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A Comparison of the 2004 and 1994 US Model BITs

Kenneth Vandevelde

Subject(s):
Foreign Direct Investment — Investment defined in treaties — Treaties, interpretation — Host state law

The Rise and Fall of the 1994 U.S. Model BIT

The United States launched its BIT program in 1977, but spent several years developing a model negotiating text through an elaborate process of interagency collaboration. In December 1981, the United States finally reached internal agreement on a model for use in negotiations and commenced its first BIT negotiations, with Panama, in January 1982, and then with Egypt in March. Meanwhile, the interagency team continued to revise the model, a process that continued until January 1983, when agreement was reached on a model that would be used for the rest of the year. By the end of 1983, four BITs had been concluded and negotiations with several other countries were in progress. These negotiations had revealed a number of deficiencies in the 1983 model, most notably its length and redundancy. Accordingly, in January 1984, the United States adopted a shortened version of the model, which with only isolated changes would remain the model in use for the next decade. In 1987, a few changes were made to the model to address concerns that had arisen after the adoption of the 1984 model.

The resumption of negotiations in 1989 occurred in a world considerably changed from that which had greeted the inauguration of the BIT program in 1977 or even the beginning of the first successful negotiations in 1982. The U.S. BIT program was(p. 284) launched very much in reaction to the calls by developing countries in the early 1970s for a New International Economic Order, one in which states might expropriate foreign investment without payment of full, or perhaps any, compensation. The United States hoped through its BIT program to bolster the position of the developed countries that customary international law requires that foreign investment receive a minimum standard of treatment, including in particular payment of prompt, adequate, and effective compensation for expropriation. Further, the BITs would provide a remedy for host country treaty violations in the form of investor-state arbitrations that would not require the involvement of the investor’s government. After four and a half years, the United States had been able to conclude ten BITs.

At the end of the 1980s, however, a number of events radically changed the international investment climate.1 One was the collapse of the Soviet Union, which demonstrated the failure of a centrally planned economy of state enterprises as an alternative to market capitalism and thus legitimated the role of private capital in economic development. Second, the strong performance of several East Asian economies that had relied on export driven growth relative to the poor growth rates of more closed economies suggested that liberalization of trade and investment could promote economic growth. Third, the sovereign debt crisis of the 1980s had reduced the availability of private lending, leaving foreign direct investment as one of the few means of obtaining capital for economic development. As a result, by the late 1980s, the economies of Eastern Europe and the former Soviet Union were making the transition from central planning to market economics and looking for investors in numerous rapidly privatizing sectors of the economy, while other economies in the developing world were reconsidering their traditional hostility, or at least suspicion, toward foreign direct investment. As all of these countries sought foreign investment, they recognized that the conclusion of BITs was one means of signaling the change in their attitude toward such investment and their commitment to providing a favorable investment climate.

Accordingly, in the decade beginning in 1989, the United States would conclude some thirty-five BITs. More significant than the number of BITs concluded was the fact that most of these BITs included very few, if any, changes from the U.S. model negotiating text. In the early 1980s, it was not unusual for potential U.S. BIT partners to appear at a negotiation with a counter-draft to the U.S. model and occasionally the United States was required to make a significant concession to obtain an agreement, such as with respect to the right of free transfers or the prohibition on performance requirements. In the 1990s, few BITs departed in any significant way from the U.S. model. The performance requirements provision, one of the most difficult to negotiate in the 1980s, was strengthened and then successfully negotiated with every U.S. BIT partner in the 1990s.

A few changes were made to the model in 1991 and 1992 to address isolated issues, and the 1992 revision did include a significant restructuring of the investor-state disputes provision, but otherwise the model BIT in the early 1990s was little changed(p. 285) from that adopted in 1984. The United States in the 1990s was witnessing the triumph of its foreign investment policy, as dozens of countries, most of them former implacable critics or foes of foreign direct investment, lined up to sign an instrument that had been drafted at the height of the ideological battle over the protection of foreign investment under international law and that represented the unalloyed position of the United States.

Meanwhile, the conclusion of the North American Free Trade Agreement (NAFTA) in December 1992 prompted a comprehensive reconsideration of the model negotiating text in light of the experience gained in that negotiation. The result was a new model negotiating text adopted in April 1994. Unlike the revisions in 1987, 1991 and 1992, each of which affected only a few provisions, the 1994 revision involved a reconsideration of every article of the BIT. The 1994 revision did not seek to reconcile the model negotiating text with the investment chapter of the NAFTA, but it did seek to use the experience of the NAFTA negotiations to improve the model negotiating text, such as by including a more elaborate provision on performance requirements. The United States revised a few provisions of the 1994 model in 1998, but did not treat these revisions publicly as resulting in a new model. The State Department continued to refer to the model as “the 1994 model” or the “1994 prototype.” There revisions came at seemingly no cost to the success of the negotiations. The 1994 model was employed when ready for use, but without any apparent slowing of the pace of negotiations and certainly without any increase in the number of derogations from the model.

Everything changed on October 30, 1998, when the Loewen Group, a Canadian funeral home company, submitted to investor-state arbitration under the NAFTA a claim against the United States arising out of an adverse $500,000,000 jury verdict rendered in a Mississippi state court.2 In preparing the model BIT negotiating text, the United States had not contemplated that it would be a respondent in an investor-state arbitration, for at least two reasons. First, the BITs typically were with developing countries that had little investment in the United States. Second, the United States regarded itself as having a legal system that provided foreign investment with treatment under U.S. law that fully complied with the obligations of the BITs, which meant that no legitimate claim was likely to arise. The NAFTA, however, had imposed on the United States obligations similar to those imposed by the BITs and those obligations were to a country that had a tremendous amount of investment in the United States.3 The claim by Loewen, moreover, in the opinion of many was not obviously frivolous on its face, though ultimately the tribunal issued an award in favor of the United States based on the fact that Loewen had not appealed the adverse jury verdict before submitting the claim to arbitration. In short, the Loewen claim demonstrated that the United States must be prepared to respond to claims at least under the NAFTA, if not under(p. 286) the BITs. Because the MFN clause in the NAFTA could entitle claimants to invoke the protections of the BITs, as a practical matter NAFTA claims could be decided in some cases by application of BIT provisions. That is, even if the only claims ever submitted against the United States were by investors of one of the NAFTA parties, BIT provisions might well be at issue. Thus, the United States undertook to reconsider the entire BIT program in light of the Loewen claim and other claims that by then had been submitted against Canada and Mexico. By September 1999, the United States had ceased BIT negotiations, pending a reevaluation of the model BIT negotiating text.

Meanwhile, in 2000, the United States began to negotiate free trade agreements (FTAs) with Singapore and Chile that included investment chapters. These investment chapters were based on the NAFTA, in part because the NAFTA provided the only existing model of an investment chapter in a U.S. free trade agreement4 and in part because the visibility and prestige accorded to the NAFTA meant that potential treaty partners would want and expect to be offered whatever the United States granted in the NAFTA. Very quickly, the United States became involved in FTA negotiations with several other countries and the possibility emerged that the United States would find itself party to two sets of agreements, BITs and FTAs, with inconsistent language. Throughout the latter half of the 1990s, U.S. BIT negotiators largely had ignored the fact that the NAFTA investment chapter was inconsistent with the BITs in some ways, but the submission of claims to investor-state arbitration had demonstrated that claimants would seek to use MFN clauses to create consistent obligations across agreements. The growth in the number of FTAs would only aggravate the situation. U.S. BIT negotiators resolved that the BITs must be brought into conformity with the investment chapters of the FTAs.

In 2002, to assist President Bush in negotiating the new FTAs, Congress enacted the Trade Act of 2002, which included the Bipartisan Trade Promotion Authority Act (TPA).5 This legislation granted to the president the authority to conclude trade agreements, the implementing legislation for which could be submitted to Congress under the “fast track” procedure, a special process that allows the legislation to be considered on an expedited basis without amendment. Such authority was thought indispensable to the successful conclusion of the FTAs under negotiation. The legislation included a number of negotiating objectives for the FTAs, including the investment chapter of the FTAs.6 These negotiating objectives technically are inapplicable to the BITs, which are(p. 287) submitted to the Senate for advice and consent, rather than to both houses of Congress for approval, as in the case of the implementing legislation for the FTAs. Nevertheless, given the desire to reconcile the BITs with the FTAs and the need to maintain Congressional support for the BIT program, U.S. BIT negotiators decided to adhere to FTA negotiating objectives in revising the BIT model negotiating text.

II  The Drafting of the 2004 Model BIT

As this brief history suggests, the drafting of the 2004 model, then, was driven by the three goals: to reconsider the model negotiating text in light of the claims submitted to investor-state arbitration as well as any potential future claims, to reconcile the BITs with the FTAs, and to adhere to the negotiating objectives of the TPA. U.S. BIT negotiators also took advantage of the revision process to incorporate numerous technical changes as well. The new model that became final in November 2004 was more(p. 288) comprehensive, more detailed, and more sophisticated than any of its predecessors and was triple the length of the 1994 model. While the drafters made innumerable changes to the text, for purposes of analysis, most of the changes were intended to accomplish one of five specific objectives, which are listed and then discussed in detail below.

The first of these objectives was to reduce the discretion exercised by investor-state arbitral tribunals. Obviously, this objective was a major part of the U.S. response to the claims submitted to investor-state arbitration under the NAFTA. Reducing the discretion of the tribunals was to be achieved in two ways: by clarifying the substantive provisions of the BIT, so as to provide clearer guidance to the tribunals, and by allowing the two BIT parties to determine certain issues for the tribunals.

The second objective was to preserve greater regulatory discretion for the BIT parties. This was to be achieved by increasing the number of general exceptions to BIT obligations, by allowing the parties greater latitude to maintain or adopt measures that do not conform to certain BIT obligations; and by limiting the remedies that investor-state tribunals may impose for a breach of a BIT obligation. These changes to a large extent were not a reaction to the pending investor-state arbitrations, but rather part of the effort to reconcile the BITs with the FTAs. The clarification of substantive provisions might also be seen as a means of preserving regulatory discretion either because it resulted in a narrowing of provisions that limit host country discretion or because it reduced the likelihood that host country discretion would be circumscribed by constructions of BIT provisions that were broader than the BIT parties intended.

The first two objectives strengthened the hand of the host country as a regulator of foreign investment. They reserved greater discretion to the host country to act, and circumscribed to a greater degree the discretion of the tribunals that would review the conformity of host country conduct to the obligations of the BITs.

Not all of the objectives, however, favored the host country as regulator. A third objective of the 2004 model was to strengthen the normative framework applicable to international investment stocks and flows, thereby increasing the protection afforded to covered investment and investors and limiting to some degree the host country’s regulatory discretion. The 2004 model does this by imposing greater obligations of transparency in the adoption of the regulatory process as well as in the investor-state disputes process, by expanding the scope of the prohibition on performance requirements, and by encouraging host countries to adopt policies that protect the environment or labor rights. The changes related to transparency and performance requirements again reflected the influence on the BITs of the FTAs, with their emphasis on liberalization, whereas the other changes responded to concerns raised about the FTAs during Congressional debates on the TPA.

Although the first three objectives dealt with the substance of the international investment framework, the last two objectives addressed procedural concerns. As has been noted, the drafters of the 2004 model sought as a first objective to give the BIT parties greater control over investor-state arbitral tribunals. This first objective, however, did not exhaust the drafters’ concerns about the investor-state arbitral process. The 2004 model also sought to improve the quality of investor-state dispute resolution. The fourth objective thus was to promote efficient and just arbitration. This was achieved through a number of provisions to expedite tribunal formation, to provide for(p. 289) prompt dismissal of frivolous claims, to promote the creation of an appellate mechanism, to allow for consolidation of related claims, and to authorize the use of expert testimony. Some of these provisions incorporated provisions that had appeared in the FTAs, whereas others responded to TPA negotiating objectives.

The final objective was to channel certain disputes out of the investor-state arbitral process entirely. Provisions incorporated in furtherance of this objective encouraged submission of claims to local remedies, facilitated negotiated settlements, or precluded submission of the claim to investor-state arbitration entirely. These provisions, as those discussed above, were included less as a reaction to the pending investor-state arbitrations and more as an incorporation of language that had appeared in the FTAs.

As these objectives suggest, the 2004 model seeks a rebalancing of host country and investor interests. The rebalancing, however, involved both the enhancement of host country regulatory discretion and an expansion of host country obligations. The greater weight given to host country regulatory discretion suggests that the 2004 model is a weaker instrument of investment protection than prior models. Yet the 2004 model does impose some new protections for covered investment, even though the new protections often are not subject to enforcement under the investor-state disputes provision, precisely because the United States was exercising caution about the expansion of BIT provisions that limit state discretion.

These objectives also suggest increased sophistication about the importance of the dispute resolution scheme. Earlier models had focused on ensuring the availability of effective legal remedies for U.S. investors. The 2004 model reflects an understanding that, in many cases, the scope of the BIT’s substantive obligations in the final analysis is prescribed by investor-state arbitral tribunals and that the scope of the rights granted are largely defined by the remedies accorded. Thus, the 2004 model seeks to sculpt the process more carefully, restraining the discretion of the arbitrators, seeking to enhance the efficiency and quality of the process, and even diverting certain claims out of the process.

These five objectives do not account for every modification to the 1994 model that appears in the 2004 model. Technical changes appear throughout and a variety of very specific concerns were addressed by small changes to the treaty text.7 These five objectives, however, largely account for the important transformation in the U.S. BIT program effected by the adoption of the 2004 model.

(p. 290) Controlling investor-state arbitral tribunals

The 2004 model imposes greater controls on investor-state arbitral tribunals than prior U.S. model BITs. Such controls are imposed in two ways. First, the 2004 model clarifies the meaning of several important BIT provisions, generally providing much more detailed language than had appeared in the 1994 model. The more detailed language leaves less room for interpretation by investor-state arbitral tribunals. Second, the 2004 model creates several mechanisms whereby both BIT parties may participate in an investor-state arbitration. In particular, they may take certain issues from an investor-state arbitral tribunal and resolve them by agreement.

1.  Clarifying the meaning of BIT provisions

In a number of claims pending before investor-state tribunals formed under the NAFTA, claimants advanced interpretations of NAFTA provisions that were inconsistent with the United States’ understanding of those provisions. In preparing the 2004 model, the United States sought to clarify the scope of these provisions, particularly those establishing the minimum standard of treatment and those imposing conditions on expropriation of covered investment. The 2004 model also clarifies other provisions, notably the definition of “investment” and “investor.”

A.  Minimum Standard of Treatment

One of the most important provisions of the BIT is that which establishes a general absolute8 standard of treatment. The provision is important because of its broad applicability to all host country treatment of covered investment. The general absolute treatment provision of the BITs has been the basis of more claims submitted to investor-state arbitration than any other provision.

The 1994 model contained a general absolute standard under which “[e]ach Party shall at all times accord to covered investments fair and equitable treatment and full protection and security, and shall in no case accord treatment less favorable than that required by international law.”9 In several NAFTA arbitrations, the issue arose as to the relationship between the standard of fair and equitable treatment and the minimum standard of treatment required by customary international law.10 As it happened, the text of the NAFTA is different from that of the 1994 model and is quite explicit about the relationship. The NAFTA, at Article 1105, provides that “[e]ach Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.” When this(p. 291) language was put at issue in the first investor-state arbitrations under the NAFTA, tribunals adopted interpretations of the language that were at variance with the interpretation that the three NAFTA parties believed to be correct. For example, on August 30, 3000, the tribunal in Metalclad v. Mexico held that Mexico violated article 1105 by its failure to provide covered investment with sufficient transparency, taking note of article 102(1) of the NAFTA, which identifies transparency as a NAFTA objective.11 Similarly, on November 12, 2000, the tribunal in S.D. Myers v. Canada12 held that a violation of the national treatment obligation of the NAFTA constituted a violation of article 1105. On April 10, 2001, a tribunal in Pope & Talbot v. Canada,13 held that the fair and equitable treatment standard of the NAFTA is independent of and not subsumed by the requirement of treatment in accordance with customary international law. This interpretation rested on the tribunal’s view that the language used in the U.S. BITs treated the two standards as separate.

In response to these awards, on July 31, 2001, the NAFTA Free Trade Commission issued an interpretation that affirmed that the reference to international law in article 1105 means only customary international law and that the standard of fair and equitable treatment is an element of customary international law, not a separate treaty standard.14

In preparing the 2004 model, the United States sought to reconcile the BITs with the FTAs, leaving future tribunals with no discretion to treat fair and equitable treatment as anything other than an element of customary international law. The 2004 model thus abandons the formulation that appeared in the 1994 model and adopts language that is based on the NAFTA and on the July 31, 2001, FTC interpretation. It provides that “[e]ach Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.”15 It adds that the fair and equitable treatment and full protection and security standards “do not require treatment in addition to or beyond that which is required by [the customary international law minimum] standard, and do not create additional substantive rights.”16

(p. 292) Article 5 is to be interpreted in accordance with Annex A to the treaty.17 Annex A essentially defines customary international law. It states that the parties “confirm their shared understanding” that customary international law “results from a general and consistent practice of states that they follow from a sense of legal obligation.” The language is based on section 102 of the Third Restatement of the Foreign Relations Law of the United States. This sentence directs tribunals to look to state practice in interpreting the international minimum standard, seeking in that way to establish some objective basis for determining what that standard requires. The language also makes clear, however, that practice alone does not create a customary rule. Rather, a customary rule arises only if states engage in the practice based on a sense of legal obligation.

To further clarify the meaning of the general absolute treatment provision, the 2004 model provides some indication of the meaning of “fair and equitable treatment” and “full protection and security.” It states that fair and equitable treatment “includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.”18 This sentence does not provide an exhaustive definition of fair and equitable treatment, but indicates only that among the requirements of fair and equitable treatment is the obligation not to deny justice. Ensuring treatment of investment in accordance with due process had been a negotiating objective under the TPA.19 The 2004 model states that full protection and security “requires each party to provide the level of police protection required under customary international law.”20

The question of whether the fair and equitable treatment standard is part of customary international law or an independent treaty standard, addressed in Pope & Talbot, generated much controversy, and the disagreement of the NAFTA parties with the answer given in Pope & Talbot provoked a formal interpretation of article 1105 of the NAFTA by the parties. In fact, the language of the NAFTA was clear in stating that the standard is part of customary international law. The language of the 1994 model with respect to the fair and equitable treatment standard, however, was quite different from that which appeared in the NAFTA and many believed that, under that language, the fair and equitable treatment standard was a treaty standard independent of customary international law.21 In this view, the revision of the language in the 2004 model to bring it into conformity with Article 1105 of the NAFTA did not clarify the standard, but narrowed it. Because the general absolute treatment standard potentially applies to virtually any host country conduct affecting covered investment, this has been interpreted by some as a significant weakening of the U.S. model BIT. Tribunal interpretations of article 1105 of the NAFTA, however, are difficult to distinguish from(p. 293) tribunal interpretations of the fair and equitable treatment standard as it appears in BITs based on earlier models.22 Thus, it is not at all clear that the 2004 model language ultimately will be read more narrowly than the 1994 model language.

The 1994 model also included another provision establishing an additional general absolute standard of treatment for investment. It provided that neither party shall “in any way impair by unreasonable and discriminatory measures the management, conduct, operation, and sale or other disposition of covered investments.”23 This provision did not appear in the NAFTA or the other FTAs and therefore it was omitted from the 2004 model. The United States, however, had taken the position in the 1990s that a prohibition on unreasonable and discriminatory measures is an element of the international minimum standard24 and thus the deletion of this clause arguably is of no substantive effect.

B.  Expropriation

The 1994 model prohibited expropriation of covered investment unless five conditions were met. The expropriation must be (1) for a public purpose, (2) nondiscriminatory, (3) accompanied by payment of prompt, adequate, and effective compensation, (4) in accordance with due process, and (5) in accordance with the general standards of treatment in Article II(3), which include a requirement of fair and equitable treatment, full protection and security, and treatment in accordance with international law and a prohibition on unreasonable and discriminatory measures that impair investment. Additional language elaborated upon what is required by the standard of prompt, adequate, and effective compensation. The prohibition applied to direct and indirect expropriations alike.

The 2004 model follows the approach of the 1994 model in requiring that the five conditions be met in the case of either a direct or indirect expropriation of covered investment. A new Annex B, however, addresses extensively the question of what is meant by the term “expropriation.” Annex B provides that host country action cannot constitute an expropriation unless it interferes with a tangible or intangible property right or interest in an investment. This language was intended to foreclose arguments that certain types of interests in which no property rights exist, such as market share, could be expropriated.25 The language was not intended to indicate that contract rights cannot be expropriated.

(p. 294) Under Annex B, expropriations are of only two types: direct and indirect. A direct expropriation occurs where the host country transfers title to the investment or seizes possession of it. An indirect expropriation occurs “where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.”26

One of the most difficult issues concerning an expropriation is to determine when host country action has an effect equivalent to direct expropriation. Annex B provides that the determination requires a case-by-case inquiry that considers all the facts of the situation. It identifies three criteria, drawn from U.S. constitutional law,27 that should be considered. The first is the economic impact of the government action, though Annex B states that an adverse effect on the value of an investment, standing alone, does not establish the existence of an indirect expropriation. That is, an investor cannot establish that an expropriation has occurred merely by proving that it has suffered a loss. Rather, either the second or the third factor should also be present. The second factor is the extent to which the government action interferes with “distinct, reasonable investment-backed expectations.” The third factor is the character of the government action. Under this third factor, government action that physically interferes with an investment is more likely to be considered an expropriation. Annex B observes, in light of these factors, that “[e]xcept in rare circumstances, nondiscriminatory regulatory actions by a party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.” Thus, Annex B permits a finding that a nondiscriminatory, legitimate regulation in furtherance of the public welfare is an expropriation, but observes that such situations will be rare.

The clarifications provided byAnnex B also are regarded by some as a narrowing of the protection accorded by the expropriation provision. Nothing in Annex B, however, is inconsistent with the language of prior models. Rather, it addresses an issue on which prior models essentially were silent.

A final clause states that the expropriation provision does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement.28 This last clause thus seeks to ensure that conduct authorized by the TRIPS Agreement is not regarded as a violation of the BIT.

C.  The Definition of “Investment”

The 1994 model defined “investment” in the same way as prior U.S. models. Under the 2004 model, the term “investment” means “every kind of investment… .”29 This definition seems tautological, but the language was intended to suggest that the term “investment” refers to anything that has the characteristics of an investment. That is, the legal definition of “investment” essentially was the same as the economic definition.

(p. 295) The 2004 model makes this explicit. It provides that the term “investment” means “every asset … that has the characteristics of an investment.”30 Article 1 further specifies that such characteristics include the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. The language of the 2004 model thus does not represent a change in U.S. policy, but merely a clarification of the meaning of the language used in the 1994 and prior models.

The 1994 definition of “investment” was followed by an illustrative list of assets that fall within the definition. The list includes companies, interests in companies, contractual rights, tangible and intangible property, intellectual property, and rights conferred by law.

The 2004 model includes a similar list, though it substitutes the term “enterprise” for “company,” a substitution that eliminated a circularity in the 1994 model, in which the term “company” was defined to include various entities, including companies. In the 2004 model, the term “enterprise” refers to these same entities, including companies. The 2004 model also modifies the illustrative list in several places to reaffirm that only those assets that have the character of an investment are included. For example, appended to the word “debt” in the list is a footnote explaining that “[s]ome forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics.”31 Similarly, the category of rights under law is qualified by a footnote stating that whether assets in this category have the character of investment depends upon such factors as the nature and extent of the rights that the holder has under the law of the Party.32

D.  The Definition of “Investor”

The 2004 model also refines the terms specifying those entities and persons who are covered investors. In the 1994 model, covered investors included companies and nationals having the nationality of a BIT party. In the 2004 model, as has been noted already, the term “company” was replaced with the term “enterprise.”

More significantly, the 2004 model explicitly addresses an issue left to customary law in the 1994 model: that of dual nationality. It provides that a dual national shall be deemed to be exclusively a national of the state of his or her dominant and effective nationality.33 This clause essentially codifies the rule under customary law and thus does not represent a departure from the rule that the United States would have expected a tribunal to apply in a case arising under the 1994 model, though now the rule has been made explicit.

2.  Participation by the BIT parties

The 2004 model includes several provisions that allow the BIT parties to participate in investor-state arbitrations. Most of these(p. 296) provisions allow the BIT parties to determine issues involving the interpretation or application of the BIT that otherwise would be determined by the tribunal. With one exception noted below, such provisions have no counterpart in the 1994 model.

U.S. BIT policy traditionally had been to provide investors with the right to submit disputes with host countries to binding third-party arbitration in order to remove investment disputes from the political arena. The 2004 model reverses this policy to some extent by allowing the two BIT parties, where they agree, to remove an issue from tribunal consideration, to return it potentially to the political arena, and to decide it themselves. As will be seen, however, most of these provisions have antecedents in the NAFTA or even the 1994 model and thus cannot be regarded as a reaction to the claims submitted against the United States under the NAFTA.

The broadest of these provisions, which is based on language that appeared in the NAFTA,34 authorizes the BIT parties to provide the tribunal with their joint decision concerning the meaning of a BIT provisions.35 Any such joint decision concerning the meaning of a BIT provision is binding on the tribunal. It also binds any tribunal formed pursuant to the state-state disputes provision.36

A second such provision, which was also based on a provision of the NAFTA,37 applies to the interpretation of the annexes. Under both the 1994 and the 2004 models, the parties have the right to specify, in an annex, certain sectors of the economy in which they reserve the right to maintain existing measures that do not conform to certain provisions of the BIT and to adopt nonconforming measures in the future. The new provision in the 2004 model states that, in cases in which the respondent asserts as a defense that a measure is within the scope of a nonconforming measure permitted by an annex, the tribunal, upon the request of the respondent, shall request the interpretation of the BIT parties on the issue.38 Within 60 days, the BIT parties may submit to the tribunal in writing any decision declaring their interpretation, which is binding on the tribunal. If the BIT parties fail to issue a decision within 60 days, then the tribunal shall decide the issue.

A third such provision provides for a joint determination of the parties of the issue of whether either of two general exceptions for financial services regulations provides a defense to a claim.39 These are exceptions allowing the host country to adopt prudential measures for the protection of investors, depositors, and policy holders, or to ensure the integrity and stability of the financial system. The exceptions also allow the host country to adopt nondiscriminatory measures of general application in pursuit of monetary or exchange rate policies. U.S. officials were concerned that disputes involving these two exceptions might be decided by arbitrators lacking the appropriate expertise. Furthermore, the U.S. authorities responsible for regulation of the financial services sector wanted to ensure their involvement in any dispute involving the financial(p. 297) services exceptions. Thus, in cases in which the respondent invokes either exception in an investor-state arbitration, the respondent shall within 120 days of the submission of the claim to arbitration transmit to the “competent financial authorities” of both BIT parties and to the tribunal a written request for a joint determination on the issue of the extent to which either exception is a valid defense. Any such determination shall be binding on the tribunal. If the parties are not able to agree on a determination, then the parties shall take appropriate steps to ensure, in making any further appointments, that the tribunal has expertise in financial services. Such expertise shall be taken into account in appointing the presiding arbitrator. If the presiding arbitrator has already been appointed, the 2004 model provides for the appointment of a new presiding arbitrator with financial services expertise, either by agreement of the parties or by the ICSID Secretary-General.

Special procedures also apply to state-state disputes in which the competent financial authorities of one party provide written notice to the competent financial authorities of the other party that the dispute “involves financial services.”40 Thus, the dispute need not involve one of the two financial services exceptions to trigger the application of special procedures. Once the notice has been given, the competent financial authorities shall make themselves available for consultations regarding the dispute and shall have 180 days to transmit a report on their consultations to the parties. Only after these 180 days have expired may the dispute be submitted to arbitration. Any report of the financial authorities may be provided by either BIT party to the tribunal, though it is not binding on the tribunal. The report also may be provided by either BIT party to a tribunal constituted under the investor-state disputes provision of the BIT to decide a claim “arising out of the same events or circumstances” that gave rise to the dispute under the state-state disputes provision.41

In addition, in cases in which a BIT party submits a dispute involving financial services to state-state arbitration under the BIT, on the request of either BIT party within 30 days of the date the dispute is submitted to arbitration, each party shall, in the appointment of all arbitrators not yet appointed, take appropriate steps to ensure that the tribunal has expertise or experience in financial services law or practice.42 The expertise of particular candidates with respect to financial services shall be taken into account in the appointment of the presiding arbitrator. Unlike in the case of investor-state arbitration, however, there is no provision for replacing the presiding arbitrator.

A fourth such provision applies in cases in which an investor alleges that a taxation measure constitutes an expropriation.43 Such a claim may be submitted to investor-state arbitration only if the claimant first submits the claim to the tax authorities of the two BIT parties. If the tax authorities agree within 180 days that the measure does not constitute an expropriation, then the claim may not be submitted to investor-state arbitration. A similar provision appeared in the 1994 model, although that provision allowed(p. 298) the authorities nine months to reach agreement. The shorter time period in the 2004 model is consistent with the TPA objective of expediting investor-state arbitration.44

The 2004 model also authorizes the nondisputing BIT party to make oral and written submissions to the tribunal regarding the interpretation of the treaty.45 This implies that the nondisputing BIT party has the right to participate in any oral proceedings, although its participation is limited to submissions regarding the interpretation of the BIT.

Preserving host country regulatory discretion

The U.S. BITs have always utilized exceptions to reserve regulatory discretion for the host country. Such exceptions included general exceptions that authorized certain measures notwithstanding any other provision of the BIT, as well special exceptions allowing measures that do not conform to particular provisions. The 2004 model expands the number of exceptions, relative to the 1994 model, thereby carving out additional regulatory discretion for host countries. At the same time, it limits the remedies that may be imposed by an investor-state tribunal where a host country does violate a BIT obligation.

1.  Creating general exceptions

The 1994 model included three general exceptions that exempt certain measures from BIT obligations. These exceptions are for measures necessary for the protection of a party’s own essential security interests,46 for the fulfillment of a party’s obligations with respect to the maintenance of international peace or security,47 or prescribing special formalities in connection with covered investments, provided that such formalities do not impair the substance of any BIT rights.48 A 1998 revision of the 1994 model inserted language stating that the essential security interests exception is self-judging.49 The 2004 model retains these general exceptions, but adds others.

A.  Regulating Financial Services

Two exceptions are intended to preserve the host country’s discretion to regulate financial services. These exceptions originated in the U.S. FTAs, which include a chapter liberalizing trade in financial services. Their inclusion both preserves regulatory flexibility and reconciles the 2004 model with the FTAs.

The first exception provides that a party “shall not be prevented from adopting or maintaining measures relating to financial services for prudential reasons… .”50(p. 299) Such prudential reasons include the protection of investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services provider, or to ensure the integrity and stability of the financial system, including the soundness of individual financial institutions.

The second exception provides that nothing in the BIT applies to nondiscriminatory measures of general application taken by a central bank or monetary authority in pursuit of monetary and related credit policies or exchange rate policies.51 The exception, however, does not apply to the provision guaranteeing free transfer of payments related to an investment or to the provision prohibiting certain performance requirements.

B.  Maintaining Confidentiality of Information

The 2004 model also includes two new exceptions to permit the host country to maintain the confidentiality of certain information, notwithstanding obligations imposed by the BITs. Such exceptions in part are a response to the increase in the number of transparency obligations in the BIT.52

The first exception, which appears in the same article as the essential security interest exception, provides that nothing in the BIT shall be construed to require a party “to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests… .”53 Although the essential security interests exception applies only to measures taken by a party, this exception is not so limited. Thus, for example, it would allow a party to disregard a disclosure order issued by a tribunal if the party determines that disclosure would be contrary to its essential security interests. Like the general essential security interests exception, it is self-judging.

A second exception provides that nothing in the BIT shall be construed to require a party to furnish or allow access to confidential information in three situations: (1) in which disclosure of the information would impede law enforcement; (2) in which disclosure would otherwise be contrary to the public interest; or (3) in which disclosure would prejudice the legitimate commercial interests of particular enterprises.54 Such an exception had appeared in the NAFTA,55 although the language follows more closely that in Article X(2) of the General Agreement on Tariffs and Trade.

2.  Allowing nonconforming measures

The earliest U.S. model BITs permitted each party to designate, in an annex, sectors within which it reserved the right to deny national treatment to covered investment. In 1991, the model was amended to permit exceptions to MFN treatment as well. The 1994 model provision was similar.

The 2004 model expands the role of the annex, allowing the parties to reserve the right to make exceptions not only to the national56 and MFN57 treatment obligations,(p. 300) but to the prohibition on performance requirements58 and to a provision permitting the parties to employ senior managerial personnel regardless of nationality.59 Thus, nonconforming measures are allowed to no fewer than four provisions. The 2004 model, in the furtherance of transparency, also requires the parties to identify in the annex existing nonconforming measures that will be exempted from treaty obligations.

Existing nonconforming measures maintained at the national or regional level that derogate from one of the four obligations are to be listed in Annex III if they relate to financial services and in Annex I if they relate to any other sector. Financial services measures are listed separately to conform to the FTAs, in which financial services are addressed in a separate chapter. The 2004 model differs from prior models in that all existing measures prescribed at the local level may be maintained without being listed in an annex. The exception for local measures implicitly acknowledges the potential difficulty of identifying all existing nonconforming measures at the local level. The 2004 model also clarifies the scope of the reference to existing measures. Measures that expire but are promptly renewed are considered existing measures.60 An existing measure does not lose its status as an existing measure by an amendment, provided that the amendment does not increase its nonconformity with the four obligations.61

In Annex II, the parties may identify sectors or subsectors with respect to which they reserve the right to adopt measures that do not conform with one or more of the four obligations.62 No such future measure, however, may require an investor by reason of its nationality to dispose of an existing investment.63

The article on nonconforming measures includes other new exceptions that further expand the discretion retained by the host country. First, the national and MFN treatment obligations do not apply to any measure covered by an exception to, or derogation from, the national and MFN treatment obligations of the TRIPS Agreements.64 Second, the national and MFN treatment obligations and the provision on senior management and boards of directors do not apply to government procurement or to subsidies or grants, including government-supported loans, guarantees and insurance.65 The 1994 model had, in the Annex, reserved the right to deny national treatment with respect to subsidies and grants.

This discussion must be qualified by the observation that these expanded exceptions were primarily not for the purpose of adopting numerous new nonconforming measures, but rather for the purpose of preserving existing measures. Since the conclusion of the NAFTA, the United States had become increasingly aware of the existence of U.S. practice potentially inconsistent with BIT obligations, particularly at the level of state and local governments. The need for the United States to create an ever-more(p. 301) complex provision for nonconforming measures, however, creates at least an opportunity for other states to seek to reserve larger numbers of nonconforming measures to larger numbers of BIT obligations.

One nonconforming measure reserved by the United States merits special attention. Although this reservation does not appear in the 2004 model posted on the U.S. Department of State Website, in the two BITs concluded thus far based on the 2004 model and in all the FTAs with investment chapters, which generally are consistent with the 2004 model, the United States has, in Annex II, reserved the right to adopt or maintain any measure that accords differential treatment to countries under any international agreement signed or in force prior to the date of entry into force of the BIT or FTA. Thus covered investors or investments may not demand treatment as favorable as that guaranteed by any prior BIT or FTA. This permits a party to provide a lesser level of protection in any agreement in which the reservation appears than under prior agreements, notwithstanding the MFN provision.

3.  Limiting remedies

The 1994 model was silent concerning the remedies that an investor-state arbitral tribunal could award, except that it required payment of prompt, adequate, and effective compensation for expropriated investment.66 During the debates on the TPA, critics spoke of the possibility that investor-state tribunals could issue orders nullifying domestic law. In response to this concern, the 2004 model states explicitly that a tribunal may award against the respondent only monetary damages, any applicable interest, and restitution.67 Where the tribunal orders restitution, the award shall provide that the respondent may pay monetary damages and interest in lieu of restitution.68 This provision makes clear that a tribunal may not order a state to rescind a measure. The 2004 model also prohibits a tribunal from awarding punitive damages.69

The collective effect of these clauses is to affirm that a host country retains full discretion to enact and maintain any measure that is within its sovereign power, provided that it compensates covered investment and investors for losses attributable to any such measures that violate a U.S. BIT. Except for orders granting provisional remedies,70 a tribunal has no authority to order any BIT party to cease, or refrain from, any action.

Strengthening the norms of the international investment regime

In preparing the 2004 model, the United States also sought to strengthen certain norms applicable to the international investment regime. In particular, the 2004 model(p. 302) creates new transparency obligations, expands the existing prohibition on performance requirements, and modestly limits the discretion of states to derogate from existing environmental and labor standards in order to attract investment.71

The strengthening of norms was largely the result of the desire to reconcile the BITs with the FTAs. The FTAs were broader agreements with a strong orientation toward market liberalization. Improving the flow of information through transparency measures and eliminating trade distorting performance requirements thus were important elements of the FTAs. Gaining Congressional approval of the NAFTA and subsequent FTAs had necessitated that these agreements seek in some measure to protect the environment and promote labor standards. The additional transparency obligations also included some obligations with respect to the investor-state arbitral process. These were both part of the reaction to the investor-state claims submitted to arbitration under the NAFTA, in which the lack of transparency had been much criticized by nongovernmental organizations (“NGOs”) who were not parties to the dispute, and in furtherance of TPA negotiating objectives, adopted in response to such criticisms.72

1.  Transparency

Transparency in Host Country Regulatory Conduct

The U.S. BITs have always included a transparency provision. The 1994 model includes a provision requiring that laws, regulations, and adjudicatory decisions pertaining to investments be promptly published or otherwise made publicly available.73 The 2004 model retains this provision, with some clarifying changes to the language.74

The 2004 model, however, includes a new general transparency provision that expands the concept of transparency beyond merely making known the host country’s laws relating to investment to include opportunities to participate in the adoption and application of investment-related policies.75 This general transparency provision, which was based on the transparency chapters of the FTAs,76 imposes five different obligations, though none of them is within the scope of the investor-state disputes provision77 and thus as a practical matter they provide only limited additional protection for investors.

First, each party must designate a contact point to facilitate communication between the parties on matters covered by the BIT.78 In particular, the role of the contact point is, upon request of the other party, to identify the office responsible for a matter and to facilitate communication with that other party.

Second, “to the extent possible” each party must publish in advance any law, regulation, procedure, or administrative ruling of general applicability relating to matters(p. 303) covered by the treaty that it proposes to adopt.79 The party also must provide interested persons and the other party a reasonable opportunity to comment on the proposed measures. This clause addresses one of the TPA negotiating objectives, which was to establish procedures “to enhance opportunities for public input into the formulation of government positions.”80

Third, upon the request of a party, the other party must promptly provide information and respond to questions pertaining to any measure that the requesting party considers might materially affect the operation of the treaty or substantially affect the other party’s interests under the treaty.81

Fourth, each party must comply with certain requirements of due process. Specifically, “[w]ith a view to administering in a consistent, impartial, and reasonable manner” all laws, regulations, procedures and administrative rulings of general applicability, each party must ensure that administrative proceedings applying such measures to particular persons, goods, or services of the other party meet three requirements.82 The first of those requirements is, “wherever possible,” persons of the other party who are directly affected by a proceeding must be provided with reasonable notice, in accordance with domestic procedures, when a proceeding is initiated.83 Further, “when time, the nature of the proceeding, and the public interest permit,” such persons must be afforded a reasonable opportunity to present facts and arguments in support of their positions prior to any administrative action.84 In addition, the procedures must be consistent with domestic law.85

Fifth, each party also must observe certain requirements of due process with respect to rights of review and appeal.86 Each party must establish and maintain judicial, quasi-judicial, or administrative tribunals or procedures for the prompt review and correction of final administrative actions regarding matters covered by the treaty. Any such tribunals must be impartial and independent of the office or authority entrusted with administrative enforcement and may not have any substantial interest in the outcome of the matter. The parties to the proceeding shall be provided with the right to a reasonable opportunity to support their respective positions. The decision must be based on the evidence and submissions of record or, where required by domestic law, the record compiled by the administrative authority.

The 2004 model includes a separate provision relating to the transparency of financial services regulations. This provision requires each party “to the extent practicable” to publish in advance any regulations of general application relating to financial services that it proposes to adopt, and to provide interested persons and the other BIT party a reasonable opportunity to comment on such proposed regulations.87(p. 304) This provision is also outside the scope of the investor-state arbitration provision.88 It too responds to the TPA negotiating objective of establishing procedures to enhance opportunities for public comment on government policymaking.89

B.  Transparency in Dispute Resolution

Increasing the transparency of the dispute settlement mechanism was also one of the negotiating objectives of the TPA.90 Accordingly, the 2004 model includes three new provisions to improve the transparency of the investor-state and state-state disputes provisions.

First, the respondent in any arbitration must promptly transmit to the other party and make available to the public many of the documents related to the arbitration.91 These include the notice of intent; the notice of arbitration; submissions by a party to the dispute, a party to the BIT, or amici curiae; transcripts of hearings where available; and orders, awards, and decisions of the tribunal. Such a provision was a specific negotiating objective of the TPA.92

The TPA also called for protecting confidential business information.93 Accordingly, the provision allows a disputing party at the time it makes a submission to the tribunal to designate information in the submission as confidential, provided that it submits a redacted version of the submission that excludes the material alleged to be confidential.94 If the other disputing party objects to nondisclosure, the tribunal shall determine whether the information is to be protected. If the tribunal decides that the information shall not be protected, the party submitting the information may withdraw the submission and resubmit its documents with the information removed or revised in accordance with the tribunal’s decision. Information asserted to be protected without objection from the other disputing party or determined by the tribunal to be protected may not be disclosed by the tribunal or a party. An exception allows a BIT party to disclose the information when required to do so by its laws.95 This exception permits the United States to comply with the Freedom of Information Act.96

A second transparency provision requires that tribunal hearings be open to the public.97 The tribunal shall make appropriate arrangements to protect from disclosure information designated as protected by a disputing party. The opening of hearings to the public also was a specific negotiating objective of the TPA.98

Finally, the 2004 model authorizes a tribunal to accept and consider amicus curiae (“friend of the court”) submissions from a person or entity that is not a(p. 305) disputing party.99 NGOs had sought to submit amicus briefs in NAFTA arbitrations, notably Methanex v. United States100 and UPS v. Canada.101 They argued that investor-state arbitrations challenging governmental regulatory measures may raise issues of broad public concern and that the public therefore should be able to participate in the arbitration, at least by making written submissions. Congress agreed and included in the TPA a negotiating objective calling for the inclusion of a provision authorizing amicus curiae submissions.102

The 2004 model does not specify the criteria to be used by a tribunal to decide whether to permit such submissions, but leaves the decision to the tribunal’s discretion. The NAFTA Free Trade Commission did issue an interpretation of the NAFTA on October 7, 2004 that authorizes amicus curiae submissions (which are not explicitly authorized by the NAFTA) and that includes criteria to guide a tribunal in deciding whether to permit a particular submission.103 The interpretation directs the tribunal to consider, among other things, the extent to which the submission would assist the tribunal in the determination of a factual or legal issue relating to the arbitration by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties, whether the submission would address matters within the scope of the dispute, whether the nondisputing party has a significant interest in the arbitration, and whether there is a public interest in the subject matter of the arbitration. Under the 2004 model, in allowing an amicus curiae submission, the tribunal shall ensure that the submission does not disrupt the proceedings or unduly burden or unfairly prejudice a disputing party.104

2.  Performance requirements

The TPA designated the reduction or elimination of “artificial or trade-distorting barriers to foreign investment” as a “principal negotiating objective.”105 Thus, the 2004 model expands the prohibition on performance requirements in three important ways.

First, the 2004 model prohibits certain performance requirements even if they are accepted by the investment or the investor as a condition of a receipt of an advantage, such as favorable tax treatment.106 These are local content requirements, restrictions on imports, and restrictions on local sales. The 1994 model explicitly had allowed performance requirements if imposed in exchange for a benefit.107 The NAFTA, however,(p. 306) had prevented the imposition of certain performance requirements as a condition of a receipt of an advantage108 and the 2004 model follows this more restrictive approach.

Second, the 2004 model prohibits the imposition of performance requirements on any investment, not merely investments of investors of the other party.109 U.S. BIT negotiators have justified this change on the ground that performance requirements are so trade distorting that the U.S. BITs should seek to prevent them from being imposed on any investment, even if not owned or controlled by investors either BIT party. The performance requirements provision is one of three in the 2004 model that applies to investment of investors of any country, the other two being the environment110 and labor111 provisions. All three of these provisions have in common that they apply to host country conduct that in some cases may involve offering preferences to particular investments, such as special tax advantages or exemptions from environmental regulations. Applying these three prohibitions to all investment prevents the host country from offering certain preferences to favored investments, thereby potentially placing covered investment at a competitive disadvantage. Thus, imposing these prohibitions on all investment has the effect of protecting covered investment. These provisions also have in common that all three seek to promote interests beyond investment protection, in particular export promotion, and protection of the environmental and labor rights. Such interests are better served by applying the provisions to all investment, rather than to covered investment only.

Third, the 2004 model provides that the performance requirements provision applies to matters of taxation.112 The 1994 and prior models had excluded matters of taxation from the scope of the performance requirements provision.113 The effect of the change in the 2004 model is that tax benefits may not be offered as an inducement for the acceptance of certain prohibited performance requirements.

The 2004 model modified the list of prohibited performance requirements that appeared in the 1994 draft.114 These modifications to a large extent reflect language that had been employed in the OECD’s draft Multilateral Agreement on Investment (“MAI”) and then included in FTAs negotiated after the enactment of the TPA in 2002.

Although, as indicated above, the general scope of the performance requirements provision was expanded in the 2004 model, in some respects the performance requirements provision was narrowed in the 2004 model. First, the 2004 model contains a number of specific exceptions to certain of the prohibitions, generally based on language that appeared in the draft MAI and the post 2002 FTAs.115 Second, as discussed above, the 2004 model also allows the parties to specify existing nonconforming measures that may be maintained despite the general prohibitions in the performance(p. 307) requirements provision and to specify sectors of the economy in which they reserve the right to adopt nonconforming measures in the future.116 The 1994 model had allowed the parties to reserve the right to maintain or adopt nonconforming measures only with respect to the national and MFN treatment obligations.117 Third, the 2004 model generally excepts government procurement, subsidies, and grants from the prohibitions on performance requirements.118

3.  Environment

Although the preamble to the 1994 model recited the parties’ agreement that the treaty’s objectives “can be achieved without relaxing … environmental measures of general application,” the substantive provisions of that model did not address environmental standards explicitly. Nothing in the substantive provisions of the 1994 model treated environmental measures differently than any other host country policy.

The 2004 model explicitly addresses environmental measures by requiring each party to “strive” to ensure that it does not waive or otherwise derogate from domestic environmental laws as an encouragement to investment.119 In the case of the United States, the term “laws” refers only to federal, not state or local law.120 The obligation with respect to environmental measures applies to derogations to attract any investment, not only investment of the other BIT party. If a party believes that the other party has offered such an encouragement, it may request consultations. Neither the investor-state nor the state-state disputes provisions applies to this article.121

The 2004 model also expressly acknowledges that nothing in the BIT precludes environmental measures otherwise consistent with the terms of the BIT.122 Although the language is not well-crafted, this clause does not constitute an exception to BIT obligations for environmental measures. Rather, it merely affirms the right of the parties to adopt environmental measures consistent with the BIT.

4.  Labor

The 1994 model in its preamble recognized that “the development of economic and business ties can promote respect for internationally recognized worker rights.” The substantive provisions of that model, however, did not expressly refer to such rights.

The 2004 model requires each party to “strive” to ensure that it does not waive or otherwise derogate from domestic labor laws in a manner that reduces adherence to specified internationally recognized labor rights as an encouragement for investment.123 The specified rights are the right of association; the right to organize and bargain collectively; a prohibition on the use of any form of forced or compulsory labor; labor protections for children and young people, including a minimum age for the employment(p. 308) of children and the prohibition and elimination of the worst forms of child labor; and acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.124 In the case of the United States, this provision applies only to federal, not state or local, law.125

The labor provision applies to derogations from labor laws to encourage any investment, not only investment of the other BIT party. If a party believes that the other party has offered such an encouragement, it may request consultations. The labor provision is outside the scope of both the investor-state and state-state disputes provisions.126

Promoting just and efficient dispute resolution

One of the eight TPA negotiating objections was to seek to “improve” the dispute resolution process through procedures to ensure the efficient selection of arbitrators and the expeditious disposition of claims,127 mechanisms to deter and eliminate frivolous claims,128 and an appellate mechanism.129 Thus, several changes that appear in the 2004 model negotiating text intended to promote a just and efficient dispute resolution process are attributable to the TPA. Others such changes, such as the provision on consolidation of claims and on expert reports, are based on innovations that appeared in the NAFTA and were included in the BITs as part of the reconciliation of the BITs with the FTAs.

1.  Expedited tribunal formation

Under the investor-state disputes provision, unless the disputing parties otherwise agree, the tribunal shall consist of three arbitrators, one appointed by each of the parties, and a third, who shall be the “presiding arbitrator,” appointed by agreement of the disputing parties.130 The 2004 draft gives the disputing parties a relatively short period of time within which to make their appointments. The investor, in fact, must identify the arbitrator it appoints at the time it submits its notice of arbitration or authorize appointment of the arbitrator by the ICSID Secretary-General.131 No such requirement appeared in the 1994 model. Requiring the investor to name its arbitrator at the time the claim is submitted was expected to expedite tribunal formation, although it also gives the respondent state a tactical advantage in knowing the identity of the claimant-appointed arbitrator before appointing the arbitrator it is entitled to appoint. The parties to the dispute then have 75 days within which to complete the constitution of the tribunal. If a tribunal has not been constituted within 75 days from the date that a claim was submitted to arbitration, the Secretary-General of ICSID, on the request of either disputing party, shall appoint the arbitrator or arbitrators(p. 309) not yet appointed.132 The 1994 model left the method of tribunal formation to the applicable arbitral rules. Under Article 38 of the ICSID Convention, the parties have 90 days within which to form the tribunal. Article 7 of the UNCITRAL Rules also permits the parties more than 75 days to constitute the tribunal.

Under the state-state disputes provision, the arbitral panel also shall consist of three arbitrators, unless the parties otherwise agree.133 Each party shall appoint one arbitrator, with the third, presiding arbitrator appointed by agreement of the parties.134 If the entire tribunal is not appointed within 75 days of when the claim is submitted to arbitration, the Secretary-General of ICSID, upon the request of either party, may appoint the arbitrators not yet appointed.135 The 1994 model had allowed a longer period of time for tribunal formation.136

2.  Expedited review of objections

To facilitate the elimination of frivolous claims, a new provision of the 2004 model directs the tribunal to decide as a preliminary question any objection that, as a matter of law, a claim is not one for which an award in favor of the claimant may be made.137 In effect, such an objection argues that, even if all of the facts alleged by the claimant are presumed to be true, the claimant would not be entitled under the law to an award in its favor. The objection must be submitted to the tribunal “as soon as possible” after the tribunal is constituted, but no later than the submission of the host country’s counter-memorial.138 The tribunal shall then suspend any proceedings on the merits and establish a schedule for resolving the objection.139 In this way, claims that do not have a legal basis may be resolved expeditiously, avoiding the need for the parties to collect and present evidence relating to disputed factual matters.

Further, the consideration of a preliminary objection that a claim lacks a legal basis or an objection to jurisdiction may be conducted on an expedited basis.140 To receive expedited consideration of either objection, the respondent must so request within 45 days of when the tribunal is constituted. Under the expedited schedule, the objection shall be decided no later than 150 days after the date of the request. If either disputing party requests a hearing, the tribunal may take an additional 30 days to decide. Upon a showing of extraordinary cause, a tribunal may delay its decision by an additional brief period of time not to exceed 30 days.

One concern raised by the creation of a preliminary procedure for addressing frivolous claims is that host countries may invoke the procedure even when a clear legal basis for the claim exists, merely to avoid the appearance of having conceded that such a basis exists. In an effort to avoid this situation, the 2004 model provides that,(p. 310) when deciding on these preliminary objections, a tribunal may award to the prevailing party reasonable costs and attorneys’ fees incurred in submitting or opposing the objection.141 In deciding whether to award these fees or costs, the tribunal shall consider whether the objection was frivolous and shall provide the disputing parties with an opportunity to comment.

3.  Appellate mechanism

The 2004 model includes two separate provisions intended to lead to the establishment of appellate review, through either a multilateral or a bilateral agreement. The 1994 model had not included any reference to the possibility of an appellate mechanism and, in fact, had provided that the decision of any investor-state arbitral tribunal shall be final and binding.142

The first provision states that, if the BIT parties adhere to a separate, multilateral agreement that establishes an appellate body to review international arbitral awards rendered in investment disputes, the parties shall strive to agree that the appellate body will review awards rendered under the investor-state disputes provision, provided that claim was submitted after the multilateral agreement enters into force.143 The other provision provides that within three years of entry into force of the BIT the parties shall consider whether to establish a bilateral appellate body.144

Recognizing implicitly that an appellate mechanism was unlikely to be created in the near term, the 2004 model includes an interim mechanism intended to prevent at least some errors in arbitral awards. Specifically, at the request of a disputing party, a tribunal shall transmit its proposed award on liability to the disputing parties and to the nondisputing BIT party prior to issuance.145 Within 60 days after transmission of the proposed award, the disputing parties may submit written comments to the tribunal concerning any aspect of the proposed award. This procedure provides the parties with an opportunity to correct errors of fact before an award is issued. This provision does not apply to any arbitration for which an appeal has been made available under the provisions of the BIT. Thus, should an appellate mechanism be established, this provision no longer would have any practical effect.

4.  Consolidation

The 2004 model includes a provision for the consolidation of related claims, a matter very rarely addressed in BITs and not addressed in the 1994 model. This provision originated in the NAFTA146 and addressed the concern that the resolution of related claims, perhaps involving very similar factual determinations by different tribunals could result in wasted resources and inconsistent results. Thus, Article 33(1) provides that, where two or more claims have been submitted separately to investor-state arbitration and the claims (1) have a question or law or fact in common(p. 311) and (2) arise out of the same events or circumstances, any disputing party may seek a consolidation order.

A disputing party that seeks a consolidation order shall deliver a written request to the Secretary-General of ICSID and to all the disputing parties sought to be covered by the order. Unless the Secretary-General finds, within 30 days of receiving the request, that the request is “manifestly unfounded,” the 2004 model requires that a tribunal be established.147

The composition of the tribunal may be determined by the agreement of the disputing parties.148 If they do not agree otherwise, the tribunal shall consist of three arbitrators, one appointed by agreement of all the claimants, one appointed by the host country, and a presiding arbitrator appointed by the Secretary-General of ICSID.149 The presiding arbitrator may not be a national of either of the BIT parties. If the claimants fail to agree on an arbitrator or the host country fails to appoint an arbitrator, the Secretary-General is authorized to appoint the arbitrators not yet appointed.150

If the tribunal is satisfied that the two criteria enumerated above have been met, in the interest of a fair and efficient resolution of the claims and after hearing the disputing parties, it may issue an order assuming jurisdiction over all or part of the claims.151 It may issue an order staying the proceedings of a previously established tribunal arbitrating one of the claims. Alternatively, it may issue an order instructing a previously established tribunal to assume jurisdiction over all or part of the claims. In the latter case, however, the claimant appointed arbitrator shall be an arbitrator appointed by agreement of all the parties now before the tribunal. If they cannot agree, the appointment shall be made by the Secretary-General of ICSID. The consolidation tribunal shall conduct its proceedings in accordance with the UNCITRAL Arbitration Rules, to the extent they are consistent with the BIT.152

As this discussion indicates, the consolidation procedure may result in a claimant’s having its claim arbitrated in a consolidated proceeding against its will. Similarly, a host country may be required to participate in a consolidated proceeding even though it preferred to arbitrate the claims in separate proceedings. If a claimant wishes to have its claim included in the consolidated proceeding and was not named in the request for consolidation, it may submit a request to the consolidation tribunal to be included.153

The 2004 model also allows the parties to consolidate claims by agreement. In that case, the consolidation procedure would be governed by the agreement of the parties rather than by the terms described above.154

(p. 312) 5.  Participation by experts

The 2004 model contemplates that the quality of arbitral decisions may be improved by the participation of experts. Thus, it provides that the tribunal may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding.155 A similar provision appeared in the NAFTA.156 Such experts may be appointed at the request of a disputing party or, unless the disputing parties disapprove, on the tribunal’s own initiative. The appointment is subject to any conditions upon which the disputing parties agree. This provision is without prejudice to the authority of the tribunal to appoint experts in accordance with the applicable arbitration rules. No such provision appeared in the 1994 model.

Diverting cases from investor-state arbitration

A small number of provisions are intended to divert some claims away from the investor-state arbitral process. These are not a response to the claims submitted to arbitration under the NAFTA, but rather are based on provisions that appeared originally in the NAFTA. Their inclusion reflects the reconciliation of the BITs with the FTAs.

1.  Encouraging local remedies

One way to divert claims from the investor-state arbitral process is to encourage resort to local remedies. The 1994 model, like all prior U.S. model BITs, provided that a claim could be submitted to investor-state arbitration only if it had not been submitted to local courts.157 The effect of this provision was to discourage resort to local courts, inasmuch as resort to local courts would extinguish the claimant’s right to international arbitration of the same dispute.

The 2004 model adopts a different approach that encourages investors to submit disputes to local courts. Under the 2004 model, a claim may be submitted to investor-state arbitration, even if it previously has been submitted to local courts. At the time the claim is submitted to arbitration, however, the investor must discontinue any pending local court proceedings and waive the right to refer the dispute to local remedies.158 Such a provision originally had appeared in the NAFTA159 and thus inclusion of this provision in the 2004 model reconciled the BITs with the FTAs. As in the 1994 model,160 the investor may still resort to local courts to obtain provisional remedies for the limited purpose of preserving the status quo while the dispute is resolved.161

2.  Encouraging negotiated settlements

A second means of diverting claims from investor-state arbitration is to facilitate negotiated settlements. The 2004 model includes(p. 313) a new provision, based on the NAFTA,162 that had no counterpart in the 1994 model. Under this provision, ninety days prior to submitting a claim, the investor must deliver to the host country a written notice of its intention to submit the claim to arbitration.163 The notice of intent shall specify the legal and factual basis for each claim and the relief sought. This provision alerts the host country to the existence of a dispute and thereby creates an opportunity for the host country to propose settlement negotiations before the claim is submitted to arbitration. In fact, the experience of the State Department is that claimants typically do take advantage of any opportunity to reach a negotiated settlement.164

3.  Imposing a three-year limitations period

The 1994 model had not imposed any limitation on the amount of time that could pass before a claim was submitted to investor state arbitration. Such a limitation did appear in the NAFTA, however.165 To create consistency with the NAFTA, the 2004 model also provides that no claim may be submitted to investor-state arbitration if more than three years have elapsed from the date on which the claimant “first acquired, or should have acquired,” knowledge of the breach and knowledge that the claimant or enterprise has incurred loss or damage.166 Thus, claims that are more than three years old may not be submitted to investor-state arbitration.

III  Conclusion

The 2004 model is a historic revision of the U.S. model BIT negotiating text in both form and substance. In form, the 2004 model addresses investment more comprehensively, in more detail, and with greater sophistication than any prior U.S. model BIT. It is about triple the length of the 1994 model that it replaced.

In substance, the 2004 model permits the BIT parties to exercise much greater control over investor-state arbitral panels than had prior models, both by crafting substantive provisions with greater precision and by creating mechanisms whereby numerous issues, by agreement of the BIT parties, may be taken from the tribunal and decided by the BIT parties. These provisions reverse a longstanding U.S. BIT policy of seeking to depoliticize investment disputes by allowing them to be submitted to international arbitral tribunals without the involvement of the home country. The 2004 model also reserves greater regulatory discretion for host countries by an expanded menu of exceptions to treaty obligations and by clarifying the limits of the remedies that host countries may impose. In all these ways, the 2004 model rebalances the U.S. BIT program to strengthen the position of the BIT parties in their relationship with investors(p. 314) and with the investor-state arbitral tribunals that may be created to enforce investor rights. This rebalancing is to some extent a reaction to claims submitted to investor-state arbitration under the NAFTA, although much of what constitutes the rebalancing had appeared in the NAFTA when it was signed in 1992. The NAFTA, as the first agreement to include BIT provisions in an agreement between two OECD countries, had been a more balanced agreement than the U.S. BITs of the early 1990s, which were with developing countries usually with little investment in the United States. In 2004, this different balance finally found its way into the BIT model negotiating text.

The 2004 model was influenced as well by the greater emphasis, in the NAFTA and subsequent FTAs, on market liberalization and by the more comprehensive nature of these agreements. Thus, the 2004 model includes strengthened disciplines on performance requirements, transparency, environmental protection, and labor rights, all matters addressed in the FTAs. Of these, however, only the performance requirements provision is within the scope of the investor-state disputes provision and thus the role of the 2004 model in strengthening the norms of the international investment regime is limited. The transparency provisions of the 2004 model also include clauses intended to increase the transparency of the investor-state arbitral process, largely the result of criticisms that arose during early investor-state arbitrations under the NAFTA.

In the 2004 model the greater attention to the investor-state arbitral process was not limited to concerns about the substantive content of awards or the transparency of the process. The 2004 model also seeks to create a more just and efficient process as well, and thus includes provisions for expedited review of frivolous claims, for consolidation of related claims, for use of experts, and for the possible creation of an appellate mechanism. Still other provisions may have the effect of diverting certain claims from investor-state arbitration entirely, by encouraging resort to local remedies or a negotiated settlement and by barring stale claims.

Ultimately, the 2004 model is an instrument of retrenchment. The single greatest innovation in the BITs had been the creation of the investor-state disputes provision and, in the 2004 model, the United States reclaimed some of the power handed to the tribunals in the 1994 and earlier models. Thus, the 2004 model clarifies certain substantive provisions for the benefit of tribunals, takes certain issues from the tribunals entirely, clarifies the limits of the remedies tribunals may provide, adds mechanisms to divert some claims to other means of dispute resolution, injects greater transparency into the process, and seeks to improve the efficiency of investor-state arbitration. Substantive obligations that were the core of prior models either have been clarified in an effort to avoid an expansive application or have been hedged with larger numbers of exceptions. In the few instances where new substantive obligations have been imposed, these generally are outside the scope of the investor-state disputes provision, thereby avoiding any expansion of the power of the tribunals.

Yet, retrenchment certainly is not abandonment. The 2004 model continues to enforce the international minimum standard (which is being interpreted by tribunals much more broadly than when the BIT program began some thirty years ago), to require nondiscrimination with respect to the establishment of investment in most cases, to require nondiscriminatory treatment of investors and establishment investment in most cases, to require full compensation for expropriation, to guarantee free transfers(p. 315) of payments related to investment, and to prohibit many performance requirements. The investor-state arbitral process has gained greater legitimacy through the transparency provisions, and other procedural reforms may improve the efficiency and quality of the process. Though the threat of intervention by the BIT parties now looms over every tribunal, instances of such intervention may prove to be uncommon.

More than fifteen years ago, the NAFTA dragged the little known but generally popular BITs into the controversial world of international trade. The decade between the entry into force of the NAFTA in 1994 and the release of the 2004 model BIT transformed the BIT program. The new model BIT is a complex, detailed, and carefully calibrated document that reflects a more cautious and tentative foreign investment policy. In that respect, form reinforces substance in the 2004 model BIT.

Footnotes:

In 1992, the year that the NAFTA was signed, Canada was the third-largest source of foreign direct investment in the United States.

In 1988, the United States had signed the Canada-United States Free Trade Agreement, which contained an investment chapter. The investment provisions in that agreement, however, were truncated because it was thought that, under the unique circumstances cross-border investment between Canada and the United States, the more elaborate provisions that appear in the U.S. BITs with developing countries were not necessary. The Canada-United States Free Trade Agreement, in any event, was superseded by the NAFTA in 1994.

In setting forth the objectives of the FTAs with respect to investment, the TPA stated:

[r]ecognizing that United States law on the whole provides a high level of protection for investment, consistent with or greater than that level required by international law, the principal negotiating objectives of the United States regarding foreign investment are to reduce or eliminate artificial or trade-distorting barriers to foreign investment, while ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States, and to secure for investors important rights comparable to those that would be available under United States legal principles and practice, by

  1. (A)  reducing or eliminating exceptions to the principle of national treatment;

  2. (B)  freeing the transfer of funds relating to investments;

  3. (C)  reducing or eliminating performance requirements, forced technology transfers, and other unreasonable barriers to the establishment and operation of investments;

  4. (D)  seeking to establish standards for expropriation and compensation for expropriation, consistent with United States legal principles and practice;

  5. (E)  seeking to establish standards for fair and equitable treatment consistent with United States legal principles and practice, including the principle of due process;

  6. (F)  providing meaningful procedures for resolving international disputes;

  7. (G)  seeking to improve mechanisms used to resolve disputes between an investor and a government through—

    1. (i)  mechanisms to eliminate frivolous claims and to deter the filing of frivolous claims;

    2. (ii)  procedures to ensure the efficient selection of arbitrators and the expeditious disposition of claims;

    3. (iii)  procedures to enhance opportunities for public input into the formulation of government positions; and

    4. (iv)  providing for an appellate body or similar mechanism to provide coherence to the interpretations of investment provisions in trade agreements; and

  8. (H)  ensuring the fullest measure of transparency in the dispute settlement mechanism, to the extent consistent with the need to protect information that is classified or business confidential, by—

    1. (i)  ensuring that all requests for dispute settlement are promptly made public;

    2. (ii)  ensuring that—

      1. (I)  all proceedings, submissions, findings, and decisions are promptly made public; and

      2. (II)  all hearings are open to the public; and

    3. (iii)  establishing a mechanism for acceptance of amicus curiae submissions from businesses, unions, and nongovernmental organizations.

For example, the 2004 model restructures the dispute resolution process so that claims may be brought only by the investor and not by the investment. In so doing, it adopted an approach pioneered by the NAFTA in Articles 1116 and 1117. Thus, under Article 24 of the 2004 model, the investor may submit a claim for any injury that it has suffered as well as for any injury suffered by an investment that it owns or controls. Where an investor submits a claim for injury suffered by the investment, any compensation shall be awarded to the investment rather than to the investor. 2004 model, Article 34(2).

Similarly, the 2004 model includes language, also at Article 24, the explicitly incorporates causation and damage requirements that are imposed by customary international law. Such language also had appeared in the FTAs.

In addition, the 2004 model includes language, at Article 28(8), authorizing the tribunal to order interim measures of protection. Again, similar language had appeared in the FTAs.

The reference to an “absolute” standard of treatment is meant to contrast this standard with a relative standard, which establishes a standard for treatment of covered investment by reference to the treatment accorded other investment. An absolute standard requires that covered investment receive a certain level of protection regardless of how other investment is treated.

14  The interpretation may be found at http://www.worldtradelaw.net/nafta/chap11interp.pdf.

19  See supra note 6.

21  Space limitations here do not permit a thorough discussion of this argument. A more thorough discussion may be found in Kenneth J. Vandevelde, U.S. International Investment Agreements (2009).

25  This language is a response to arguments made in a number of cases that host country restrictions that diminished market share constituted an expropriation. Such cases include Pope & Talbot v. Canada, supra note 10, S.D. Myers v. Canada, supra note 12, and Methanex v. United States, infra note 99.

44  See supra note 6.

47  Id.

49  By “self-judging,” it is meant that a state has sole discretion to determine whether a measure it has adopted falls within the exception.

52  See infra text accompanying notes 72–88.

71  See Chapter 6, by Patrick Juillard, in this volume for a brief discussion of the evolving nature of Model BITs.

72  See supra note 6.

76  See, e.g., NAFTA Chapter 18.

80  See supra note 6.

89  See supra note 6.

90  See supra note 6.

92  See supra note 6.

93  See supra note 6.

98  See supra note 6.

102  See supra note 6.

103  The FTC interpretation may be found on the U.S. Department of State Website at http://www.state.gov/documents/organization/38791.pdf

104  See the more extensive discussion on the effect of amicus curiae and transparency in investment dispute resolution in Chapter 12, by Thomas Wälde,in this volume.

105  See supra note 6.

127  See supra note 6.

128  Id.

129  Id.

134  Id.

135  Id.

149  Id.