express rules about such matters as expropriation, monetary transfers, and compensation of injured investors because of war, revolution, and civil strife. The second set of rules lies in the decisions of arbitral tribunals, which apply the regime norms to specific fact situations. For example, according to many investment tribunals, fair and equitable treatment means that the host government must respect ‘the legitimate expectations’ that it has created in the investor. (p. 14) Indeed, one cannot fully know or understand the rules of the investment regime without studying the decisions of the arbitral tribunals that have applied often vague treaty terms to concrete fact situations. Thus, one may conclude that the deliberate use by contracting states of vague and general norms in investment treaties, coupled with the well-known tendency of lawyers and arbitrators to be guided by previous arbitral decisions, has the effect of creating an implicit system of delegated rule-making within the investment regime. From this perspective, arbitrators do not merely settle disputes; they also make rules for the regime.

(e)  Regime decision-making

The fourth and final regime element is decision-making procedures, which are defined as ‘prevailing practices for making and implementing collective choice’. The international regime for investment has no centralized governing council with the power to administer and apply its rules or the authority to make and implement collective choice. In that respect, it is unlike the European Union, the World Trade Organization (WTO), or the United Nations. Decision-making processes and authority are decentralized and diffused throughout the regime by individual treaties. Investment treaties provide for decision-making in basically four ways: (1) by consultation between the state parties to the treaty; (2) by arbitration between state parties in cases where they are unable to resolve conflicts through consultation and negotiation; (3) by consultations and negotiations between the investor and the state; and (4) by investor–state arbitration.

In the early days of the investment treaty movement, once states had signed a BIT they seemed to have engaged in little state-to-state consultation about its application. In more recent times, such consultation has taken place with increasing frequency and some treaties have even given it institutional form. One example is the North American Free Trade Agreement (NAFTA), which created a Free Trade Commission with the power to make binding interpretations of NAFTA provisions that NAFTA tribunals must follow in making their decisions.51

The last mentioned decision-making procedure, investor–state arbitration, is the most important of the four, particularly from the point of view of frequency of use. It is a unique feature of the regime for two reasons. First, there are few instances in the international system where international law gives private persons and companies the right to compel a sovereign state to appear before a tribunal and defend its sovereign actions, ostensibly taken to protect the public interest. The WTO, for example, has dispute resolution processes, but states, and states alone, are participants in those processes. Thus, the global investment regime has to a large extent granted a private right of action to investors and has thereby also privatized the decision-making process to a large extent, since arbitrators are (p. 15) private persons compensated by the disputants, not officials of governments or international organizations. Second, it is within the investor–state arbitrations that the most important decisions about the regime are decided. The decisions of arbitral tribunals in the approximately 568 investor–state disputes that have arisen under investment treaties have not only resolved a vast array of investor–state conflicts but have also shaped the rules and norms of the regime. Their number will continue to grow in the years ahead.

Why have states chosen this essentially private method for implementing collective choice? No doubt capital-exporting countries believed that granting investors a private right of action for violation of regime rules would be an effective way of assuring that regime rules were respected. But investor–state arbitration as a decision-making procedure has another advantage for home countries: it is a way for capital-exporting governments to reduce governmental transaction costs arising out of the investments made by their nationals. Under the previous systems, governments had to deal with their nationals seeking diplomatic protection and other forms of interventions with host country governments. That method potentially entailed significant diplomatic, political, and economic costs, since it might impact on and complicate important multifaceted relationships between the investor’s home country and the host country. Investor–state arbitration relieves home countries of those costs. In effect, it allows them to say to their nationals and companies aggrieved by host government acts: ‘You have your own remedy in the treaty. Use it if you wish. Go away and don’t bother us.’

1.5  A Different Kind of Regime

While the approximately 3,300 investment treaties would seem to meet the definition of an international regime, one must acknowledge that this emerging regime for international investment has significant differences from other international regimes. Three of the most important are: (1) the regime has largely been constructed bilaterally, rather than multilaterally; (2) it gives broad scope to private and decentralized decision-making; and (3) no multilateral international organization supports the investment regime.

(a)  Bilateral construction

First, the investment regime has been constructed largely through bilateral negotiations, rather than multilateral ones. Most other international regimes, like the WTO, the International Criminal Court, the international human rights regime, and the nuclear non-proliferation regime, have been the product of multilateral, indeed global, negotiations.

An interesting question is why the nations of the world have been willing to conclude BITs in growing numbers over the last fifty years but have generally resisted global agreements on investment. There is both a technical and a political (p. 16) explanation for this result. The technical explanation is that a bilateral treaty must accommodate the interests of only two parties and is therefore far less complicated to negotiate than a multilateral, global treaty, which must accommodate the interests of many countries.52 The political explanation is that, given the asymmetric nature of bilateral negotiations between a strong, developed country and a usually much weaker developing country, the bilateral setting allows the developed country to use its power more effectively than does a multilateral setting, where that power may be much diluted. For example, in multilateral settings, developing countries have the opportunity to form blocking coalitions with like-minded states to enhance their power in the negotiations, something that is impossible in bilateral negotiations. On the other hand, the prospects of investment capital from specific developed countries, along with other political and economic benefits arising from a definite bilateral relationship, may make a developing country more willing to enter into a BIT with a specific developed country than it would a multilateral agreement where those benefits may seem more tenuous and theoretical. Moreover, whereas developed countries would be willing to enter into bilateral treaties with developing countries for investment liberalization, knowing full well that few if any enterprises from the developing country would ever invest in the developed state, they have been unwilling to enter into treaties that would grant such liberalization to investors from other developed states, who could become strong competitors to the host countries’ own enterprises.53

Viewed from a different perspective, it is possible to conclude that the approximately 2,900 BITs, although bilateral in form, have not really been negotiated on a strictly bilateral basis. One might say that they have been the product of ‘serial multilateralism’, instead of the traditional ‘conference multilateralism’, which has produced most of the world’s international regimes. That is to say, capital-exporting states, which have driven the treaty-making process, have done so on the basis of prepared models or prototypes, which they then proceeded to negotiate with individual countries, showing little willingness to deviate significantly from the model that they had prepared. Thus, from the outset those capital-exporting states contemplated engaging in a multilateral process of negotiating with other states one at a time.

The similarity in models used by capital-exporting states has, of course, led to a similarity in the treaties actually concluded. What explains the similarity of the models that states have used to negotiate BITs? Do they represent a grand conspiracy among capital-exporting states? Certainly there has been communication among capital-exporting states over the years as they have developed and (p. 17) refined their models. But an even more important factor has helped to shape the investment treaty regime: the epistemic community of international lawyers and scholars. Epistemic communities are defined as ‘networks of professionals with recognized expertise and competence in a particular domain and an authoritative claim to policy relevant knowledge within that domain or issue area’.54 Epistemic communities are vital to regime creation and maintenance because, according to one scholar, they ‘are crucial channels through which new ideas circulate from societies to government as well as from country to country’.55 Since the movement to negotiate investment treaties began, the epistemic community of international lawyers, scholars, jurists, and arbitrators has through advising, writing, advocacy, and judicial and arbitral decisions shaped the regime. They are now the principal actors for maintaining and operating it.

(b)  Privatized and decentralized decision-making

A second important difference from other international regimes is the strong roles that non-state actors play in formulating, elaborating, and applying the rules of the regime. In effect, the investment regime ‘privatizes’ decision-making, whereas in other regimes, such as the WTO, decision-making remains firmly in the hands of member states.

In most other regimes, states and their representatives are entrusted with the crucial function of elaborating and defining the rules of the regime. Thus, for example, state representatives may meet periodically to negotiate new rules, and institutions under the control of states may be entrusted with the task of applying those rules to specific cases. A similar model of decision-making does not prevail in the international investment regime. Instead, it has delegated decision-making to private persons—arbitrators, who are not representatives of states, and whose mission, unlike that of diplomats, is not to pursue state policy. Indeed, arbitral rules of conduct require them to decide and act ‘independently’, which means that they may not be influenced by states, governments, the parties, or anybody else for that matter. Other private parties—lawyers and law firms representing investors and states—also play an important role in the decision-making process. Through their advocacy, they strongly influence both the process of decision-making and its end result. Thus, to a significant extent, regime elaboration and operation are largely in the hands of private parties who are not accountable to the states that have created the regime.

In theory, of course, arbitrators only decide disputes. They have no authority to make rules, and their decisions do not formally constitute legal precedent. But in practice, the approximately 560 decisions that have emanated from tribunals are consistently cited by lawyers and other tribunals and have a powerful influence on the making of future regime decisions.

(p. 18) Despite the decentralized and privatized decision-making processes of the regime, the resulting decisions by arbitral tribunals demonstrate a surprisingly high degree of uniformity and consistency. Three factors seem to explain this phenomenon. First, the norms and rules applied by tribunals are significantly similar, if not identical, among investment treaties. Second, arbitrators are conscious of and influenced by the decisions of other investor–state tribunals. Although they are not bound by the decisions of other tribunals, arbitrators, to a greater or lesser extent, are concerned that arbitral decisions create a consistent jurisprudence of international investment law. Third, arbitrators are very much a part of an international epistemic community with similar training and, in many cases, comparable professional backgrounds.56

(c)  Lack of a multilateral international organization

Normally, an international regime is supported by a multilateral international organization.57 For example, the global trade regime rests upon the WTO, a robust international organization, which as of March 2013 consisted of 159 member states, a staff of 639 persons, and a budget of 197,203,900 Swiss Francs (approximately US$165 million).58 It has a broad mandate to oversee the implementation of multilateral trade agreements and to serve as a forum for consultation and negotiations among states with respect to international trade.59 The international investment regime has nothing similar. Individual international organizations—such as ICSID, which only facilitates the resolution of investor–state disputes; the ECT organization and secretariat, which only concern trade and investment in the energy sector; and the North American Free Trade Commission, which only deals with the application of NAFTA—serve to support parts of the regime but do not do so in a comprehensive fashion similar to that of the WTO. Nonetheless, the very existence of the international investment regime indicates that a multilateral international organization is not a necessary condition for the creation of a regime. On the other hand, the absence of such an organization—with its associated resources, knowledge, and structures—may impede the future development of the regime and reduce its ability to withstand challenges.

(p. 19) 1.6  Regime Challenges and Prospects

Regime theorists recognize that regimes are not permanent. The fact that at a particular moment in time the parties’ expectations may have ‘converged’ around a given set of principles, norms, rules, and decision-making procedures in the investment area of international relations to form a regime does not mean that those expectations have converged permanently. Thus, despite the fact that the international investment regime is founded on 3,300 treaties solemnly concluded by some 180 different states, one cannot assume that it will endure. The endurance of a regime depends on two factors: regime effectiveness and regime robustness.60 Regime effectiveness requires the continued willingness and ability of its members to abide by its rules and to pursue its objectives and purposes. Regime robustness refers to the ability of the regime to withstand external threats and challenges. The effectiveness and robustness of the international investment regime is by no means assured. It faces four salient challenges: two are internal to the regime and two are external.

  1. 1.  The investment regime has been founded on the assumption that it will increase international investment, which in turn will lead to increased prosperity and economic development. Much research has questioned whether investment treaties have in fact increased investment flows to poor countries.61 If the regime is ultimately judged not to have achieved its fundamental objective of promoting investment, then the justification for its continued existence becomes problematic.

  2. 2.  While public opinion generally seems to accept the norms and rules of the regime, its decision-making processes, particularly investor–state arbitration, have been seriously called into question. Host governments and elements of civil society have challenged the decision-making process on many grounds: that it is not transparent, that it does not account for the disparity in the economic situations of the regime members, that arbitrators are not truly independent, that they have an investor bias, and that their decisions infringe on the legitimate exercise of sovereignty by host states.62 For these alleged reasons, Bolivia in 200763 and Ecuador in 201064 formally withdrew (p. 20) from ICSID, an important pillar of the regime. These factors have also led Venezuela to terminate its BIT with the Netherlands,65 Ecuador to denounce nine of its BITs and announce its intention to renegotiate the remainder,66 Bolivia in 2012 to terminate its BIT with the United States,67 South Africa to begin terminating its BITs as they reach their initial date of expiration,68 and Indonesia in 2014 to declare its intention to terminate all 67 of its BITs.69 More generally, governments have chafed at the constraints that treaty provisions impose on their exercises of national sovereignty, particularly on their ability to enact laws and regulations in the public interest that may negatively affect investor interests. It is for these reasons, for example, that the Russian Federation, one of the original members of the ECT in 1994, decided to terminate its provisional application in July 2009,70 thereby removing itself from the Treaty’s mandatory investor–state dispute settlement provisions, among other provisions.

  3. 3.  The Washington Consensus—the shared belief in many countries from the late 1980s until the end of the 1990s that increased investment, open economies, privatization, and economic deregulation would result in increased global prosperity and economic development71—was a powerful force for the spread of investment treaties and the development of the regime that they created.72 (p. 21) Many parts of the world have lost faith in the ability of the Washington Consensus to bring prosperity, and therefore they are looking for alternative ways of achieving economic development.73 The shattering of the Washington Consensus may constitute the loss of an important conceptual support for a global investment regime based on treaties.

  4. 4.  Serious regional and global economic crises, like the one that struck Argentina in 2001 and much of the developed world in 2008, pose important external threats to the international investment regime. Countries under great stress, faced with potential social and political upheaval as a result of rapidly declining standards of living, often seek radical solutions and are impatient with international investment rules that may restrict their latitude of action. For example, during times of economic crisis, they may be unwilling to grant national treatment to foreign investors, to avoid changing regulations in the name of ‘fair and equitable treatment’, and to refrain from seizing vital national resources held by foreigners just because they have made treaty promises not to expropriate.

These threats are real and they have the potential power to undermine the regime that has been painstakingly constructed over the last sixty years. The regime’s future will require wise management and flexible leadership if it is to withstand the challenges.

1.7  Conclusion: A Sticky Regime?

The actions of Ecuador, Bolivia, Venezuela, South Africa, Indonesia, and Russia in withdrawing, at least to a limited degree, from the international investment regime, along with unofficial expressions of dissatisfaction in other countries, raise a question as to whether their initiatives are the beginning of an effort to change the nature of the regime or to dismantle it entirely, or whether they are merely aberrations that will have no effect on regime robustness. Before predicting the end of the international investment regime and hearing such criticisms as ‘clarion calls to roll back the foreign investment regime’,74 one should recognize certain factors that will foster its stability and continued growth.

First, it should be noted that it is not an easy matter for a state to withdraw completely from the investment treaty regime with no negative consequences. For one thing, a country’s withdrawal from or denunciation of an investment treaty, whose purpose, after all, is to reduce political risk to investors, may be seen by the international investment community as a negative signal, and may result in a slowing of the flow of foreign capital and technology needed by that country (p. 22) or in significantly raising their cost. Capital-importing countries sign investment treaties in order to promote investment by reducing their level of political risk as perceived by investors. Therefore, to withdraw from an investment treaty would seem to have the effect of increasing perceived political risk and thereby impeding foreign investment. Moreover, because capital-importing states are often in competition with one another for foreign investment, and because they have signed investment treaties in order to gain an advantage in that competition, they may also fear that opting out of investment treaties will place them at a competitive disadvantage.

A second important factor is that virtually all treaties contain provisions that inhibit their denunciation once approved by the contracting states. Foreign investments are generally long-term transactions. To give foreign investors assurance of a predictable and stable legal framework, investment treaties: (1) establish an initial period for which the treaty will be in force without providing for a right to terminate the treaty during that period; and (2) specify how long the treaty will continue following the expiration of its initial period or its termination. Investment treaties generally provide that they shall be in force for ten or fifteen years. Upon the expiration 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 does not usually 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’ or ‘survival clause’ stipulating that investments made, acquired, or approved prior to the date of the termination of the treaty will be protected by the treaty’s provisions for a further period of ten, fifteen, or twenty years. Thus, for example, in 2009, a tribunal hearing claims against Russia under the ECT in the much publicized Yukos expropriation cases held that Russia’s termination of the Treaty’s provisional application did not affect the continuing protection (including investor–state arbitration) under its provisions for another twenty years of investments made before the withdrawal of provisional application.75 The investment regime therefore appears to have a ‘sticky’ (p. 23) quality which causes a country that has denounced the treaty nonetheless to give treaty treatment to an investor that had made its investment while the treaty was in force, thus requiring a country to continue to adhere to treaty norms, rules, and decision-making processes with respect to covered investments.

Third, rather than abandon the investment treaty movement entirely, many states in their more recent treaties have included new provisions to deal with some of the criticisms levelled at earlier treaty texts. Thus, the new treaties give host governments more latitude to regulate investor conduct in the interests of protecting important national concerns such as public health, the environment, and national security. This ability to adapt treaty provisions to new realities has given the investment regime a dynamic quality.

Finally, despite criticism of investment treaties, countries continue to negotiate them. Moreover, as the developed world emerges from a serious economic and financial crisis at the end of the first decade of the twenty-first century, nation states have energetically launched campaigns to negotiate ‘mega-regional economic groupings’, which are ‘broad economic agreements among a group of countries that together have significant economic weight and in which investment is only one of several subjects’.76 They include the contemplated Trans-Pacific Partnership (TPP), the EU–United States Transatlantic Trade and Investment Partnership (TTIP), and the Canada–EU Comprehensive Economic and Trade Agreement (CETA), among others. Following other regional economic treaties, the new agreements on which these groups will be based will include investment chapters the provisions of which will in all probability mirror those of earlier agreements, such as the NAFTA. The successful conclusion of these mega-negotiations will give added momentum and permanence to the international investment regime and the treaties on which it is based. Faced with being excluded from these groupings, countries that have previously terminated their participation in investment treaties may reconsider the wisdom of their attempted withdrawal from the international investment regime.

1.8  The Aim and Scope of This Book

The basic building block of this emerging regime for investment has been the international investment treaty. The aim of this book is to examine investment treaties of all varieties in a comprehensive and integrated fashion. Although over 3,300 individual investment treaties exist as distinct instruments of international law, this book examines them as a single phenomenon.

Several reasons justify an integrated and comprehensive approach to the study of investment treaties. First, the movement to conclude investment treaties, both bilateral and multilateral, has been driven by many common factors. These include the perceived inadequacy of pre-existing international law in the area of (p. 24) investment and the desire of investors and their home countries to gain increased protection from political risk. Second, the content of specific investment treaties has been shaped and informed by earlier treaties. For example, the experience of negotiating BITs influenced the content and approach of the investment chapters in the North American Free Trade Agreement and the Energy Charter Treaty. Third, as a result, investment treaties, while not identical, demonstrate as a whole a remarkable similarity in terminology, structure, legal concepts, and approach. At the same time, because the applicable investment law is founded on treaties, it has distinct features that differentiate it from the customary international law of investment. Fourth, because of the similarities in language and content among investment treaties, both lawyers and arbitration tribunals are increasingly citing provisions from arbitral interpretations of investment treaties that do not strictly apply in the cases they are facing. For example, in arbitration cases involving a specific BIT, arbitrators and lawyers may cite relevant NAFTA treaty provisions and arbitral cases, and NAFTA arbitral tribunals and counsel may refer to BITs and arbitral decisions interpreting them. And fifth, because investment treaties have become an increasingly common phenomenon, individuals planning and executing international investments need to understand them better and take due account of them.

In approaching its subject, The Law of Investment Treaties will begin by examining the phenomenon of international investment, its significance, the forces that drive it, and its attendant risks (Chapter 2). The book will then consider the history of international investment law (Chapter 3), with particular emphasis on the factors that gave rise to the development of investment treaties. It will also discuss the movement to negotiate such treaties as it has emerged and grown since the end of World War II (Chapter 4). That discussion will consider the aims and purposes of investment treaties, as well as the process by which such treaties come into existence. Generally, all investment treaties have two basic purposes: to promote foreign investment and to protect it. Most investment treaties pursue these objectives by establishing rules about the host country’s treatment of foreign investment and by providing processes for enforcing these rules. These rules restrain the host government’s ability to deal with foreign investors and investments. In cases of dispute, the enforcement process provides an international mechanism outside the jurisdiction of the host country.

Although the precise provisions of investment treaties are not uniform, and some treaties restrict host country governmental action more than others, virtually all investment treaties address the same issues and employ similar concepts and terminology. One of the consequences of the investment treaty movement has been to define in some detail what an investment treaty should be, thereby creating an agreed-upon legal framework for the protection of foreign investment, notwithstanding variations among individual treaties concerning specific provisions. The book will next give the reader an overview of the general structure of an investment treaty (Chapter 5) and will then consider the sources and methods that may be used in the study and interpretation of investment treaties (Chapter 6).

(p. 25) Succeeding chapters will consider the basic issues covered by investment treaties, namely: their scope of application, particularly with regard to the investments and the investors covered by the treaty (Chapter 7); investment promotion, admission, and establishment (Chapter 8); and the general standards of treatment to be accorded to covered investors and investments, such as ‘fair and equitable treatment’, ‘national treatment’, ‘most-favoured-nation treatment’, ‘full protection and security’, and ‘the standards of international law’ (Chapter 9). Thereafter, the book will discuss special treatment standards, including those related to monetary transfers (Chapter 10); investor–state obligations (Chapter 11); protection against expropriation, nationalization, and dispossession (Chapter 12); and various other standards of treatment (Chapter 13). It will conclude with a consideration of treaty provisions on exceptions, modifications, and terminations (Chapter 14); the various dispute settlement mechanisms provided by investment treaties (Chapter 15); and the consequences for states and investors of the breach by host states of their treaty commitments to protected investments, particularly the issues of compensation and damages resulting from treaty breaches (Chapter 16).


1  eg Treaty Concerning the Reciprocal Encouragement and Protection of Investment (United States–Armenia) (23 September 1992) S Treaty Doc No 1993103-11; Treaty Concerning the Promotion and Reciprocal Protection of Investments (Germany–Poland) (10 November 1989) (1990) 29 ILM 333; Agreement for the Promotion and Protection of Investments (Indonesia–United Kingdom) (27 April 1976), Treaty Series No 62. US bilateral investment treaties (BITs) tend to refer to the ‘encouragement of investment’, rather than the ‘promotion of investment’. Based on an analysis of BIT provisions, it appears that the two terms, encouragement and promotion, have the same meaning.

2  UNCTAD, World Investment Report 2014 (2014) 114.

3  For a listing of countries that have signed BITs and other investment agreements, see ibid 222–5.

4  ibid 123.

5  ibid 223–5.

6  See YZ Haftel and A Thompson, ‘Delayed Ratification: The Domestic Fate of Bilateral Investment Treaties’ (2013) 67 Int’l Org 355, 357.

7  eg United States–Colombia Trade Promotion Agreement (signed 22 November 2006), US Trade Representative website, at <http://www.ustr.gov/trade-agreements> accessed 1 September 2009.

8  M Yasushi, ‘Economic Partnership Agreements and Japanese Strategy’ (2006) 6(3) Gaiko Forum 53; see also S Yanase, ‘Bilateral Investment Treaties of Japan and Resolution of Investment Disputes with Respect to Foreign Direct Investment’ in AJ van den Berg (ed), International Commercial Arbitration (Kluwer Law International, 2003) 426.

9  eg Case concerning Elletronica Sicula spa (ELSI), (United States of America v Italy) [1989] ICJ 15 (applying the 1948 Treaty of Friendship, Commerce and Navigation between Italy and the US); see also Case concerning Oil Platforms (Islamic Republic of Iran v United States of America) [2003] ICJ Rep 161 (applying 1955 Treaty of Amity, Economic Relations and Consular Rights between the US and Iran).

10  North American Free Trade Agreement (United States–Canada–Mexico) (17 December 1992) (1993) 32 ILM 289.

11  European Energy Charter Treaty (opened for signature 1 February 1995) (1995) 34 ILM 360.

12  ‘Unified Agreement for the Investment of Arab Capital in the Arab States’ in Economic Documents (Tunis: League of Arab States) No 3, UNCTAD website (original language: Arabic), at <http://investmentpolicyhub.unctad.org/Download/TreatyFile/2394> accessed 9 September 2014.

13  ASEAN Comprehensive Investment Agreement, signed 26 February 2009, entered into force 29 March 2012. This Agreement terminated and replaced the previous investment agreements among the ASEAN states, notably the Agreement for the Promotion and Protection of Investments of 1987. ASEAN website, at <http://www.asean.org/images/2012/Economic/AIA/Agreement/ASEAN%20Comprehensive%20Investment%20Agreement%20(ACIA)%202012.pdf> accessed 9 September 2014.

14  For text of CAFTA-DR, see the website of the US Trade Representative at <http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text> accessed 9 January 2015.

15  European Union: Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C329/49, available at <http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12012E/TXT> accessed 9 January 2015. See particularly, Title IV, Free Movement of Persons, Services and Capital.

16  eg UNCTAD has determined that in 2014, 44 new international investment treaties were signed and that many states were actively engaged in the negotiation of ‘megaregional agreements’, defined as ‘broad economic agreements among a group of countries that together have significant economic weight and in which investment is only one of several subjects’. ‘Megaregional agreements’ include the Trans-Pacific Partnership (TPP), the EU–United States Transatlantic Trade and Investment Partnership (TTIP), and the Canada–EU Comprehensive Economic and Trade Agreement (CETA). UNCTAD, World Investment Report 2014 (2014) 118.

17  Convention on the Settlement of Investment Disputes between States and the Nationals of Other States (18 March 1965) 17 UST 1270; 575 UNTS 159.

18  ‘List of Concluded Cases’, International Centre for Settlement of Investment Disputes website, at <http://icsid.worldbank.org/ICSID/FrontServlet?requestType=GenCaseDtlsRH&actionVal= ListConcluded> accessed 18 August 2014 (listing concluded cases in chronological order).

19  The word ‘treatification’, while not recognized by any standard English dictionaries, has been used on rare occasions. The origin of this derivation of the word ‘treatify’ may perhaps be found in the 1908 Nobel lecture of the Peace Prize Laureate Frederik Bajer, who urged that a treaty be established to govern the canals between the North and Baltic seas, stating, ‘there is a need to “treatify”, if I may coin this expression, the waterways—the French call them “canaux interocéaniques”—which connect the two seas’. ‘The Organization of the Peace Movement’, available at <http://www.nobelprize.org> accessed 14 September 2014. JW Salacuse, ‘The Treatification of International Investment Law’ (2007) 13 Law and Business Review of the Americas 55.

20  P Juillard, ‘L’Evolution des sources du droit des investissements’ (1994) 250 Receuil des Cours 74.

21  Mondev Int’l Ltd v United States, Case No ARB(AF)/99/2 [2003] (NAFTA Ch 11 Arb Trib [11 October 2002]) 42 ILM 85, ¶ 125.

22  UNCTAD, World Investment Report 2014 (2014) 1254.

23  One early notable example is the case of CME Czech Republic BV v The Czech Republic, UNCITRAL (14 March 2003) UNCITRAL Final Award, arbitration under the Netherlands–Czech Republic BIT, which resulted in an award and payment of $355 million to an injured investor in 2003, one of the largest awards ever made in an arbitration proceeding up to that time; P Green, ‘Czech Republic Pays $355 Million to Media Concern’ (16 May 2003) New York Times, available at <http://www.nytimes.com/2003/05/16/business/czech-republic-pays-355-million-to-media-concern.html> accessed 14 September 2014. More recent awards have approached US$1 billion. See eg Mohamed Abdulmohsen Al-Kharafi & Sons Co v Libya and ors, CRCICA Final Arbitral Award (22 March 2013).

24  eg M Sornarajah, The International Law on Foreign Investment (3rd edn, Cambridge University Press, 2010) 176–7.

25  A Lowenfeld, ‘Investment Agreements and International Law’ (2003) 42 Col J Transnat’l L 12; SM Schwebel, ‘The Influence of Bilateral Investment Treaties on Customary International Law’ (2004) Proceedings of the 98th Annual Meeting of the American Society of International Law 27–30.

26  FA Mann, ‘British Treaties for the Promotion and Protection of Investments’ (1982) 52 BYIL 241, 249.

27  B Kishoiyian, ‘The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law’ (1994) 14 Nw J Int’l L & Bus 327, 329. See also Sornarajah (n 24 above) 177.

28  JW Salacuse, ‘The Emerging Global Regime for Investment,’ (2010) 51 Harv Int’l LJ 427.

29  Webster’s Third New International Dictionary defines the word regime as ‘a method of ruling or management’ and ‘a form of government’. Webster’s Third New International Dictionary 1911 (3rd edn, G & C Merriam Co, 1981).

30  SD Krasner, ‘Structural Causes and Regime Consequences: Regimes as Intervening Variables’ in SD Krasner (ed), International Regimes (Cornell University Press, 1983) 2.

31  DJ Puchala and RF Hopkins, ‘International Regimes: Lessons for Inductive Analysis’ in Krasner (n 30 above) 62.

32  See eg R Crawford, Regime Theory in the Post-Cold War World: Rethinking Neoliberal Approaches to International Relations (Dartmouth, 1996); A Hasenclever et al, Theories of International Regimes (Cambridge University Press, 1997); SD Krasner (ed), International Regimes (Cornell University Press, 1983); V Rittberger (ed), Regime Theory and International Relations (Cornell University Press, 1993).

33  See eg MTD v Chile, ICSID Case No ARB/01/7 (25 May 2004) ¶¶ 3, 22, 110–111.

34  See eg Crawford (n 32 above).

35  RO Keohane, After Hegemony: Cooperation and Discord in a World of Political Economy (Princeton University Press, 1984) 32–9.

36  ibid 34–5.

37  See eg ‘“Capitalism Needs to Go,” Says Hugo Chavez’, 3 April 2009, available at <http://ourlatinamerica.blogspot.com/2009/04/capitalism-needs-to-go-says-hugo-chavez.html> accessed 14 September 2014; G Parra-Berna, ‘Multilateral Banks Pose Problem for Latin America, Correa Says’, BLOOMBERG, 20 December 2006, available at <http://www.bloomberg.com/apps/news?pid=20601086&sid=aqxeFXqL9vpQ&refer=latin_america> accessed 14 September 2014.

38  RO Keohane, International Institutions and State Power: Essays in International Relations Theory (Westview Press, 1989) 132.

39  Investment treaty preambles, which state the contracting parties’ goals, often provide that the aim of the treaty is to promote ‘economic cooperation’ between the concerned states. See eg the preamble to the BIT between France and Argentina, which begins: ‘Desiring to develop economic cooperation between the two States and to create favourable conditions for French investments in Argentina and Argentine investments in France …’ Accord entre le Gouvernement de la République française et le Gouvernement de la République Argentine sur l’encouragement et la protection réciproques des investissements [Agreement between the Argentine Republic and the Republic of France for the Promotion and Reciprocal Protection of Investments], Argentina–France, 3 July 1991, 1728 UNTS 282, translated in 1728 UNTS 298. Similarly, the preamble to the BIT between Argentina and Spain expresses that the states are: ‘Desiring to intensify economic cooperation for the economic benefit of both countries.’ Acuerdo para la promoción y protección recíprocas de inversiones entre el Reino de España y la República Argentina [Agreement on the Promotion and Reciprocal Protection of Investments between the Kingdom of Spain and the Argentine Republic], Argentina–Spain, 3 October 1991, 1699 UNTS 188, translated in 1699 UNTS 202.

40  See AT Guzman, ‘Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties’ (1998) 38 Va J Int’l L 639.

41  KJ Vandevelde, ‘A Brief History of International Investment Agreements’ in KP Sauvant and LE Sachs (eds), The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows (OUP, 2009) 3, 13. The average number of nationalizations of foreign investor property per year rose steadily from 1960, the year when many former colonies became independent, when such measures averaged slightly more than 15, until 1975, when they reached over 50, resulting in significant losses to foreign investors. UNCTAD, International Investment Agreements: Key Issues, 7, UN Doc UNCTAD/ITE/IIT/2004/10 (2004). It is no coincidence that the movement to negotiate BITs, discussed earlier, took root during this period as a means to avoid such costs in the future.

42  See generally UNCTAD, Investor–State Disputes Arising From Investment Treaties: A Review, UNCTAD/ITE/IIT/2005/4 (1 February 2005).

43  See eg MTD v Chile, ICSID Case No ARB/01/7 (25 May 2004) 3, 22, ¶¶ 110–111.

44  Hasenclever et al (n 32 above) 9.

45  Krasner (n 30 above) 2.

46  H Muller, ‘The Internationalization of Principles, Norms, and Rules by Governments: The Case of Security Regimes’ in Rittberger (n 32 above) 361–8. See also Hasenclever et al (n 32 above) 9.

47  eg the preamble to the 1995 BIT between Mongolia and Singapore states: ‘RECOGNIZING that the encouragement and reciprocal protection of such investments will be conducive to stimulating business initiative and increasing prosperity in both States …’.

48  R Swedberg, ‘Max Weber’s Contribution to the Economic Sociology of Law’ (2006) 2 Annu Rev Law Soc Sci 61.

49  R Vernon, Sovereignty at Bay: The Multinational Spread of U.S. Enterprise (Basic Books, 1971) 46.

50  In the ICSID case of Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v The Argentine Republic, ICSID Case No ARB/O3/19, (Decision on Jurisdiction) (3 August 2006) ¶ 55, the tribunal defined ‘treatment’ as follows: ‘The word “treatment” is not defined in the treaty text. However, the ordinary meaning of that term within the context of investment includes the rights and privileges granted and the obligations and burdens imposed by a Contracting State on investments made by investors covered by the treaty.’

51  North American Free Trade Agreement (United States–Canada–Mexico) (17 December 1992) (1993) 32 ILM 289, Arts 2001–2002. The Commission has exercised this power on occasion. See NAFTA Free Trade Commission, ‘Notes of Interpretation of Certain Chapter 11 Provisions’, 31 July 2001.

52  For a discussion of the differences between bilateral and multilateral negotiations, see FO Hampson, Multilateral Negotiations: Lessons from Arms Control, Trade, and the Environment (JHU Press, 1995) 1–51, 345–60; IW Zartman (ed), International Multilateral Negotiation: Approaches to the Management of Complexity (Jossey-Bass, 1994) 1–10, 213–22.

53  Such a problem arose during the negotiation of the failed OECD Multilateral Agreement on Investment, conducted between 1995 and 1998. See G Kelley, ‘Multilateral Investment Treaties: A Balanced Approach to Multinational Corporations’ (2001) 39 Col J Transnat’l L 483, 494–8.

54  P Haas, ‘Introduction: Epistemic Communities and International Policy Coordination’ (1992) 46 Int’l Org 1, 3.

55  ibid 27.

56  As of 31 December 2009, a total of 1,004 appointments of arbitrators and conciliators had been made in the 305 cases registered with ICSID since its inception. (It should be noted that several individuals were appointed in more than one ICSID case.) Although they represented 72 different nationalities, 43% (435) of the arbitrators and conciliators were nationals of only five countries: US (120), France (106), UK (94), Canada (75), and Switzerland (70). Ten nationalities accounted for 607 appointments (60.45% of the total), of which only Mexicans (32 appointments) were from a developing country. ICSID, The ICSID Caseload—Statistics (Issue 2010–11) 7, 8, 17 (2010), available at <http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal= ShowDocument&CaseLoadStatistics=true&language=English> accessed 12 September 2014.

57  Hasenclever et al (n 32 above) 2.

58  WTO, Annual Report 2013, 135, available at <http://www.wto.org/english/res_e/booksp_e/anrep_e/anrep13_chap8_e.pdf> accessed 9 January 2015.

59  Marrakesh Agreement Establishing the World Trade Organization, 15 April 1994, 1867 UNTS 154 (1994).

60  Hasenclever et al (n 32 above) 2.

61  eg M Hallward-Driemeier, ‘Do Bilateral Investment Treaties Attract FDI? Only a Bit … and They Could Bite’, World Bank, Working Paper No 3121 (June 2003); JW Salacuse and N Sullivan, ‘Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain’ (2005) 46 Harv Int’l LJ 66.

62  eg JA Van Duzer, ‘Enhancing the Procedural Legitimacy of Investor–State Arbitration through Transparency and Amicus Curiae Participation’ (2007) 52 McGill Law Review 681; SD Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing International Law through Inconsistent Decisions’ (2005) 73 Fordham Int’l L R 1521; M Sornarajah, ‘A Coming Crisis: Expansionary Trends in Investment Treaty Arbitration’ in K Sauvant (ed), Appeals Mechanisms in International Investment Disputes (OUP, 2008) 39.

63  ICSID News Release of 16 May 2007.

64  ICSID News Release of 9 July 2009, announcing Ecuador’s denunciation of the ICSID treaty with effect from 7 January 2010.

65  UNCTAD, Recent Developments in International Investment Agreements (2007–June 2008), 2 IIA MONITOR 6 (2008), available at <http://www.unctad.org/en/docs/webdiaeia20081_en.pdf> accessed 9 January 2015.

66  ibid.

67  ‘Notice of Termination of United States-Bolivia Bilateral Investment Treaty’ The Federal Register, 23 May 2012, available at <https://www.federalregister.gov/articles/2012/05/23/2012-12494/notice-of-termination-of-united-states-bolivia-bilateral-investment-treaty> accessed 9 January 2015.

68  ‘South Africa begins Withdrawing from EU Member Bits’, IISD, News in Brief, 30 October 2012, available at <http://www.iisd.org/itn/2012/10/30/news-in-brief-9/> accessed 9 January 2015.

69  ‘Indonesia to Terminate More Than 60 Bilateral Investment Treaties,’ Asia Pacific, 16 March 2014, available at <http://www.ft.com/cms/s/0/3755c1b2-b4e2-11e3-af92-00144feabdc0.html#axzz34ZPTTWA7> accessed 9 January 2015.

70  Government of the Russian Federation, Decree No 1005-r: On Russia’s Intention Not to Become a Member of the Energy Charter Treaty (30 July 2009) (approving a note verbale notifying the Portuguese Republic, the depository of the Energy Charter Treaty, that it does not intend to become a party to the Treaty and that ‘it did not apply provisionally any provision of the Treaty to the extent that such a provision was inconsistent with the Constitution, laws or regulations of the Russian Federation’).

71  The term ‘Washington Consensus’ is said to have been coined by economist John Williamson in 1989. It consisted of 10 broad reforms: (1) fiscal discipline; (2) reordering public spending priorities away from politically powerful groups, such as the military, and towards basic services and infrastructure; (3) tax reform; (4) financial liberalization; (5) competitive, stable exchange rates; (6) trade liberalization; (7) reduction in barriers to foreign investment; (8) privatization of state enterprises; (9) deregulation; and (10) property rights reform. S Flanders, ‘A New Washington Consensus’, The Financial Times, 14 March 1997, 2. See also JW Salacuse, ‘From Developing Countries to Emerging Markets: A New Role for Law in the Third World’ (1999) 33 Int’l Lawyer 875.

72  See UNCTAD, World Investment Report 2013 (2013) 101, affirming that the years 1994–98 witnessed the most rapid growth of signed investment treaties in their history, with nearly 1,000 investment treaties concluded during that period and an average of four per week signed in the three-year period 1994–96. During the period 2010–12, by contrast, international investment agreements were concluded on average at a rate of one per week.

73  eg M Hudson and J Sommers, ‘The End of the Washington Consensus’, Counterpunch, 12–14 December 2008.

74  A Kaushal, ‘Revisiting History: How the Past Matters for the Present Backlash Against the Foreign Investment Regime’ (2009) 50 Harv Int’l LJ 491, 495.

75  Hulley Enterprises Ltd (Cyprus) v The Russian Federation, PCA AA 226 (Interim Award on Jurisdiction and Admissibility) (30 November 2009) ¶ 339; Yukos Universal Ltd (Isle of Man) v the Russian Federation, PCA AA 227 (Interim Award on Jurisdiction and Admissibility) (30 November 2009) ¶ 339; Veteran Petroleum Ltd (Cyprus) v the Russian Federation, PCA AA 228 (Interim Award on Jurisdiction and Admissibility) (30 November 2009) ¶ 339. Stating at ¶ 339:

Furthermore, pursuant to Article 45(3)(b) of the Treaty, investment-related obligations, including the obligation to arbitrate investment-related disputes under Part V of the Treaty, remain in force for a period of 20 years following the effective date of termination of provisional application. In the case of the Russian Federation, this means that any investments made in Russia prior to 19 October 2009 will continue to benefit from the Treaty’s protections for a period of 20 years—i.e., until 19 October 2029. As a result, the Tribunal finds that the provisional application of the ECT, including the continuing provisional application of Article 26 in this case, does provide a basis for the Tribunal’s jurisdiction over the merits of this claim.

76  See n 16 above.