Jump to Content Jump to Main Navigation
The Law of Investment Treaties, 2nd Edition by Salacuse, Jeswald W (1st May 2015)

14 Investment Treaty Exceptions, Modifications, and Terminations

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

Jeswald W. Salacuse

Subject(s):
BITs (Bilateral Investment Treaties) — Treaties, amendments and modification — Treaties, invalidity, termination, suspension, withdrawal — ECT (Energy Charter Treaty) — Public purpose (expropriation and) — Object & purpose (treaty interpretation and)

(p. 376) 14  Investment Treaty Exceptions, Modifications, and Terminations

14.1  The Tensions of Investment Treaties

The negotiation and implementation of any treaty has the potential to confront a state with the tension between its perceived national interests and its requested or ratified treaty obligations. Such tensions seem to be a permanent feature of investment treaty practice. On the one hand, a state seeking the benefits of foreign investment contemplates or agrees to international obligations regarding the treatment it will accord to such investors and investments during the long years of their existence in its territory; on the other, those same states wish to retain the maximum amount of freedom possible to enact legislation and regulations during the same period in order to pursue their perceived national interests in an uncertain future. The tension between these two imperatives is present at the bargaining table when representatives of concerned states negotiate investment treaties, in government offices when officials consider how existing or proposed laws or regulations may affect their treaty obligations, and in arbitration hearings when tribunals deciding an investor–state dispute must determine whether a government measure, ostensibly taken for the public welfare, conflicts with a respondent state’s investment treaty commitments.

A state has three basic devices to mediate the tensions created by investment treaty practice. The first, which is employed as part of the negotiating process, is to create specific exceptions in the treaty to assure a host state sufficient latitude of action for the future. The other two, which are invoked after the investment treaty enters into effect, are for a state to modify the treaty provisions by agreement with other contracting parties or terminate participation in the treaty and thus end its international investment obligations. This chapter considers the investment treaty devices of exceptions, modifications, and terminations.

(p. 377) 14.2  Treaty Exceptions

(a)  In general

Nearly all investment treaties include one or more exceptions in order to protect certain important interests from the treaty’s coverage and allow the contracting states to maintain their ability to exercise legislative and regulatory authority in that area. Some of these exceptions (many of which have been discussed earlier in this book) are narrowly drafted and only restrict the application of a specific treaty provision to a particular circumstance or transaction. For example, treaty provisions that grant investors the freedom to make monetary transfers often contain provisions clarifying that such commitments do not prohibit a contracting state from preventing a transfer through a good faith and non-discriminatory application of its laws relating to bankruptcy, insolvency, and the protection of creditors’ rights.1

Other exceptions are broader in scope and exempt a specified class of persons, transactions, or situations from the application of all investment treaty provisions. For example, many treaties contain what might be called a ‘denial of benefits’ clause. This exception allows the contracting states to deny the benefits of a treaty to investments of companies controlled by third country nationals if the companies lack ‘substantial business activities’ in the home country or if the controlling persons are nationals of a country with which the denying party does not maintain ‘normal economic relations’.2 Accordingly, US BITs usually include the following provision:

Each Party reserves the right to deny to any company the advantages of this Treaty if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country with which the denying Party does not maintain normal economic relations.3

This exception explicitly carves out a class of ‘investors’ that would otherwise be entitled to protections under the treaty. For many years the United States has maintained economic sanctions against Libya and Cuba, and these two countries have been cited by the US State Department as examples of countries that the United States does not maintain normal economic relations with and whose nationals and companies would therefore not benefit from US BITs with third countries. In 2004, the United States lifted economic sanctions against Libya and thereby recognized Libyan-controlled entities with substantial business activities (p. 378) in treaty partners as being able to benefit from investment treaties with those countries.4

A searching examination of the body of investment treaties reveals a wide diversity of exceptions, which includes differences in their nature, breadth, and conditions for application. A 2007 study by UNCTAD found that the number of exceptions finding their way into newly negotiated treaties was increasing.5 An examination of treaties signed since that time confirms this trend. One reason for the increase is that the experience of host countries with investor–state arbitration has revealed various situations in which investment treaty provisions can intrude into and inhibit domestic law-making and regulation, sometimes in unexpected and undesired ways. As a result, states negotiating investment treaties have perceived a need to demarcate clearly the latitude that host countries reserve to themselves in order to protect their vital national interests. The following are some of the principal types of exceptions found in investment treaties.

(b)  Exceptions to protect essential security interests and the maintenance of public order

Many investment treaties contain provisions that except contracting parties from core treaty obligations under exceptional circumstances in which a country’s important national interests are at stake. Such important interests include national security, the maintenance of public order, and the restoration of peace and security. For example, Article XI of the bilateral investment treaty (BIT) between the United States and Argentina states: ‘This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.’6

Because of the use of the term ‘preclude’ in some treaty texts, exception clauses are sometimes referred to as ‘non-precluded measures provisions’.7 Many treaties, however, seek to arrive at the same result without using the term ‘preclude’. Thus, Article 24 of the Energy Charter Treaty (ECT), on exceptions, states that the (p. 379) treaty’s provisions are not to be construed ‘to prevent any Contracting Party from taking any measure which it considers necessary’, ‘for the protection of essential security interests’, and ‘the maintenance of public order’, among others. Many other treaties also follow this linguistic pattern.8 Some treaties also provide exceptions to allow states to pursue other objectives, including public health, public morality, and emergency situations.9 It should be noted, however, that such exception clauses rarely refer specifically to economic crisis or economic interests as creating a basis for justifying an exception to treaty obligations.

These general exception clauses or non-precluded measures provisions have the justifiable goal of giving host countries the legislative and regulatory latitude to deal with threats to important national interests. On the other hand, their existence in treaties raises the risk that host countries will invoke them in unjustified circumstances in order to avoid their legal obligations and thwart the justified expectations of investors. This risk is particularly severe because of the vagueness and generality of key terms such as ‘protection of essential security interests’. For example, can a state facing difficult economic challenges justify the expropriation of foreign investments on the grounds that such action was necessary to protect its essential security interests?

In order to provide some safeguards against the abusive invocation of exception clauses, many investment treaties establish conditions that must be met for (p. 380) a host country legitimately to invoke the clauses and avoid treaty obligations. One example is a requirement that the invoking party notify the other party of its intention to invoke the exception clause and provide pertinent information regarding the proposed measure. The treaty may also attempt to specify the conditions that must be legitimately met to allow for the exception. For example, the Kuwait–Japan BIT states: ‘the public order exception may only be invoked where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society’.10 More generally, it would seem that the treaty provisions, discussed in Chapter 13, at section 13.5, requiring contracting states to act with transparency and to respect various principles of regulatory due process in their treatment of investors, would also apply to many situations in which a host state invokes and applies treaty exceptions.

Despite the existence of such restrictions, the interpretation and application of exceptions clauses can generate controversy because of their breadth, ambiguity, and potential for abuse. They raise at least three basic questions: (1) To what extent are such clauses self-judging so that the legality of invoking them is solely within the judgment of the host country and not effectively reviewable by an arbitral tribunal? (2) May a host government invoke the exception clause in cases of economic and financial crisis on the grounds that such crises threaten ‘essential security interests’? (3) What specifically are the elements of the threat that justify invoking the exception?

The Argentina financial and economic crisis at the beginning of the twenty-first century gave rise to claims by aggrieved investors that led arbitral tribunals to consider these questions. In order to cope with the crisis, which caused significant political turmoil in the country, Argentina took measures that included a significant devaluation and a refusal to meet certain contractual commitments to investors. American investors alleged that these actions violated the US–Argentina BIT. One of the grounds on which Argentina defended its actions was that the treaty did not preclude it from taking the steps necessary to deal with its essential security interests and to preserve public order because of the exception clause, Article XI, quoted earlier. It further argued that the exception clause was self-judging and that Argentina’s decision to invoke it was not reviewable by an arbitral tribunal. An examination of relevant Argentine cases provides some guidance in answering the questions; however, as will be seen, tribunals have not given uniform answers on all three questions.

(i)  The self-judging nature of the exception clause

As with any treaty clause, one must focus on the specific language of the exception provision being applied, since there is a wide variation among treaties. For one thing, some clauses appear to be self-judging while others do not. For example, (p. 381) the exception clause in the US–Bahrain BIT states: ‘This Treaty shall not preclude a party from applying measures which it considers necessary for the fulfillment of its obligations with respect to international peace and security, or the protection of its own essential security interests’ (emphasis added).11 The exception clause of the ECT contains similar language.12 The use of the phrase ‘which it considers’ gives rise to the inference that the exception clause is self-judging. On the other hand, the US–Argentina BIT quoted earlier does not include that phrase and therefore might be interpreted as non-self-judging.

Thus, in approaching an exception clause it is important to determine whether there is some specific language as to its self-judging character. Even if the exception contains self-judging language, however, that fact does not mean that a host state may invoke it at its unfettered discretion. By virtue of Article 23 of the Vienna Convention on the Law of Treaties (VCLT), states have a duty to carry out their treaty obligations ‘in good faith’; consequently, a tribunal or court applying an investment treaty is required to determine whether a contracting state has invoked an exception clause in good faith. As a result, even an explicitly self-judging clause is not completely beyond the jurisdiction of an investor–state tribunal.13

Tribunals in four cases involving Argentina concluded that the exception clauses invoked by Argentina (including the US–Argentina BIT quoted earlier) were not self-judging. They appear to have been motivated by different factors. In CMS v Argentina,14 the tribunal compared the language of the US BIT with treaties, such as the General Agreement on Tariffs and Trade (GATT), which were explicitly self-judging. It then found that the language in the US BIT did not contain sufficiently similar indications of a self-judging nature. In LG&E v Argentina,15 the tribunal also held the provision to be non-self-judging because it found no evidence that the contracting parties had a contrary intent.16

(ii)  Application of exception clauses to economic crises

Some general exception clauses expressly include economic crises. The Kenya–Slovakia BIT states: ‘Nothing in this Agreement shall be construed as preventing a Contracting Party from taking any action that it considers necessary for the protection of its essential security interests in time of war or armed conflict, (p. 382) financial, economic, social crisis or other emergency in international relations’.17 Japan has included in its recent agreements a ‘prudential measures’ provision, which states:

  1. 1.  Notwithstanding any other provisions of this Agreement, a Contracting Party shall not be prevented from taking measures relating to financial services for prudential reasons, including measures for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by an enterprise supplying financial services, or to ensure the integrity and stability of the financial system.

  2. 2.  Where the measures referred to in paragraph 1 do not conform with the provisions of this Agreement, they shall not be used as a means of avoiding the Contracting Party’s obligations under this agreement.18

This language is very similar to that in the General Agreement on Trade in Services (GATS) Annex on Financial Services and the 2012 US Model BIT includes a similar provision.19

Although most exception clauses do not specifically refer to economic crises or economic emergencies as reasons justifying their application, all tribunals that have considered the matter thus far have interpreted the clauses broadly enough to include such crises and emergencies within the scope of essential security and public order provisions. Tribunals have not limited the exceptions to extreme physical threats such as war and revolution. On this point the tribunal in LG&E v Argentina, interpreting the exception clause in the US–Argentina BIT, stated:

The Tribunal rejects the notion that Article XI is only applicable in circumstances amounting to military action and war. Certainly, the conditions in Argentina in December 2001 called for immediate, decisive action to restore civil order and stop the economic decline. To conclude that such a severe economic crisis could not constitute an essential security interest is to diminish the havoc that the economy can wreak on the lives of an entire population and the ability of the Government to lead. When a State’s economic foundation is under siege, the severity of the problem can equal that of any military invasion.20

(iii)  Elements justifying the exception

A basic problem in interpreting and applying an exception clause is determining what must be established and what degree of severity is necessary in order to release a host country from its obligations under an investment treaty. Thus, the CMS tribunal, while affirming that ‘economic difficulties’ were within the scope (p. 383) of the exception clause, went on to say: ‘The question is, however, how grave these economic difficulties might be.’21

The tribunals deciding the cases arising out of the Argentine crisis have not given a uniform answer to this question. Three of the tribunal decisions22 took a strict approach to interpreting exception clauses and essentially viewed them as incorporating the very limited customary international law defence of state of necessity. Thus, the tribunal in Enron v Argentina, believing that a restrictive interpretation of any ‘escape route’ from treaty obligations was required, decided that as the treaty itself provided no guidance as to the meaning of essential security interests it was ‘necessary to rely on the requirements of the state of necessity under customary law’.23

One of the most authoritative statements of the state of necessity defence is found in Article 25 of the Draft Articles on the Responsibility of States for Internationally Wrongful Acts (2001), a document that tribunals have relied upon in interpreting the exception clauses in investment treaties.24 It states:

necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act (a) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole.

It further provides that ‘necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) the international obligation in question excludes the possibility of invoking necessity; or (b) the State has contributed to the situation of necessity’. All three tribunals that equated the exception provision in the US–Argentina BIT with the state of necessity defence found that the required elements for the necessity defence did not exist. As the tribunal stated in Enron:

As the Tribunal has found above that the crisis invoked does not meet the customary law requirements of Article 25 of the Articles on State Responsibility, thus concluding that necessity or emergency are not conducive to the preclusion of wrongfulness, there is no need to undertake a further judicial review under Article XI as this Article does not set out conditions different from customary law in this respect.25

(p. 384) The tribunal’s decision, however, has been annulled for failing to interpret fully the language of Article 25. Specifically, the annulment committee found that the tribunal failed to consider whether the ‘only way’ language in Article 25 could be interpreted to mean there must be no alternative measures that the state could have taken that did not involve a similar or graver breach of international law. The committee also criticized the tribunal for failing to consider the questions of who decides whether there is a relevant alternative available and whether the state should receive some margin of appreciation.26

The tribunal in LG&E v Argentina27 arrived at a different result after interpreting the exception clause in the US–Argentina BIT. It found that a state of necessity existed in Argentina between 1 December 2001 and 26 April 2003 because conditions in the country had deteriorated to the point that ‘the essential interests of the Argentine state were threatened’.28 In reaching this conclusion, it applied the elements of the state of necessity defence as presented in Article 25 of the Draft Articles on State Responsibility and found that they were satisfied by the situation in Argentina during the crisis. The tribunal stated that Article XI of the US–Argentina BIT establishes the state of necessity as a ground for exempting Argentina from liability from what would otherwise be a wrongful act under the treaty. However, it concluded that the exemption would only be justified in emergency situations and that, once the emergency had ended, the state would no longer be exempted from liability. Thus, in the case of the Argentine crisis, Argentina would be liable for its actions after 26 April 2003, which was the date when the tribunal determined the crisis to have ended. The tribunal also determined that although Article XI of the BIT and the Draft Article on State Responsibility make no mention of whether a state has an obligation to compensate investors during a state of necessity or emergency, damages suffered during such period should be borne by the investor and not by the host country.29

Tribunals have properly recognized that a defence under Article XI is distinct from the state of necessity as determined under customary international law.30 Since it is based in customary international law, the state of necessity defence is theoretically always available to a respondent state whether or not a specific exception clause exists in the applicable treaty. To some extent, conflating the two defences negates the intention of the contracting states that specifically negotiated (p. 385) and included an exception clause in the treaty. By including such a treaty provision while making no reference to the state of necessity defence, one would normally assume that the contracting states intended their exception clause to mean something different from the state of necessity as expressed in Article 25 of the Draft Articles on State Responsibility. Moreover, normal principles of treaty interpretation require that the exception clause be read on its own terms and that the state of necessity defence not be unjustifiably incorporated into the treaty.

It should be pointed out that the difference between the two defences may be significant. Thus, the customary international law defence of state of necessity requires that a state raising such defence meet certain strict requirements. For example, the state may not have contributed to the state of emergency and the measures taken must be the only way available for the state to protect essential interests. Article XI of the US–Argentina BIT and indeed most investment treaty exception clauses do not contain such strict limitations, nor do they imply such a result. The possibility exists, therefore, that a state could meet the requirements of a treaty exception clause and therefore be exempt from liability under an investment treaty without satisfying the state of emergency requirements envisioned by Article 25.31

(c)  Exceptions for specified national legislation

Investment treaties may also contain specified exceptions that permit host country legislation in areas deemed by contracting parties to be of great national importance. Two are particularly worthy of note: environmental and tax laws.

With the rise in environmental concern throughout the globe, investment treaties have increasingly sought to give host countries wide latitude to legislate on matters relating to the natural environment. For instance, the US–Uruguay BIT provides: ‘Nothing in this Treaty shall be construed to prevent a party from adopting, maintaining, or enforcing any measure otherwise consistent with the Treaty that it considers appropriate to ensure that investment activity in its territory is conducted in a manner sensitive to environmental concerns.’32 This particular provision would appear to be self-judging, since it refers to measures that the host states ‘consider’ appropriate. The phrase ‘otherwise consistent with the Treaty’ would seem to mean that the measures in question would be consistent but for the fact that they were taken to assure that investments will be conducted in an environmentally sensitive manner.

Generally, tax matters fall outside the scope of investment treaties and instead are treated in separate bilateral tax treaties. However, in recognition of the potential overlap between tax matters and investment rights, many investment treaties allow the application of their dispute settlement procedures to specified tax-related (p. 386) disputes.33 For example, many US BITs apply their dispute settlement procedures to tax matters relating to expropriation, monetary transfers, and the observance and enforcement of the terms of investment agreements or authorizations.34 In El Paso v Argentina,35 the claimants alleged that various measures taken by Argentina during its financial crisis violated provisions of the US–Argentina BIT and specifically that the imposition of a high export duty on hydrocarbons rendered the claimant’s business unprofitable. Although Argentina argued that the part of the claim based on the export duty related to tax matters and, therefore, was exempt from dispute resolution under the BIT, the tribunal took a different view. It found that the tax aspect of the issue was ‘part and parcel’ of the expropriation dispute and concluded that it had jurisdiction over the entire matter.36 In Burlington v Ecuador,37 Ecuador objected to jurisdiction based on Article X of the US–Ecuador BIT, which excludes matters of taxation, except those relating to expropriation, transfers, or the observance and enforcement of terms of an investment agreement. The claimant challenged a law that granted the Ecuador government 50 per cent of unforeseen surpluses from oil contracts. The tribunal first found that the law was a tax because ‘(i) there is a law (ii) that imposes a liability on classes of persons (iii) to pay money to the State (iv) for public purposes’.38 The tribunal then found that some of the claimant’s claims raised matters of taxation, specifically those based on fair and equitable treatment, arbitrary impairment, and full protection and security, while others, such as the umbrella clause claims, did not.39 After determining that the parties had not entered into an investment agreement, the tribunal found that it did not have jurisdiction over the non-expropriation claims.40

The exception to the general rule that tax matters belong to tax treaties also contains an exception: BITs’ dispute settlement procedures apply to specified tax disputes ‘to the extent they are not subject to the dispute settlement provisions of a Convention for the avoidance of double taxation between the two Parties’, or if so subject, are not resolved in a reasonable period of time.41 This clause resolves the potential conflict regarding the choice of forums in favour of the tax treaty. However, bilateral tax treaties do not generally cover expropriatory taxation or tax terms included in investment agreements. Thus, although BITs claim to except these matters to the extent they are covered by the tax treaty, in practice few are actually covered.

(p. 387) A small number of US BITs also except the application of minimum standards of treatment to tax matters. For instance, both the US–Turkey and US–Morocco BITs except all tax matters from the obligations of national, MFN, non-discriminatory, and fair and equitable treatment under the BIT.42

14.3  Treaty Modifications

The experience of arbitral tribunals or other bodies applying a particular investment treaty, often in ways and in circumstances not contemplated at the time of negotiation, may cause one or more of the contracting states to view the international obligations they have assumed with dissatisfaction and as being in conflict with their national interests. One way in which parties may resolve tensions that arise after the conclusion of a treaty is by conducting negotiations to modify it. Most BITs do not make reference to amending or modifying their texts, although they do provide for consultations between the contracting states. Moreover, Article 39 of the VCLT states what is accepted as the general rule with regard to treaty modifications: ‘A treaty may be amended by agreement between the parties.’ That rule, of course, is equally applicable to modifying investment treaties.

Treaty modifications can take place through explicit renegotiations or through less formal processes. In 2006, for example, Bolivia announced that it was dissatisfied with the constraints of its investment treaties and that it planned to renegotiate all of its BITs,43 a process that clearly contemplated a formal effort to modify the treaty texts. Another approach to modification, without using that label, was taken by the Czech and Netherlands governments after a partial award was made in the case of CME v Czech Republic.44 Dissatisfied with the way the tribunal in that case had interpreted the Czech–Netherlands BIT, the Czech government, as provided for in the text of the treaty, called for consultations with the Netherlands. Delegations from the two countries met at The Hague in April 2002 to arrive at a common understanding of the three issues of treaty interpretation that arose out of the partial award. The two sides agreed on a ‘common position’ and incorporated it into Agreed Minutes that were signed on 1 July 2002. The Czech Republic then submitted the Agreed Minutes to the tribunal as a binding statement of the meaning and application of the treaty.45 The tribunal considered itself to be bound by the common position of the two contracting parties. Although the procedure engaged by the two governments did not result in a formal modification of the text of the BIT, this subsequent agreement, embodied in (p. 388) the Agreed Minutes, had the effect of modifying the treaty in that the BIT before and the agreement after The Hague meeting are not the same.

Multilateral treaties often contain express provisions on modification because the number of members involved necessitates an explicit and formal process. For example, NAFTA states that the parties may agree on any modification of, or addition to, that agreement. When so agreed and approved in accordance with the applicable legal procedures, a modification or addition constitutes an integral part of the Agreement.46 The ECT, which is a multilateral convention with over fifty members, contains elaborate provisions on treaty modification. Article 42 provides that any contracting party may propose amendments to that treaty. The text of any proposed amendment must be communicated by the Secretariat to the contracting parties at least three months before it is proposed for adoption in a Charter Conference. Amendments to the ECT must be communicated by the Secretariat to the Depository, which then submits them to the contracting parties for ratification, acceptance, or approval. If accepted by at least three-quarters of the contracting parties, the Amendments enter into force for the parties that have ratified, accepted, or approved them ninety days after the deposit of the instruments with the Depository. Thereafter, the amendments will enter into force for any other contracting party that deposits its instrument of ratification, acceptance, or approval of the amendments ninety days after their deposit occurs.47

14.4  Treaty Terminations

The termination of treaties is governed by the VCLT and customary international law. The VCLT permits the termination of a treaty or the withdrawal of a party only in conformity with the provisions of the treaty or ‘at any time by consent of all the parties after consulting with the other contracting States’.48 It further provides that if a treaty contains no provision for denunciation or withdrawal it is not subject to such denunciation or withdrawal unless: (1) it is established that the parties intended to admit the possibility of denunciation or withdrawal; or (2) such right may be implied by the treaty’s nature.49 These principles of course apply to the interpretation and application of investment treaties.

Most investment treaties contain specific provisions on treaty termination and party withdrawal. Foreign investments are often long-term transactions. To give foreign investors assurance of a predictable and stable legal framework, investment treaties: (1) establish an initial period for which the treaty will be in force without providing for a right to terminate the treaty during that period; and (2) specify (p. 389) how long and under what circumstances the treaty will continue following the expiration of its initial period or its termination.

Investment treaties generally provide that they shall be in force for ten50 or fifteen51 years. Upon the expiry of this initial period, the treaty may continue either for a fixed additional period or until it is terminated by one of the parties. For example, the Indonesia–Algeria BIT provides: ‘The present Agreement … shall remain in force for a period of ten years and shall continue in force thereafter for another period of ten years and so forth unless denounced in writing by either Contracting Party one year before its expiration’ (emphasis added).52

A party may terminate a treaty only after the end of the initial period and after submitting advance written notice.53 Investment treaties make no provision for termination or withdrawal before that time nor does the VCLT. Once a treaty is lawfully terminated, that fact does not result in the immediate denial of treaty protection for investments made while the treaty was in effect. Most treaty termination provisions contain a ‘continuing effects’ or ‘survival’ clause, which provides that for investments made, acquired, or approved prior to the date of termination the treaty will remain in force for a further period of ten, fifteen, or twenty years.54 In view of the time and expense necessary to prepare investments, the Canada–Peru BIT continuing effects clause stipulated in Article 52.3 covers not only investments but ‘commitments to invest made prior to the effective date of termination’.55 An interpretative footnote to this provision explains that for the purposes of that Article ‘commitments to invest’ means concrete steps taken by an investor to make an investment. For example, a commitment to invest would occur when an investor has applied for a permit or licence authorizing the establishment of an investment.

The termination provisions of the ECT generally follow the pattern found in BITs, although the initial period of effectiveness is much shorter. Its termination provision provides that a contracting party may give written notification to the (p. 390) depository of its withdrawal from the treaty five years after the ECT has entered into force for a contracting party. Such a withdrawal takes effect one year after the notification is received by the Depository, or as specified in the notification of withdrawal. The provisions of the ECT continue to apply to investments made in the territory of a contracting party by investors of other contracting parties or in the area of other contracting parties by investors of that contracting party for a period of twenty years after the withdrawal takes effect.56 Article 45 of the ECT provides for its provisional application to each signatory state ‘to the extent that such provisional application is not inconsistent with its constitution, laws or regulations’. That article also has a continuing effects clause which stipulates that if a member state withdraws from provisional application of the ECT, investments made during provisional application will continue to benefit from its provisions for twenty years following termination.57 In 2009, a tribunal hearing claims against Russia under the ECT in the much publicized Yukos expropriation cases held that Russia’s termination of the Treaty’s provisional application did not affect the continuing protection of investment under its provisions, including dispute settlement, of investments made before the withdrawal of provisional application for another twenty years.58 The tribunal would ultimately award the claimants over US$50 billion in damages, the highest arbitral award in history.

A number of states have recently begun to terminate treaties in accordance with treaty provisions.59 Venezuela terminated its BIT with the Netherlands in 2008.60 Ecuador terminated nine of its BITs in 2008 (with Cuba, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Romania, and Uruguay) for not bringing enough investment.61 Ecuador has since terminated BITs with (p. 391) France, Sweden, Germany, and the United Kingdom and Northern Ireland and professed its intent to end all remaining treaties.62 Bolivia terminated its BIT with the United States with effect from June 2012.63 Since 2012, South Africa has given notice of termination of BITs with the Belgo-Luxembourg Economic Union, Spain, the Netherlands, Italy, Greece, the United Kingdom, France, Germany, Denmark, Switzerland, and Austria.64 According to UNCTAD, more than 1,300 treaties will have reached the stage where they may be renegotiated or terminated by the end of 2013, and an additional 103 treaties was to have reached that stage in 2014.65 As more treaties approach the end of their initial fixed period, the world may witness additional investment treaty terminations and renegotiation.

Footnotes:

1  eg Agreement between the Government of the United Mexican States and the Government of the Republic of Korea for the Promotion and Reciprocal Protection of Investments (14 November 2000), Art 6(3). See the discussion in Ch 10, section 10.7.

2  eg Treaty between the United States of America and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment (19 May 1992), Art I(2).

3  ibid. See also the ASEAN Comprehensive Investment Agreement, Art 19 (‘Denial of Benefits’).

4  CNN, ‘Bush signs order lifting sanctions on Libya’ (21 September 2004), at <http://www.cnn.com/2004/WORLD/africa/09/20/libya.sanctions/> accessed 18 December 2013.

5  UNCTAD, Bilateral Investment Treaties 1995–2006: Trends in Investment Rulemaking (2007) 81.

6  Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment (14 November 1991). cf the UK–Argentina BIT, which does not have such a broad exceptions clause. Art 7, entitled ‘Exceptions’, applies only to exclude the BIT’s national treatment provisions to three specified situations. Agreement between the Government of the United Kingdom and Northern Ireland and the Government of the Republic of Argentina for the Promotion and Protection of Investments (11 December 1990). See also ASEAN Comprehensive Investment Agreement, Art 18 (‘Security Exception’).

7  WW Burke-White and A von Staden, ‘Investment Protection in Extra-Ordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’ (2008) 48 Va J Int’l L 307.

8  eg the Colombia–India BIT, Art 13 which states:

  1. 4.  Nothing in this Agreement precludes either Contracting Party from taking action, which it considers necessary for the protection of its essential security interests or in circumstances of extreme emergency in accordance with its laws normally, and reasonably applied on a non-discriminatory basis.

  2. 5.  Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination against the investors of the other Contracting Party or a disguised restriction on investment of investors of a Contracting Party in the territory of the other Contracting Party, nothing in this Agreement shall be construed to prevent the adoption or enforcement by a Contracting Party of measures:

    1. a.  necessary to maintain public order;

    2. b.  necessary to protect human, animal, plant life or health;

    3. c.  relating to the protection of the environment or the conservation of exhaustible natural resources, if such measures are made effective in conjunction with restrictions on domestic production or consumption;

    4. d.  in pursuance of its obligation under the United Nations Charter for the maintenance of international peace and security.

Agreement for the Promotion and Protection of Investments between the Republic of Colombia and the Republic of India (10 November 2009).

9  eg the Malaysia–Australia FTA, Art 12.18 which states:

  1. 1.  Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between Parties where like conditions prevail, or a disguised restriction on investment flows, nothing in this Chapter shall be construed to prevent the adoption or enforcement by any Party of measures:

    1. (a)  necessary to protect national security and public morals;

    2. (b)  necessary to protect human, animal or plant life or health . …

Malaysia–Australia Free Trade Agreement (22 May 2012).

10  Agreement Between Japan and the State of Kuwait for the Promotion and Protection of Investment (22 March 2012), Art 17.

11  Treaty between the Government of the United States of America and the Government of the State of Bahrain Concerning the Encouragement and Reciprocal Protection of Investment (29 September 1999), Art 14.

12  ECT, Art 24(5).

13  Burke-White and von Staden (n 7 above).

14  CMS Gas Transmission Co v The Argentine Republic, ICSID Case No ARB/01/8 (Award) (12 May 2005).

15  LG&E Energy Corp v Argentine Republic, ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006).

16  Other cases that also found that Article XI of the Argentina–US BIT was not self-judging include Continental Casualty Co v The Argentine Republic, ICSID Case No ARB/03/9 (Award) (5 September 2008) and El Paso Energy International Co v The Argentine Republic, ICSID Case No ARB/03/15 (Award) (31 October 2011).

17  Agreement between the Government of the Slovak Republic and the Government of the Republic of Kenya for the Promotion and Reciprocal Protection of Investments (14 December 2011), Art 14.

18  eg Agreement among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment (13 May 2012), Art 20.

19  2012 US Model BIT, Art 20.

20  LG&E Energy Corp v Argentine Republic, ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006) ¶ 238.

21  ibid ¶ 354.

22  CMS Gas Transmission Co v Argentine Republic, ICSID Case No ARB/01/8 (Award) (12 May 2005); Enron Corp and Ponderosa Assets LP v Argentine Republic, ICSID Case No ARB/01/3 (Award) (22 May 2007); Sempra Energy International v Argentine Republic, ICSID Case No Arb/02/16 (Award) (28 September 2007). The annulment committee in CMS heavily criticized the tribunal’s approach to Art XI as an error of law but did not annul the award, while the decisions in Enron and Sempra were both annulled. CMS (see earlier in this note) (Annulment Proceeding) (25 September 2007) ¶¶ 130–136. The Sempra decision was annulled for failing to apply Article XI of the treaty. Sempra (see earlier in this note) (Annulment Proceeding) (29 June 2010) ¶¶ 159–207.

23  Enron Corp and Ponderosa Assets LP v Argentine Republic, ICSID Case No ARB/01/3 (Award) (22 May 2007) ¶¶ 6, 333.

24  Draft Articles on the Responsibility of States for Internationally Wrongful Acts (2001), Art 25.

25  Enron Corp and Ponderosa Assets LP v Argentine Republic, ICSID Case No ARB/01/3 (Award) (22 May 2007).

26  Enron Corp and Ponderosa Assets LP v Argentine Republic, ICSID Case No ARB/01/3 (Annulment Proceeding) (30 July 2010) ¶¶ 368–406.

27  LG&E Energy Corp v Argentine Republic, ICSID Case No Arb/02/1 (Decision on Liability) (3 October 2006).

28  ibid ¶ 257.

29  ibid ¶ 264.

30  El Paso Energy International Co v The Argentine Republic, ICSID Case No ARB/03/15 (Award) (31 October 2011) ¶ 553; Continental Casualty Co v The Argentine Republic, ICSID Case No ARB/03/9 (Award) (5 September 2008) ¶ 167; LG&E Energy Corp v Argentine Republic, ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006) ¶ 245. In CMS Gas Transmission Co v The Argentine Republic, ICSID Case No ARB/01/8, the Decision of the ad hoc Committee on the Application for Annulment of 25 September 2007, the Committee stated: ‘Article XI is a threshold requirement: if it applies, the substantive obligations under the Treaty do not apply. By contrast, Article 25 is an excuse which is only relevant once it has been decided that there has otherwise been a breach of those substantive obligations.’ ibid ¶ 129.

31  Burke-White and von Staden (n 7 above).

32  Treaty between the United States of America and the Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment (November 2005), Art XII.

33  Treaty between the United States of America and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment (19 May 1992), Art XI.

34  ibid.

35  El Paso Energy International Co v Argentina, ICSID Case No ARB/03/15 (Decision on Jurisdiction) (27 April 2006).

36  ibid ¶ 115.

37  Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB/08/5 (Decision on Jurisdiction) (2 June 2010).

38  ibid ¶ 165.

39  ibid ¶¶ 181, 205–215.

40  ibid ¶¶ 248–249.

41  Treaty between the United States of America and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment (19 May 1992), Art XI.

42  Treaty between the United States of America and the Republic of Turkey Concerning the Reciprocal Encouragement and Protection of Investments (3 December 1985), Art XI.

43  US Department of State, ‘2009 Investment Climate Statement—Bolivia’, available at <http://www.state.gov/e/eb/rls/othr/ics/2009/117852.htm> accessed 17 December 2013.

44  CME Czech Republic BV v Czech Republic (Partial Award) (13 September 2001).

45  CME Czech Republic BV v Czech Republic (Final Award) (14 March 2003) ¶¶ 87–93.

46  North American Free Trade Agreement (17 December 1992) (1992) 32 ILM 612, Art 2202.

47  The Energy Charter Treaty (17 December 1994) 2080 UNTS 100. See also ASEAN Comprehensive Investment Agreement, Art 46 (‘Amendments’) which simply provides: ‘The provisions of this Agreement may be modified through amendments mutually agreed upon in writing by the Member States.’

48  VCLT, Art 54.

49  VCLT, Art 56.

50  eg Agreement between the Government of the Republic of Botswana and the Government of the People’s Republic of China on Promotion and Protection of Investments (12 June 2000), Art 14.

51  eg Agreement on Encouragement and Reciprocal Protection of Investments between the State of Eritrea and the Kingdom of the Netherlands (14 April 2004), Art 13.

52  Agreement between the Government of the Republic of Indonesia and the Government of the People’s Democratic Republic of Algeria Concerning the Promotion and Protection of Investments (21 March 2000), Art XIII.

53  eg the Jordan–Yemen BIT, Art 10 provides: ‘Each Contracting Party has the right to terminate this agreement at the end of its duration or at any time after the expiry of the initial ten years period by a written notice served to the other Contracting party one year prior to the intended termination date.’ Agreement between the Government of the Hashemite Kingdom of Jordan and the Government of the Republic of Yemen on the Mutual Promotion and Protection of Investments (8 May 1999).

54  eg the Japan–Bangladesh BIT, Art 14.3 provides: ‘In respect of investments and returns acquired prior to the date of termination of the present Agreement, the provisions of Articles 1 to 13 shall continue to be effective for a further period of fifteen years from the date of termination of the present Agreement.’ Agreement between Japan and the People’s Republic of Bangladesh Concerning the Promotion and Protection of Investment (10 November 1998).

55  Agreement between Canada and the Republic of Peru for the Promotion and Protection of Investments (14 November 2006), Art 52.3.

56  The Energy Charter Treaty (17 December 1994) 2080 UNTS 100, Art 47.

57  ECT, Art 45(3)(2).

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

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

59  In addition, Bolivia, Ecuador, and Venezuela have denounced the ICSID Convention. See footnotes to ICSID, List of Contracting States and Other Signatories of the Convention (1 November 2013), available at <http://www.academia.edu/5423492/ICSID_3_LIST_OF_CONTRACTING_STATES_AND_OTHER_SIGNATORIES_OF_THE_CONVENTION> accessed 17 January 2015.

60  UNCTAD, Issues Note, International Investment Policymaking in Transition: Challenges and Opportunities of Treaty Renewal (June 2013) 3.

61  ibid.

62  M Alvaro, ‘China Worried About Ecuador Move to End Bilateral Investment Treaties’, Wall Street Journal (16 October 2013), available at <http://adrresources.com/doc/headlines/20131016_China_Worried_About_Ecuador_Move_to_End_Bilateral_Investment_Treaties.PDF> accessed 17 December 2013.

63  United States Federal Register, Notice of Termination of United States–Bolivia Bilateral Investment Treaty (23 May 2012), available at <https://www.federalregister.gov/articles/2012/05/23/2012-12494/notice-of-termination-of-united-states-bolivia-bilateral-investment-treaty> accessed 17 December 2013.

64  Discussions by the Department of International Relations and Cooperation with European and non-European countries to terminate bilateral investment treaties without automatic renewal clauses and their terminal dates, Republic of South Africa Department of International Relations and Cooperation (25 October 2013), available at <http://www.dfa.gov.za/docs/2013pq/pq2958.html> accessed 17 December 2013.

65  UNCTAD, Issues Note, International Investment Policymaking in Transition: Challenges and Opportunities of Treaty Renewal (June 2013) 3.