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

4 A History of International Investment Treaties

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

Jeswald W. Salacuse

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved.  Subscriber: null; date: 27 May 2019

Definition of investment — Investor — BITs (Bilateral Investment Treaties) — Treaties, interpretation — World War I to World War II — Specialized treaty frameworks — Regional trade — Most-favoured-nation treatment (MFN)

(p. 87) A History of International Investment Treaties

4.1  Introduction: The Treatification of International Investment Law

As a result of the perceived deficiencies of the customary international law applicable to foreign investments discussed in the preceding chapter, international investors in the mid-twentieth century had no assurance that investment arrangements and contracts made with host country governments would not be subject to unilateral change by those governments at some later time. In fact, they did experience expropriations and forced renegotiation of contracts on many occasions. As a result, foreign investments at that time, particularly in developing countries, seemed to be, in the oft-quoted words of Professor Raymond Vernon, ‘obsolescing bargains’ between the investor and the host country.1 Years earlier, in his exploration of the role of contract in the social order, noted American legal scholar Karl Llewellyn captured more graphically this same tension between negotiated agreements and subsequent reality when he likened it to a Greek tragedy: ‘Life struggling against form . …’2 In the post-colonial era of nationalizations and contract renegotiations, the economic facts of life in host countries struggled against the form of various legal commitments made to foreign investors. In that struggle, life usually seemed to triumph over form.

To change the dynamics of this struggle so as to protect the interests of their companies and investors, capital-exporting countries began a process of negotiating international investment treaties that, to the extent possible, would be: (1) complete; (2) clear and specific; (3) uncontestable; and (4) enforceable. These treaty efforts took place at both the bilateral and multilateral levels, which, though separate, tended to inform and reinforce each other. As a result of this process, a widespread treatification3 of international investment law took (p. 88) place in a relatively short time. By the beginning of the second decade of the twenty-first century, unlike the situation in the immediate post-World War II era, foreign investors in many parts of the world were protected primarily by international treaties rather than by customary international law alone. For all practical purposes, treaties have become the fundamental source of international law in the area of foreign investment.4 This shift has been anything but theoretical. For one thing, it has imposed a discipline on host country treatment of foreign investors by obliging them to grant covered investors full protection and security, fair and equitable treatment, national treatment, most-favoured-nation treatment, full rights to make international monetary transfers, and protection against arbitrary treatment and expropriation without adequate compensation. In those cases where host governments have failed to abide by their foreign investment commitments aggrieved investors have invoked their treaty rights to sue those governments in arbitration, a phenomenon that has become increasingly common in the new century. As beneficiaries of resulting arbitral awards, many of which were substantial, investors had the power to seek enforcement in national courts throughout the world under treaties such as the ICSID Convention5 and the New York Convention.6 Today, as a result, it increasingly seems that in the international investment domain legal form is winning out in its struggle with life.

The aim of this chapter is to examine the history, purposes, and consequences of the investment treatification process. Subsequent chapters will analyse the structure and content of investment treaties and how their provisions have been applied to protect, advance, and accommodate the diverse interests of international investors, capital-exporting countries, and host states.

4.2  Historical Background of the Treatification Process

The modern investment treaty is the product of a historical process that has passed through several phases. Let us briefly examine each phase.

(a)  The early beginnings

Since the very inception of international investment, foreign investors have sought assurances from the sovereigns in whose territory they invest that their interests would be protected from negative actions by the sovereign and (p. 89) local individuals. Investors have even requested that the sovereign grant them privileges and benefits that nationals themselves did not enjoy. Often these assurances and grants of privilege would be embodied in a document that the sovereign issued or agreed to. In the era before the formation of states that conducted foreign relations, traders and investors often formed themselves into associations and negotiated directly with foreign sovereigns to obtain such assurances and grants. For example, in AD 991 the Byzantine Emperors Basil II and Constantine VIII, in a document known in Latin as a chrysobul, granted to the merchants of Venice the rights to trade in the ports and other places of the Byzantine Empire without paying customs duties, as well as the right to a quarter in Constantinople, known as an embolum, for dwelling and trading.7 Various other sovereigns also granted concessions and franchises to individuals or groups of traders and investors. Similar developments were taking place at the same time across western, northern, and eastern Europe. For example, King Henry II of England issued a grant, dated ad 1157, guaranteeing protection to German merchants from Cologne and to their establishment in London.8

Although these documents were called ‘grants’ or ‘concessions’ and not agreements and usually took the form of a unilateral act by the sovereign, they were also usually the product of some degree of negotiation between the sovereign or his representatives and the foreign traders who were their beneficiaries. Sovereigns were motivated to grant protection and privileges to foreign traders out of a desire to secure certain advantages for themselves, such as the promotion of foreign trade or the improvement of relations with groups in foreign territories. Thus, the basis of these early grants and concessions was reciprocity of benefits. This rationalization was articulated, for example, by King Erik of Norway in ad 1296 when he granted the Hamburg merchants extensive privileges for the purpose of ad meliorandum terram nostram cum mercaturis (‘for the amelioration of our territories through trade’).9

While the instruments issued by sovereigns during this period are most directly analogous to modern international concession contracts granted to foreign companies, one can also view these grants and concessions, in their enunciation of certain standards of investor treatment, as the distant ancestors of modern investment treaties.

(p. 90) (b)  The emergence of a treaty framework for investment protection in the seventeenth and eighteenth centuries

As Europe emerged from the Middle Ages and began to form nation-states, the sovereigns of those states acted in various ways to protect and advance the interests of their nationals in other countries.10 Towards this end, they would often negotiate with foreign countries to obtain commercial and trading rights for their nationals. The product of such negotiations was usually a written agreement between the two sovereigns. This historical period witnessed an increase in the reliance on treaties between two sovereigns as an important means of regulating trans-border economic activity. The result was a welter of bilateral agreements among the states and principalities of Europe, which, over time, began to demarcate principles of protection for aliens and their property that would later be echoed in modern-day investment treaties. Specifically, in varying degrees one can find the following principles of treatment in these early international agreements: (1) protection and security of aliens and their property;11 (2) special means of protection for asset recovery and monetary transfers; (3) most-favoured-nation treatment12 (which requires equality of treatment with other foreigners); (4) national treatment (which prohibits unfavourable discrimination in favour of nationals); and (5) guarantees of access to justice and safeguards against its denial.13 Thus, during this period one can say that the sovereigns of Europe laid a foundation for what would later become the framework for the international investment treaty. And, like modern investment treaties between states, the subjects of the sovereigns concerned were not themselves parties to these agreements—they were mere beneficiaries.14

During this period, treaties were not only used to establish mutual economic relationships among nations but were also employed as instruments of economic domination. One of the most important treaties in this respect was between the King of France and the Ottoman Sultan in 1536, providing for reciprocal trading and navigation rights between the two monarchs’ subjects.15 Although (p. 91) this agreement and others like it purported to be based on principles of equality and mutuality, they in fact favoured European nationals, not Ottoman subjects, because of the Europeans’ superior economic and technological power. These treaties were the basis of what became known as the capitulary system. Individual treaty chapters (capitula in Latin) granted foreign traders a variety of privileges, including exemptions from customs duties, the right to be governed by their home country law, freedom from the jurisdiction of local courts, and the right to sue and be sued exclusively in special consular courts. In many places, these treaties became the basis of a fully-fledged extraterritorial system of privilege and immunity that applied not only to all European nationals but also to a select group of Ottoman subjects.16

These capitulations were an institutionalized symbol of the inferiority and subservience of local institutions and individuals to European power, and they facilitated the domination of much of the non-western world by western states. Treaties having a similar effect were negotiated in many areas, including the Middle East and Asia.17 Thus, the international economic treaty became an important instrument for spreading European economic power and influence. For people in the non-western world, however, these treaties were an instrument of economic exploitation. In time, with the end of colonialism and the emergence of newly sovereign states in many parts of the non-western world, the capitulary system would end. However, the memory of these experiences would die much less quickly and would influence some groups in these countries to resist investment treaties in (p. 92) the modern era.18 Nonetheless, the historical foundations of the investment treaties that proliferated in the twentieth and twenty-first centuries and became an important basis for much contemporary international investment law may be traced to these early trading agreements.

(c)  Further developments in the eighteenth, nineteenth, and early twentieth centuries

Most foreign investment in the eighteenth, nineteenth, and early twentieth centuries was made in the context of colonial expansion. Because imperial powers imposed their political and military power on colonized territories and controlled the actions of colonial and protectorate governments and their legal systems, the European countries felt no need for commercial and investment treaties.19 A blend of diplomacy and force20 was relied on to prevent adverse interference with the investments and commercial activities of European nationals in their countries’ colonies and protectorates.

Beginning in the eighteenth century, western countries began to conclude commercial treaties among themselves on a basis of greater equality than those negotiated with non-western nations.21 The purpose of these agreements was to facilitate trade, rather than investment. For example, from its foundation at the end of the eighteenth century, the United States made large numbers of agreements known as treaties of friendship, commerce, and navigation (often called FCN treaties),22 and their geographical spread reflected the expansion of US foreign trade.23 Although these treaties were intended to facilitate trade and shipping, some contained provisions affecting the ability of one country’s nationals to own property or do business in the territory of the other country. European countries made similar treaties, although they did not use the same designation.24(p. 93) Many of the concepts and terms used in these agreements would find their way into the investment treaties concluded in the twentieth and twenty-first centuries.

Emerging countries at that time, such as the United States, felt the need to develop a new international legal instrument that would serve two important purposes: (1) establish a comprehensive legal framework for developing good relations with stronger powers to assure national security and further commerce; and (2) create new commercial relations with other emerging nations. The solution to this problem was to create a broad treaty covering friendly relations, establishment, commerce, and navigation. This was the origin of the ‘friendship, commerce, and navigation treaty’ of which the United States became a leading exponent.25 The FCN treaties evolved to play an important role in the articulation and implementation of US policy concerning standards of treatment and the protection of foreign investment.26 Their provisions evolved over time to respond to the needs and business practices of US commercial interests, and the political and legal environment affecting investment activities.27

The first Treaty of Amity and Commerce, concluded by the United States with France in 1778, established bilateral trade on a most-favoured-nation basis and provided for the protection of vessels, crews, passengers, and cargoes;28 however, it did not include any general property protection provisions.29 The early FCN treaties were principally trade-oriented agreements. Investment protection did not play an important role in their provisions, though the treaties did include the obligation to protect the property of nationals of the other party in its territory. The standard was an ‘absolute’ one because it did not depend upon the level of protection afforded to the property of nationals of other countries, typically guaranteeing ‘special protection’ or ‘full and perfect protection’ to the covered property.30

In addition to broad terms of property protection clauses, these early treaties developed specific provisions covering commercial property and persons engaged in commerce. For example, an 1815 treaty between the United States and Great Britain restricted protection to ‘merchants and traders’ and promised ‘the most complete protection and security for their commerce’. The 1903 US–Ethiopia FCN treaty assures ‘security of those engaged in business and of their property’ in order to facilitate bilateral commercial relations.31 Implicit in all of the provisions (p. 94) is the idea that the persons and property of foreigners are entitled to a minimum of respect and protection. Similarly, and regardless of the fact that domestic law might offer a lower level of protection, host governments might not take such property by arbitrary executive decree and were subject to FCN provisions that must be applied according to a broad rule of reason.32 Thus, a fundamental objective of the treaty-making process was to secure minimum international standards of treatment for investors and investments abroad.

The early FCN treaties also granted foreign nationals the right of equal access to domestic courts and later began to include most-favoured-nation33 and national treatment provisions covering other activities potentially related to investment. FCN treaties of this era also began to include provisions dealing explicitly with the problem of expropriation. Typical provisions prohibited the seizures of ‘vessels, cargoes, merchandise and effects’ of the other party’s nationals without payment of ‘equitable and sufficient compensation’ or ‘sufficient indemnification’. Later, this protection was extended to cover ‘property’ generally. These FCN treaties also prohibited the confiscation of debts or other property during hostilities.34 Towards the end of the nineteenth century, FCN treaties extended the scope of protection in an important new domain when they began to address restrictions on earnings repatriation. After World War I, these principles became the foundation for more explicit and effective investment provisions.

(d)  From World War I until World War II

After World War I, US FCN treaties increasingly dealt with investment abroad by focusing on the treatment of US nationals and companies regarding the establishment of businesses, the protection of American property from arbitrary and discriminatory governmental actions, expropriation, the processes for settling disputes, and the protection of intellectual property. Nonetheless, during this time US direct foreign investment was not significant and European investment, with certain exceptions, still favoured their colonial and dependent territories. In such areas, European governments judged that special agreements to protect their nationals’ investments were not needed.

Immediately after World War I, under the leadership of the Secretary of State Charles Evans Hughes, the United States broadened and revitalized its commercial treaty programme and focused particularly on the expansion of US foreign trade. One of the results of the effort was the development of a new FCN treaty model containing a uniform clause for investment protection the provisions of which, though clothed in new language, were analogous to those initiated in the (p. 95) nineteenth century. The new FCN treaties distinguished between absolute and relative standards of treatment. The absolute treatment standard required each party to provide ‘the most constant protection and security’ as well as ‘protection required by international law’. The relative standard guaranteed national and most-favoured-nation treatment with respect to the right to ‘engage in scientific, religious, philanthropic, manufacturing and commercial work’ by a national of one party in the territory of the other party, thus broadening the list of protected activities to include non-commercial enterprises. To address the problem of expropriation, the new FCN model introduced a refinement assuring that the property of the other party’s national ‘shall not be taken without due process of law and without payment of just compensation’.35 Although these inter-war FCN agreements in many respects provided for a heightened standard of protection compared to the pre-World War I treaties, they nevertheless failed to provide protection to property owned by corporations, a matter to be addressed only in the post-World War II period.

(e)  The immediate aftermath of World War II

In the immediate aftermath of World War II, the nations of the world laid the foundations for a set of new institutions that they hoped would lead to global economic expansion and prosperity. One of the envisioned goals was the facilitation of the international flow of capital and investment. The new institutions, all of which were based on international treaties, included the International Bank for Reconstruction and Development (IBRD), one of the stated purposes of which was ‘to promote private foreign investment’,36 the International Monetary Fund (IMF),37 and the General Agreement on Tariffs and Trade (GATT),38 which set the foundation for a multilateral trading system that nearly fifty years later would evolve into the World Trade Organization (WTO).39

Just as the nations of the world in the immediate post-war era attempted to create a multilateral framework for trade and currency, so too did they attempt to establish a similar framework for investment. This effort took the form of the Havana Charter of 1948,40 which would have allowed the International Trade (p. 96) Organization (ITO) to promulgate rules on international investment as well as trade.41 Notwithstanding its focus on international trade, however, an important objective of the Charter was to encourage economic development, especially in developing countries, and to foster ‘the international flow of capital for productive investment’. Consequently, the Havana Charter contained a number of provisions concerning foreign investment and the relationship between host states and foreign investors.42 For example, Article 11(2)(a) of the Charter would have authorized the ITO, inter alia, to make recommendations for and promote bilateral or multilateral agreements on measures designed to assure just and equitable treatment for the skills, capital, enterprise, arts, and technology brought from one member country to another. This was done in order to avoid international double taxation and stimulate foreign private investments. Article 11(2)(c) of the Charter also envisioned that the ITO would formulate and promote the adoption of a general agreement or statement of principles regarding the conduct, practices, and treatment of foreign investment. In Article 12(2) of the Charter, participating states were to provide reasonable opportunities for investments acceptable to them and adequate security for existing and future investments and to give due regard to the desirability of avoiding discrimination as between foreign investments.43

Capital-exporting countries and investors considered that the Havana Charter’s investment-related provisions did not create an effective investment protection regime. For instance, the reference in Article 11(2) to ‘just and equitable’ treatment did not place a legal obligation on host countries but merely authorized the ITO to recommend that this standard be included in future agreements. This provision was viewed as simply an exhortation with respect to future governmental actions.44 The vague language of Article 12(2) provided only a qualified protection against discriminatory treatment and expropriation; therefore capital-exporting states judged it insufficient to meet the challenges that began to arise during the decolonization period. Because of these concerns, coupled with other broader trade issues, the capital-exporting nations opted not to ratify the Havana Charter.45

Due partly to opposition from the western business community, the Havana Charter failed to be ratified by a sufficient number of participating states and, as a result, never became a reality.

(p. 97) Despite this early failure to create a global treaty on investment, in the following years capital-exporting nations continued to make international rules through treaties that facilitated and protected the investments of their nationals and companies abroad in other forums. These efforts took place at both the bilateral and multilateral levels, which, though separate, tended to inform and reinforce one another through the next sixty years.

(f)  The later post-World War II years

(i)  Bilateral efforts

The post-World War II years witnessed a great expansion in foreign investment, led initially by the United States, then joined by Europe, later by Japan, and still later by other parts of the world. Responding to this growth in US foreign investment after World War II, the US government undertook a programme to conclude a network of bilateral treaties of friendship, commerce, and navigation which, in addition to other commercial matters, specifically sought to facilitate and protect US direct foreign investments abroad.46 Indeed, because of the diminished importance of bilateral commercial treaties as a means to promote trade in the post-war era of multilateral trade rules, the United States increasingly viewed FCN treaties as the preferred method for investment protection.47 Starting with the existing FCN framework, the United States added various new provisions that were basically of two types: (1) those dealing with the protection of the investment property itself; and (2) those dealing with subjects other than property, but which nevertheless were vital in determining the legal and economic status of foreign-owned property. The provisions under the first category dealt with (a) taking of property; (b) protection and security of property; (c) equitable treatment; (d) unreasonable and discriminatory measures; and (e) public ownership.48 The provisions under the second category concerned most-favoured-nation and national treatment and expanded those standards to cover new investment activities and intellectual property. This second category also included dispute settlement clauses.49

The post-World War II US FCN treaties contained a number of innovations that would later shape the investment treaty practice of other nations. One important innovation of the revised FCN treaties was the application of traditional FCN treaty benefits to corporate activities, including those of local subsidiaries.50 Even more important, for the first time in US treaty practice, FCN treaties (p. 98) contained a clause providing a legal remedy for the resolution of conflicts between the contracting parties concerning the interpretation and application of treaty provisions51 by agreeing to submit to the jurisdiction of the International Court of Justice (ICJ) for the settlement of all such disputes.52 Moreover the FCN treaties also encouraged the settlement of private controversies through commercial arbitration by including a clause providing for judicial enforcement of arbitration awards.53 A dispute between the United States and Italy over Italy’s treatment of an American subsidiary in Sicily under the 1948 United States–Italy FCN Treaty would in fact result in a decision by the ICJ in 1989.54 In addition, the FCN treaties of this period specifically incorporated the ‘Hull formula’ by requiring ‘prompt, adequate, and effective compensation’ for the expropriation of the property of nationals and companies of the other party. This provision was intended to expand the previous requirement of ‘just compensation’ significantly and thereby reinforce protection guarantees.55 In an effort to protect investors from host country exchange controls, the FCN treaties also constrained the rights of state parties to impose restrictions on currency transfers.56 Another distinctive feature of the FCNs of this era was their basic purpose of establishing binding principles for the treatment of foreign nationals and their property. Unlike earlier FCN agreements, they did not contain schedules of customs duties,57 a basic feature of those early treaties the principal focus of which was international trade.

Although the United States signed approximately twenty-three such treaties between 1946 and 1966,58 the effort soon lost momentum as developing countries, increasingly sceptical of the benefits of foreign investment, demonstrated a growing reluctance to make the types of guarantees requested by the US government to protect investments abroad made by their nationals and companies.

(ii)  Multilateral efforts

At the same time, despite the defeat of the Havana Charter, official and non-governmental efforts were made to prepare multilateral conventions governing foreign investment exclusively. These endeavours included the International Chamber of Commerce’s International Code of Fair Treatment of Foreign (p. 99) Investment (1949),59 the Draft International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (1957),60 a private effort known as the Abs-Shawcross Convention, and the OECD Draft Convention on the Protection of Foreign Property (1967), among others.61 Although none of these proposals was ever adopted, they did inform and influence the development of the bilateral investment treaty movement that was to come.62

One multilateral effort in the mid-twentieth century that did have great significant, lasting impact was the creation by six European states (Belgium, France, Germany, Italy, Luxembourg, and the Netherlands) of the European Economic Community in 1957 by agreeing to the Treaty of Rome.63 Over the next half century, through a series of subsequent treaties and treaty amendments, their creation would evolve into the European Union (EU), which by 2014 consisted of twenty-eight states. As a result of the Treaty of Lisbon,64 signed in 2007 and which became effective in 2009, the European Union is founded upon two treaties, the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU),65 both of which bind all member states. This treaty structure, and in particular the TFEU, contains important provisions relating to intra-European investment and investment relations between the Union and its member states, on the one hand, and non-member states, on the other. Thus, in part, the TFEU may be seen as an investment treaty designed to promote and protect the flow of capital among EU members.

One of the basic purposes of the European Union is to create an internal market among its member states, an internal market which, according to the TFEU, ‘shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties’.66 Various specific treaty provisions seek to achieve this result with (p. 100) respect to the movement of capital. For example, Articles 49, 54, and 55 of the TFEU grant all member-state firms and nationals the right of establishment in all EU member countries and guarantee that such firms will receive national treatment. Moreover, under Articles 63 to 66 of the TFEU, investors from EU member states have the right to transfer capital and earnings freely, and are guaranteed national treatment on expropriation. Indeed, Article 63 of the EU Treaty specifically prohibits restrictions on the movement of capital and payments between member states and between member states and third countries. Any alleged violation of treaty rights can be adjudicated by the Court of Justice of the European Union (ECJ), which has jurisdiction to hear cases related to violations of treaty rights directly and to overturn national legislation, regulations, and court decisions inconsistent with EU treaties. In addition to enforcing treaty provisions within the EU, the ECJ’s jurisprudence has influenced tribunals in investor–state arbitrations in the interpretation of other investment treaties. The EU Treaties authorize the European Commission, the European Union’s executive arm, to reduce barriers to investment both among EU members and from third countries, a task that the Commission has pursued quite energetically, both through regulatory actions and the initiation of cases before the ECJ. Finally, as a result of the Treaty of Lisbon, EU institutions also gained authority over the foreign investment relations of its members with third states and to negotiate investment treaties with non-member states on behalf of the Union.67

(g)  The development of the bilateral investment treaty and the creation of the International Centre for Settlement of Investment Disputes

A new and important phase in the historical development of investment treaties began on the eve of the 1960s. At this point, individual European countries began to negotiate bilateral treaties that were unlike previous bilateral commercial agreements but that were similar in many ways to the multilateral efforts mentioned previously. These new treaties dealt exclusively with foreign investment and sought to create an international legal framework to govern investments by the nationals of one country in the territory of another. The modern bilateral investment treaty (BIT) was thus born.

Germany, which had lost all of its foreign investments as a result of its defeat in World War II, took the lead in this new phase of investment treaty-making. Beginning with the first such agreement with Pakistan in 1959, Germany proceeded to negotiate similar investment treaties with countries throughout the developing world. Eventually, Germany would become one of the nations with the greatest number of BITs, having concluded 134 such treaties, in addition to sixty-two other international investment agreements, by the end of 2013.68 At (p. 101) the same time, various European countries that were in the process of liquidating their colonial empires felt a need to safeguard the existing investments of their nationals in the newly independent territories and also to facilitate future investments. Therefore, the former colonial powers also began to develop bilateral treaty programmes,69 concluding BITs not only with their former colonies but also with other developing countries. Moreover, not only did former colonial powers like the United Kingdom, Belgium, France, and the Netherlands actively negotiate BITs, but European countries that had no colonies, such as Switzerland, Austria, and Italy, joined the BIT movement in relatively short order.70 By 1980, European countries had concluded approximately 150 BITs with a broad array of developing countries.71

As will be seen in subsequent chapters, the European BITs incorporated many of the principles that had been elaborated in earlier bilateral commercial agreements, as well as in the various unsuccessful multilateral efforts. To implement their bilateral treaty programmes, each capital-exporting state would develop a model or prototype treaty that it would use in negotiations with other countries. The models developed by the European states bore significant similarities.72 Generally, the BITs guaranteed investors of one treaty partner in the territory of another treaty partner various standards of protection, including protection from expropriation without just compensation, and the right to make monetary transfers.

One of the BIT movement’s most important innovations was the treaty provision allowing aggrieved investors to bring claims directly against host governments in international arbitration for BIT violations. This process, known as investor–state arbitration, became a powerful enforcement tool to assure host country respect for treaty standards. Prior to this time, unless an investor had concluded a separate agreement with a host government calling for arbitration, an aggrieved investor could only rely on its home country to press claims against the (p. 102) host government. As indicated in Chapter 3, a home government was not obliged to press such claims, and if it chose to do so, it became the owner of that claim. This gave the home government the full and exclusive power to decide how to press it, whether and how to settle it, and what should be done with any settlement payments.

An important institutional support for the enforcement of BIT provisions was the creation of the International Centre for Settlement of Investment Disputes (ICSID) in 1966. In the early 1960s, the World Bank directed its attention to the problem of resolving disputes between foreign investors and host governments because it believed that the lack of a fair and effective means of investment dispute settlement was impeding the flow of capital necessary for the economic development of less developed countries.73 The concern of investors that host countries would not respect their commitments was an important element of political risk and created an unfavourable investment climate. The Bank came to believe the problem of unfavourable investment climates in many poor countries might be addressed procedurally by creating international machinery that would be voluntarily available for the conciliation and arbitration of investment disputes.74 In other words, the establishment of an adequate method of investor–state dispute settlement was seen as a way to improve a country’s investment climate and thus to encourage foreign private capital flows to developing countries.

The World Bank therefore proposed the adoption of an international convention that would create a new international institution: the International Centre for Settlement of Investment Disputes. ICSID was to provide conciliation and arbitration facilities for investment disputes between foreign investors and host country governments. The Convention on the Settlement of Disputes between States and Nationals of Other States75 was concluded in 1965, initially adopted by thirty states,76 and entered into force on 14 October 1966. It sought to foster a climate of mutual confidence between capital-importing and capital-exporting states by providing basic rules to protect the legitimate interests of governments and foreign investors alike in the resolution of investor– state disputes. Both capital-exporting and capital-importing states were to be members of the Centre and participate in its governance.77 After the adoption of the Convention, countries began to consent to ICSID jurisdiction in the BITs (p. 103) they negotiated. The first BIT to include an ICSID clause was the Netherlands–Indonesia treaty signed in 1968, nearly ten years after the conclusion of the first BIT.78 Increasingly, it has become standard practice for BITs to make a reference to ICSID for the settlement of disputes arising under their provisions, as well as to other international arbitral processes. In addition, the membership of ICSID grew steadily over the years and by June 2014 included 150 states.79 Owing to the great number of BITs and the incorporated references to ICSID arbitration within them, some commentators claim ICSID is the natural forum for the resolution of investor–state disputes.80 At the same time, many, if not most BITs also offer ad hoc arbitration under United Nations Commission on International Trade Law.(UNCITRAL) Rules as an alternative method of resolving investor–state disputes.

Although ICSID was formally established in 1965,81 it did not hear its first case until 1972.82 Despite this somewhat delayed start, ICSID was destined to become an important institution for international investment dispute resolution.83 By the end of 2013, for example, it had administered more than 430 investor–state cases, out of 568 total known cases,84 involving more than ninety-five states.85 Of that number, 285 ICSID cases had resulted in final decisions.86 From the point of view of the investor, a mechanism in international law had at last been created to deal with investors’ historic inability to pursue and enforce international legal provisions against host states. While in general terms the ICSID Convention can be considered an ‘investment treaty’, it is beyond the scope of this book, since it governs the procedure for dispute settlement, rather than the substantive standards for the treatment of investment and investors.87

(p. 104) (h)  The gathering momentum of the BIT movement

The reason for the greater success of the European BIT programmes as compared with earlier US efforts is not completely clear, but the answer may lie in the fact that the European countries were less demanding with respect to guarantees on such matters as free conversion of local currency, abolition of performance requirements, and protection against expropriation. Moreover, specific foreign aid relationships between some European countries and the European Community, on the one hand, and individual developing countries, on the other, may have predisposed the developing countries to look more favourably on concluding BITs with European states.88

Nonetheless, spurred in part by the experience of the Europeans, the United States launched its own BIT programme in 1981.89 By September 2014, the United States had signed forty-six BITs with developing countries and emerging markets.90 As non-western countries began to export capital, they too negotiated BITs to create a legal framework for their nationals’ investments in specific countries. Thus, by 1997, Japan had signed four BITs, and Kuwait had signed twenty-two.91

With the end of the Communist era and the abandonment of command economies in many parts of the world, the late 1980s witnessed a new phase in the history of the BIT movement. The emerging economies of Eastern and Central Europe, as well as some Latin American, African, and Asian countries that had previously been hostile to foreign investment, now actively sought foreign capital to finance their development. This dramatic transformation entailed sweeping changes in law and policy.92 Reflecting this policy shift, countries with emerging markets entered into BITs with industrialized states in order to receive capital and technology to advance their development and did so at an accelerating pace. Whereas some 309 BITs had been concluded by the end of 1988,93 more than (p. 105) 2,608 BITs were concluded by 2008.94 This dramatic change in so short a time period represents a substantial feat of international law-making. In 2001 alone, a total of ninety-seven countries concluded some 158 BITs, a numerical record for any single year since the BIT movement began in 1959.95 The cumulative result of this effort has been the creation of an increasingly dense BIT network of 2,902 BITs, in addition to some 334 other international investment agreements with similar provisions, for a total of 3,236 treaties linking over 180 different countries by the year 2014.96

Meanwhile, the number of BITs involving two developing countries, what one may call ‘south-south’ BITs, began to increase steadily. By the end of 2005, the number of ‘south-south’ BITs had grown to 644, representing 26 per cent of BITs overall. Non-western countries with large FDI outflows, such as China, Malaysia, and the Republic of Korea, have been among those with the highest number of BITs. As of 2014, the leading developing country among BIT signatories was China, with 130 BITs, followed by Egypt, with 100, many of which were signed with other developing economies.97

While BITs are usually made between capital-exporting states and developing countries, on occasion two developing countries or two industrialized countries have formed such agreements, often referred to as ‘north-north’ treaties. Examples of the former include BITs between Thailand and China and between Egypt and Morocco.98 The most notable example of the latter is the 1988 agreement between the United States and Canada which created a free trade area.99 This agreement included a special chapter that in effect functioned as a BIT and closely paralleled BITs that the United States had negotiated with other countries.100 By 1994, the agreement evolved into the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States.101 For all intents and purposes, NAFTA’s section on investment, Chapter 11, constitutes a BIT among the three countries. BITs have become a global phenomenon, not limited to efforts by developed countries to obtain protection for their nationals in developing countries. As of 2014, UNCTAD estimated that among all BITs, 41 per cent were north-south, 27 per cent were south-south, 9 per cent were north-north, and 27 per cent were between ‘countries in transition’ (a group defined as Southeast Europe and the Commonwealth of Independent States) and other parts of the world.102

(p. 106) (i)  The development of multilateral regional and sectoral investment agreements

The 1980s and 1990s also witnessed a new phase in the evolution of investment treaties: the development of regional investment agreements the purpose of which was to promote and protect investments among countries within a geographical area. Up to that point, the most famous and most successful of such endeavours was the European Union, discussed earlier, which had been launched in the late 1950s and had become increasingly integrated and enlarged in the following years. With varying degrees of success, other regions, often under the auspices or with the support of regional international organizations such as the League of Arab States or the Association of Southeast Asian Nations, also sought to develop regional international investment treaties. The principal regional arrangements are examined briefly.

(i)  Arab States Investment Agreement

One of the earliest of such regional multilateral investment treaties was the Unified Agreement for the Investment of Arab Capital in the Arab States,103 which was signed on 26 November 1980 in Amman, Jordan, during the Eleventh Arab Summit Conference, and entered into force on 7 September 1981.104 The Middle East is characterized by countries such as Kuwait, Saudi Arabia, and the United Arab Emirates, which have accumulated significant capital reserves as a result of their oil revenues, and others, like Egypt, the Sudan, and Syria, which have a significant need for investment funds.105 One of the purposes of the Unified Agreement for the Investment of Arab Capital in the Arab States is to encourage nationals of the wealthy Arab states to invest in the region’s poorer countries. Towards this end, the Agreement seeks to protect ‘Arab investors’ from injurious actions that might be taken by the governments of foreign states that have ratified it and in which they have invested. An ‘Arab investor’ is defined by Article 1(7) as ‘an Arab citizen who owns Arab capital which he invests in the territory of a State Party of which he is not a national’. An ‘Arab citizen’ according to Article 1(4) is ‘an individual or body corporate having the nationality of a State Party, providing that no part of the capital of such body corporate belongs either directly or indirectly to non-Arab citizens’.

Like other investment treaties, the Agreement sets down various standards of treatment that a host state owes to the investments of Arab investors. Thus under Article 6, the capital of Arab investors is to be given the same treatment as capital (p. 107) owned by citizens of the host state. In addition, it allows Arab investors to transfer their capital and earnings and also protects Arab investments from expropriation and confiscation by the host country government. Expropriation for a ‘public benefit’ is permitted, ‘provided that this is done on a non-discriminatory basis in return for fair compensation and according to general legal provisions regulating the seizure of property for the purposes of the public benefit’.106 On the other hand, the Agreement does not offer protective standards as high as those usually found in BITs. For example, it contains no specific guarantees of full protection and security or of fair and equitable treatment. Nor does it provide strong enforcement by guaranteeing the right to dispute settlement under ICSID’s auspices. It does, however, provide for a rather elaborate investor–state dispute settlement. It states that until the Arab Court of Justice is established and its jurisdiction is determined, investment disputes under the Agreement will be settled by an Arab Investment Court; however, the Court’s jurisdiction is subordinate to other forms of dispute settlement, specifically conciliation and international arbitration to which the investor and the state party may have agreed. Since the adoption of the Agreement, certain investor–state disputes have been decided under its provisions,107 including one in 2013 which resulted in an arbitral award of US$935 million in favour of a Kuwaiti investor against the government of Libya, arising out of the cancellation of a hotel and resort development on the Mediterranean coast.108

(ii)  Islamic States Investment Agreement

The Organization of Islamic Cooperation (OIC) (formerly known as the Organization of the Islamic Conference) was founded in 1969 for the purpose of strengthening solidarity and cooperation among Islamic States. As of 2014, it had a membership of fifty-seven states spread over four continents, making it the second largest intergovernmental organization after the United Nations. The present charter109 of the OIC was adopted in 2008 and requires that a state have a Muslim majority to be eligible for membership.110

Article 1(9) of the Charter provides that one of the Organization’s purposes is to ‘strengthen intra-Islamic economic and trade cooperation; in order achieve economic integration leading to the establishment of an Islamic Common Market’. In pursuit of that goal, in 1981, a year after its Arab members had approved the Unified Investment Agreement of the Arab States, the OIC adopted the Agreement for the Promotion, Protection, and Guarantee of Investments Among (p. 108) Member States of the Organization of the Islamic Conference.111 The Agreement became effective in 1988 when it secured ratification by ten states. As of 2014, thirty-three states had signed the Agreement and twenty-five had ratified it.

In comparison to most BITs and multilateral investment treaties, the OIC’s Agreement provides rather weak investment protection. Although the Agreement protects covered investment from expropriation and affords them most-favoured-nation treatment, it does not guarantee them fair and equitable treatment, full protection and security, or national treatment, provisions that are commonly found in most BITs. Moreover, its provisions on dispute settlement are vague and seem to leave open the question of whether injured investors have any right at all to invoke investor–state arbitration against an offending state. It was perhaps for these reasons that arbitration under its provisions did not arise until 2012, nearly a quarter of a century after the Agreement came into effect. In that year, an arbitral tribunal functioning under UNCITRAL Rules determined, in a case brought by a Saudi national against Indonesia relating to the governmental seizure of a bank in which the Saudi held shares, that states bound by the Agreement had made a standing offer to protected investors to arbitrate claims arising under the Agreement and that investor–state arbitration was therefore authorized.112

(iii)  ASEAN Comprehensive Investment Agreement

The Association of Southeast Asian Nations (ASEAN) was established in 1967 by five Asian states—Indonesia, Malaysia, the Philippines, Singapore, and Thailand.113 One of its basic purposes, according to its founding Declaration, was to ‘accelerate the economic growth, social progress and cultural development in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of South-East Asian Nations …’. In subsequent years, ASEAN would become increasingly institutionalized and its membership would expand to include Brunei Darussalam (1984), Viet Nam (1995), Lao PDR (1997), Myanmar (1997), and Cambodia (1999). In order to give the organization greater institutional and legal form and to advance regional integration, the ten nations of ASEAN adopted a formal constitution, the Charter of the Association of Southeast Asian Nations, which entered into effect in December 2008.114 Among other things, (p. 109) the Charter formally recognized ASEAN as an intergovernmental organization with legal personality.115

From its foundation, ASEAN has sought to advance regional economic development and integration. Towards this end, it has endeavoured to facilitate the flow of capital and investment among its members. Its Charter makes this clear by stating that one of ASEAN’s fundamental purposes is ‘to create a single market and production base which is stable, prosperous, highly competitive and economically integrated with effective facilitation for trade and investment in which there is free flow of goods, services and investment’.116 One of the mechanisms it has employed to achieve this goal is the investment treaty.

The creation of a strong regional investment treaty among the ASEAN states has been a progressive step-by-step process. The first step took place in 1987 when the governments of Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand concluded the ASEAN Agreement for the Promotion and Protection of Investments (15 December 1987).117 Similar to many BITs, this treaty provided a higher level of protection for other ASEAN investors than that found in either the Arab or Islamic states investment agreements mentioned earlier. For example, each country undertook an obligation to ensure full protection to investments made by investors of other member nations and not to impair by unjustified or discriminatory measures the management, maintenance, use, enjoyment, extension, disposition, or liquidation of such investments. All investments made by investors of a member were to be accorded fair and equitable treatment in the territory of other treaty members. The investor’s treatment can be no less favourable than that granted to an investor from a most favoured nation.

Investments made by nationals or companies of a member country were not to be subject to expropriation or nationalization or any equivalent measure, except for public use or in the public interest, under due process of law, on a non-discriminatory basis and upon payment of adequate compensation. The compensation should amount to the market value of the investment that prevailed immediately before the measure of dispossession became public knowledge, and it should be freely transferable in usable currencies from the host country. The compensation is to be determined and paid without undue delay. The national or company affected has the right to a prompt review of the amount by a judicial body or some other independent authority.

The treaty provided for various dispute settlement options to be decided upon by mutual agreement of the parties, including: (a) (ICSID); (b) arbitration under UNCITRAL rules; (c) the Regional Arbitration Centre at Kuala Lumpur; or (d) any other regional centre for arbitration in ASEAN. The first arbitral decision under the treaty was rendered in 2003.118

(p. 110) ASEAN took a second major step when, in 1998, the ASEAN members adopted the Framework Agreement on the ASEAN Investment Area119 to reduce barriers to investment within the entire ASEAN region, while specifically affirming their 1987 Investment Agreement. The Framework Agreement appears to have had limited success in that regard.120 Finally, in order to lay the legal foundation for the ASEAN Economic Community envisioned by the ASEAN Charter, and in particular to facilitate the free flow of capital required by such an Economic Community, in 2010 the ten ASEAN states signed the Comprehensive Investment Agreement (ACIA),121 which after ratification by all ten states came into effect on 1 March 2012. The basic purpose of the ACIA is to replace the 1987 Investment Agreement and the 1998 Framework Agreement, mentioned previously, and consolidate them ‘into a comprehensive investment agreement which is forward-looking, with improved features and provisions, comparable to international best practices in order to increase intra-ASEAN investments and to enhance ASEAN’s competitiveness in attracting inward investments into ASEAN’.122 The ‘international best practices’ which were taken into account in drafting the ACIA are those found in the 2004 Model US BIT, NAFTA, the OECD Guidelines for Multinational Corporations, and the then Draft Free Trade Agreements between ASEAN and China, Korea, and Australia/New Zealand.123 The ACIA is thus not only a consolidation of its two predecessor treaties but also provides more comprehensive investor protection and lays the foundation for increased liberalization of investments within the ASEAN region. Indeed the stated objectives of the ACIA, according to Article 1, are: (a) the progressive liberalization of investment regimes of Member States; (b) the provision of enhanced protection to investors of all Member States and to their investments; (c) improvement of transparency and predictability of rules, regulations, and procedures conducive to increased investment among Member States; (d) the promotion of the region as an integrated investment area; and (e) cooperation to create favourable conditions for investment by investors of a Member State in the territory of the other Member States. The ACIA also authorizes the ASEAN Investment Area Council, a ministerial body with representation from all ten ASEAN states, to oversee the implementation of the Agreement.124

(p. 111) ASEAN has not only sought actively to advance the economic integration of the ASEAN region through the progressive negotiation of investment treaties among its members, but in the first decade of the twenty-first century in its strengthened institutional form as an intergovernmental organization has also undertaken to negotiate trade and investment agreements on behalf of its membership with other countries. Thus, it has concluded the ASEAN–Australia–New Zealand Agreement (AANZFTA)125 and the ASEAN-China Economic Cooperation Agreement,126 both of which contain investment provisions. In addition, as of 2014 it was engaged in negotiating similar agreements with Japan and Korea.127

(iv)  Mercosur investment treaties

Yet another regional treaty effort took place within Latin America among the countries of the Common Market of the Southern Cone (‘Mercosur’), a customs union and trade bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela, established in 1991 by the Treaty of Asunción.128 The Mercosur members concluded two regional investment treaties in 1994 as protocols to the Treaty of Asunción. The first, the Protocol of Colonia for the Promotion and Reciprocal Protection of Investments in Mercosur, is intended to serve as the region’s main investment legal regime.129 As such, it defines the rights enjoyed by persons from a member state who make investments in other member states.

Mercosur’s second regional investment treaty—the Protocol of Buenos Aires for the Promotion and Reciprocal Protection of Investments Coming from Non-Mercosur State Parties—serves as a baseline agreement, outlining the ‘general legal principles to be applied by each of the State Parties to investments coming from non-Mercosur states … so as not to create differentiated conditions that would distort the flow of investments’.130 Despite their relatively broad investor protection provisions, the Colonia and Buenos Aires Protocols were not in force (p. 112) as of 2014. Both treaties require ratification by the four Mercosur member countries.131 However, the first had been ratified only by Argentina and Uruguay and the second only by Argentina, Paraguay, and Uruguay.

(v)  COMESA Treaty

A fifth regional treaty was concluded within Africa: The Common Market for Eastern and Southern Africa (COMESA).132 COMESA is one of the largest trading blocs in Africa. Encompassing 374 million people,133 it is a preferential trading area with nineteen members that stretches from Libya to Zimbabwe.134 COMESA replaced a preferential trade area that had existed since 1981.135 By 2000, COMESA aimed for the removal of all internal tariffs through a free trade area, and by 2004, a common external tariff was meant to be created. By 2005, the goals set for the year 2000 had only been partially achieved.136

In 2007, member states agreed to impose a common external tariff, which is a vital step to creating a customs union. Having reservations about liberalized trade, Angola, Ethiopia, and Uganda declined to adopt the measure.137 COMESA representatives have met with their European counterparts to discuss a new economic partnership agreement.138 In 2008, COMESA agreed to expand the free trade zone to include the East African Community and the Southern Africa Development Community.

While COMESA’s primary focus is the development of intra-regional trade, the COMESA Treaty also contains provisions on investment that may have significance for foreign investment in the future. One of the Treaty’s declared aims is ‘to create an enabling environment for foreign, cross border, and domestic investment’,139 and it also states: ‘[t]‌he member states shall permit the free flow of capital within the Common Market’.140 Moreover, it calls for member states to adopt various standards, including fair and equitable treatment, refraining from expropriating investment, and guaranteeing monetary transfers by investors, the purpose of which is the protection and promotion of investment.141 These projected (p. 113) standards have, however, yet to become a legal reality throughout the COMESA region.

(vi)  North American Free Trade Agreement

Certainly the most famous and successful of the regional arrangements concluded at the end of the twentieth century was the North American Free Trade Agreement (NAFTA), signed by the United States, Canada, and Mexico on 17 December 1992.142 NAFTA put in place the legal structure for one of the largest free trade areas in the world, with over 360 million consumers and $6 trillion in annual output. Despite the omission of the word ‘investment’ from its title, NAFTA governs both trade and investment among its three member states. In effect, Chapter 11 of NAFTA, entitled ‘Investment’, constitutes an investment treaty among the three countries and its text has clearly been influenced by the provisions of earlier BITs.

In order to facilitate the flow of capital within the NAFTA area, Chapter 11 seeks: (1) to reduce or remove barriers to investment in one country by investors of another member country; (2) to create a secure investment climate by specifying clear rules concerning the treatment to which NAFTA investors and their investments are entitled; and (3) to provide a fair means for the settlement of disputes between a NAFTA investor and the host country. Section A of the chapter contains provisions on the establishment and treatment of investment, and section B governs investor–state dispute settlement.

Key NAFTA investment provisions in facilitating the flow of capital and the making of investments are found in Articles 1102, 1103, and 1104 which guarantee that investors and investments will receive national treatment or most-favoured-nation treatment, whichever is the more favourable, with respect to the ‘establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments’. Article 1106 of NAFTA prohibits a host country from imposing any specified performance requirements on an investment undertaken not only by an investor of a NAFTA country (including investors of the host country) but of other foreign investors in connection with the establishment, acquisition, expansion, management, conduct, or operation of any investment.

Other important provisions in NAFTA require each member country to permit all monetary transfers by an investor relating to an investment of another NAFTA country to be made freely, without delay, and in freely usable currency at the market exchange rate prevailing on the date of transfer. NAFTA also prohibits member states from directly or indirectly nationalizing or expropriating an investment of an investor from another NAFTA party or taking a measure tantamount to nationalization or expropriation except for a public purpose, (p. 114) on a non-discriminatory basis, and upon payment of just compensation.143 In addition, the NAFTA chapter on investment requires each country to accord investments from other member countries the minimum treatment required by international law, including fair and equitable treatment and full protection and security. NAFTA also gives an aggrieved individual the right to bring a claim in arbitration against a state that has violated NAFTA treatment standards. In the years since NAFTA was launched, it has been the subject of a significant number of investor–state arbitrations in which investors have brought claims against each of the three member states.

(vii)  The Energy Charter Treaty

Another important multilateral treaty affecting international investment is the Energy Charter Treaty (ECT),144 which was opened for signature in Lisbon on 17 December 1994 and had gained fifty-four members by 2014, including the European Union and Euratom. The ECT has a sector, rather than a regional, focus. It aims to create a legal framework that will encourage the development of a secure international energy supply through liberalized trade and investment among member states. The treaty arose out of the idea, emerging with the end of Communism, that western countries were in need of stable, efficient sources of energy while the states of the former Soviet Union, because of their natural resource endowment, had great energy potential whose development required the capital and technology held by the west; consequently, cooperation in the international energy sector could bring benefits to all sides. The ECT became effective in 1998.

Part III of the ECT, entitled ‘Investment Promotion and Protection’, is in effect an investment treaty, and it clearly has been profoundly influenced by the language of the various European and American BITs in its structure, content, and drafting.145 One of the unique features of the treaty, which distinguishes it from other international investment agreements, is that it is a sector agreement, meaning that it only applies to investments in a particular economic sector. According to Article 1, the ECT’s scope is limited to investments associated with economic activities concerning the exploration, extraction, refining, production, (p. 115) storage, land transport, transmission, distribution, trade, marketing, or sale of energy materials and products. On the other hand, its substantive provisions on the protection and treatment of investments and investors, as well as their enforcement through investor–state arbitration, are very similar to what one might find in a western BIT with a developing country. The resemblance is not accidental. Virtually all of the states participating in the Conference that wrote the treaty had previously signed at least one BIT, and many had concluded several.

Like most BITs and regional investment agreements, the ECT provides for two basic forms of dispute settlement: (1) Article 26 provides for investor–state arbitration in disputes between investors and host states for alleged injuries to investment due to breaches of the treaty; and (2) Article 27 sets down procedures for the settlement of disputes between member states over the interpretation or application of treaty provisions. Investors have invoked the investor–state dispute provisions on numerous occasions since the treaty’s inception. The Energy Charter Secretariat estimates that aggrieved investors had lodged fifty-eight international arbitration cases by mid-2014, many of which have resulted in awards against member states.146

(viii)  Dominican Republic–Central America–United States Free Trade Agreement

In an effort to build an eventual free trade area for North and South America and the Caribbean and thereby expand on the work of NAFTA, the United States concluded an agreement with the Dominican Republic and five Central American states, Costa Rica, El Salvador, Honduras, Nicaragua, and Guatemala, in 2004. Signed on 5 August 2004, it is known as the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA-DR), sometimes simply referred to as ‘CAFTA’. After contentious debate, the US Congress approved the CAFTA-DR Agreement in July 2005, and the President signed the implementing legislation on 2 August 2005.147 The agreement was implemented on a rolling basis: El Salvador was the first to ratify on 1 March 2006, and Costa Rica the last, on 1 January 2009. The Agreement went into effect fully among all seven signatories on 1 January 2009. According to its preamble, one of the objectives of CAFTA-DR is ‘… to contribute to hemispheric integration and to provide impetus toward establishing the Free Trade Area of the Americas’.148 Although (p. 116) CAFTA-DR, like the North American Free Trade Agreement (NAFTA), does not refer to investment in its title, it is similar to NAFTA in that it covers both trade and investment. Indeed, CAFTA-DR’s investment chapter borrows heavily from Chapter 11 of NAFTA, as well as from the US Model BIT. CAFTA contains twenty-two chapters and annexes detailing, inter alia, country-specific tariff schedules and rules of origin.

Chapter 10 of CAFTA-DR, which contains the investment provisions, is highly similar to the investment provisions in prior US agreements, particularly NAFTA. As such, it safe to assume that US views and interests were critical in shaping Chapter 10 and that the influence of the other six parties seems limited primarily to the reservations and certain limitations in the party-specific annexes, particularly those with respect to sectors in which national treatment is not required for foreign investors. Like Chapter 11 of NAFTA, Chapter 10 of CAFTA-DR on investment is divided into three sections. Section A contains the substantive investment protections. Section B sets down the rules for investor–state dispute settlement. Section C contains definitions of key terms employed in Chapter 10. The provisions on investment largely follow the structure and content of NAFTA. As in most other investment treaties, CAFTA’s main protections are national treatment (Article 10.3), Most-Favored Nation Treatment (Article 10.4), minimum standard of treatment (Article 10.5, encompassing ‘fair and equitable treatment’149 and ‘full protection and security’),150 and protection against expropriation (Article 10.7). The treaty prohibits certain performance requirements (Article 10.9), and allows states to maintain non-conforming measures that pre-date CAFTA (Article 10.13). It also allows member states to deny the benefits of the treaty to investors of non-parties with which those CAFTA states do not have diplomatic relations. CAFTA, like other modern investment treaties, also provides for investor–state arbitration for the settlement of disputes arising under its provisions.151

(j)  The evolution of BIT provisions into free trade agreements

NAFTA and the ECT also signalled the development of another trend in investment treaty-making: the incorporation of investment treaty provisions into free trade agreements (FTAs). Following NAFTA, the United States proceeded to make a number of FTAs, all of which included a separate chapter that was virtually indistinguishable from a BIT.152 Such agreements were concluded, for (p. 117) example, with Israel,153 Jordan,154 Bahrain,155 Chile,156 and Singapore.157 Japan would adopt a similar approach in the promotion of its economic partnership agreements (EPAs),158 which also contain chapters on investment and provide for investor–state arbitration as a means of enforcement. Other Asian countries have followed suit, so that by the year 2014 there were 324 such combined trade and investment agreements and many others were in the process of negotiation.159 Thus, it appears that the investment treaty, which arose out of trade agreements, is returning to its origins.

Although conceptually distinct, international investment and international trade are functionally connected in that most enterprises invest in order to trade. It is through trade in the products and services they produce that most direct foreign investments ultimately secure profits for their investors. Thus, oil companies invest in petroleum exploration in order to find oil that they may sell to the international market. Agro-industrial firms invest abroad in large-scale land developments in order to sell the products they grow. Tourism companies invest in hotels in tropical countries in order to sell their services to tourists from countries in colder climes. Multinational firms engage in vast amounts of intra-firm trade as they invest abroad to create global supply chains that maximize manufacturing efficiencies by locating production facilities among different countries depending on the advantages they offer and then exporting the components thus produced back to the investor’s home country for final assembly. Such multinational investors are not only concerned to protect their investments in those countries but they also want to be certain that they will be able to export goods and services back to their home country with minimum cost. Modern FTAs with investment chapters provide both of these valuable functions. From the point of view of host countries, the prospect of the economic benefits of increased international exports of goods and services produced in their territories has been a powerful incentive to agree to high standards of foreign investor protection that they might otherwise have been hesitant to accept. Whereas traditional investment treaties had imposed legal obligations only on host countries to protect covered foreign investments, FTAs impose obligations on both host and home countries. They oblige (p. 118) host countries to protect covered investments and they require home countries to accept the importation of goods produced in their treaty partner’s territory.

The connection between trade and investment was also formally recognized by GATT, which would later become the WTO, during its Uruguay Round of negotiations between 1986 and 1994.160 One of the products of that negotiation, to which all WTO members must now adhere, is the Agreement on Trade-Related Investment Measures (TRIMs).161 This Agreement forbids the imposition of measures that are inconsistent with Article III of GATT on national treatment162 and its Article XI on the elimination of quantitative restrictions.163 Its purpose is to prevent WTO members from imposing local content and trade balancing requirements as a condition for the creation or operation of foreign investment projects. One WTO dispute settlement case has applied the Agreement to invalidate Indonesian measures used to favour the development of a ‘national car’ enterprise.164 In addition, the WTO’s General Agreement on Trade in Services165 also includes provisions affecting investment related to services.

(k)  Efforts at a global treaty on investment

While negotiations over the years have led to a substantial number of investment treaties, the results of these efforts have been limited in geographical scope, being either bilateral or regional, or in the case of the ECT, restricted to a particular sector. Given the success of their efforts at international rule-making, it was natural for capital-exporting countries to contemplate the negotiation of a global treaty on investment;166 however, thus far, concrete results in this domain have been virtually non-existent. Two initiatives at the end of the twentieth century are worthy of note, in addition to those that took place immediately after World War II.

The first of these began in April 1991 when the Development Committee, which is a Joint Ministerial Committee of the Boards of Governors of the IMF and the World Bank, requested that the Multilateral Investment Guarantee Agency (MIGA) prepare a ‘legal framework’ to promote foreign direct investment. The resulting Guidelines on the Treatment of Foreign Investment,167 which had a long (p. 119) gestation period in the World Bank Group (mainly at the IBRD, MIGA, and IFC) and was based upon extensive consideration of important legal instruments in the field, such as BITs, was then considered at an international conference held under the auspices of the Bank Group and the French Ministry of Finance in July 1992. It was later resubmitted to the Development Committee, which gave its approval in September 1992. Because of their source and the careful process by which they were developed, the Guidelines, although not law, have enjoyed considerable influence and credibility.168 The Guidelines set out a general framework for the treatment of foreign investors by host states and cover areas of concern to investors, such as the admission of foreign investment, standards of treatment and transfer of capital and net revenues, expropriation and its compensation, and the settlement of disputes.169 The basic goal of the Guidelines is to set down a global framework.

The second notable initiative to establish global rules on investment took place within the Organization for Economic Cooperation and Development (OECD). In September 1995, negotiations to establish a Multilateral Agreement on Investment (MAI) began at the OECD with the goal of completing a draft treaty in time for the 1997 ministerial meeting. The OECD mandate called for ‘a broad multilateral framework for international investment with high standards of liberalization of investment and investment protection and with effective dispute settlement procedures’.170 Thus, the dual objectives of investment liberalization and investment protection, which had directed developed countries’ BIT efforts, also appeared in the search for a workable Multilateral Agreement on Investment.

In developing a treaty framework, the MAI negotiators drew heavily on NAFTA and the BITs. For example, the draft MAI structure addressed the same issues as those earlier treaties. While a structure for the MAI was agreed upon relatively quickly, the precise content of the rules to govern that structure were not. The negotiating states achieved consensus fairly quickly on the issues of investment protection and dispute resolution. Following the BITS, the states seem to have agreed on strong dispute settlement procedures and on post-investment national or most-favoured-nation treatment, whichever was the most favourable. They also agreed on extensive rights to monetary transfers and to require prompt, adequate, and effective compensation in cases of expropriation.

It was on the question of investment liberalization that significant disagreements surfaced—disagreements that often brought the United States into conflict with European countries. All the principal negotiating states had substantial investments abroad and so had a common interest in seeing that those investments received maximum protection. Moreover, the developed OECD members (p. 120) had already established strong systems of investment protection within their own borders. On the other hand, the OECD states each had different economic interests with respect to investment liberalization, particularly with regard to foreign investments that might be undertaken in their territories. Each had different procedures governing investments and different local industries that they wished to protect from competition by foreign investors. The negotiators were unable to find common ground with respect to investment liberalization.

Beyond disagreement among OECD members, other parties raised their voices to contest the MAI negotiations. First, developing countries, led by India, opposed the MAI and any attempt to create new rules of international law to protect and liberalize foreign investment. They saw the prospect of a global treaty on investment as a threat to their national sovereignty and economic independence. They therefore challenged the legitimacy of a forum that did not allow developing countries to participate fully in the negotiating process. Second, a broad coalition of non-governmental organizations (NGOs), based largely in developed countries, arose to challenge both the process and content of the MAI negotiations. In 1997, the NGOs obtained a draft of the MAI. Discovering that negotiators had consulted business interests but not other elements of civil society, the NGOs mounted an effective worldwide protest through the internet. The NGOs argued that the drafting process was flawed because the OECD chose to conduct secret negotiations with business interests at the expense of labour unions, environmentalists, human rights organizations, and others. Seeing the MAI as yet another instrument that would advance globalization at the expense of local groups and interests, anti-globalization forces soon joined the protest.

As the public within OECD countries became aware of the contested MAI negotiations, various American and European politicians and groups took opposing stands on the issue and their governments became more cautious in pressing for conclusion of the treaty. In early 1998, as the talks seemed to slow down, the negotiators decided to take a six-month hiatus and reconvene in October. In the meantime, the French government commissioned a study, to be known as the Lalumière report, on the MAI negotiations. The report supported the need to protect foreign investment and to liberalize investment rules, but it criticized the structure and content of the MAI draft and argued that the OECD was not the right forum for negotiating a major international agreement of the scope and impact of the proposed MAI. It concluded that negotiations should not continue on the existing basis. Less than a week before the MAI negotiations were to resume, French Prime Minister Lionel Jospin announced that France would no longer participate in the MAI talks. Citing the Lalumière report, Jospin argued that the MAI would allow private interests to erode state sovereignty and that the effort needed a new framework encompassing all countries, including the developing nations. The right forum, Jospin argued, was not the OECD but ‘quite naturally that of the WTO’.171 On 3 December 1998, after unsuccessfully trying (p. 121) to restart negotiations without France, the OECD announced officially that the MAI negotiations were closed.

Looking back at the effort to negotiate the MAI, one may say that it failed for several reasons. First, the OECD was the wrong forum in which to negotiate a treaty meant to have a global scope and which would potentially impact so many non-OECD countries. Second, the process that the OECD constructed was flawed. Secrecy is important in many negotiations; transparency is important in others. In the MAI negotiation, the OECD achieved the worst of both worlds: secrecy with leaks. It gave the public the impression that the OECD was actually a cabal bent on foisting corporate interests on the world. NGOs, in particular, skillfully exploited the failings of the negotiating process. Third, the timing was wrong. Many countries at the time were suffering from ‘economic treaty fatigue’. They had recently negotiated far-reaching economic treaties, including the WTO, NAFTA, and the European single market, and were still experiencing a painful adjustment. Countries needed time to implement these existing rules before taking on yet another set of new economic rules. Recognizing this fact, the US government, for example, did not attach great importance to the negotiations and did not make a major effort on their behalf. It assigned lower level officials to the negotiations, and President Clinton never put his own personal political prestige and effort behind the MAI, as he had done to secure the ratification of NAFTA and the Uruguay Round agreements. Fourth, the negotiators were unable to find a grand bargain that would sustain the MAI treaty structure. The old BIT bargain of ‘investment protection for investment promotion’ was not a sound basis for the MAI. Most OECD countries already had strong protective investment regimes and were therefore unwilling to grant investment liberalization for something they already had. They judged that the MAI’s cost to their domestic industries was too high a price to pay. Fifth, NGOs, while technically not part of negotiations, had recently become an important factor in many multilateral negotiations. The NGOs had skillfully developed new techniques to influence negotiations, but the OECD had no experience in dealing with them and, as a result, was out-manoeuvred.

Although the OECD effort failed and a global treaty on investment does not yet exist, efforts towards that goal may yet be rekindled in the future, possibly through the WTO.172 In any event, the lessons learned in the MAI experiment (p. 122) may ultimately prove instructive in formulating a process that will result in a similar global agreement. It may also be necessary to broaden the scope of such global investment treaty to include provisions that will impose obligations on investor behaviour while carrying out activities in a host country.173

(l)  The trend towards regional and inter-regional trade and investment treaties

Perhaps in part because of the failure to achieve a global treaty on investment and the inability of the WTO’s Doha Round of international trade negotiations, begun in 2001, to produce concrete results, the second decade of the twenty-first century has witnessed the growth in regional investment agreements, plus a new development in the evolution of investment treaties: the negotiation of inter-regional trade and investment treaties. The new regional investment treaties include the China–Japan–Republic of Korea Investment Agreement,174 the Central America–Mexico Free Trade Agreement,175 and the various investment treaties, mentioned previously, negotiated by ASEAN on behalf of its members with other countries in the Pacific. One question raised by the new regional treaties is their effect on existing BITs between countries signing the regional agreements. Generally, most regional agreements allow the continuation of relevant BITs, thus creating parallel systems of investment protection.176

A potentially far-reaching development is the negotiation of investment agreement among countries in different regions that together have a significant economic importance. UNCTAD has called these proposed agreements ‘mega-regional agreements’177 but some might also be called ‘mega-interregional treaties’ because they involve countries from more than one region. One may identify seven separate negotiations which together involve eighty-eight countries, accounting for a substantial portion of the world’s population and GDP. As of 2014, the seven negotiations are: (1) the Canada–EU Comprehensive Economic and Trade Agreement (CETA); (2) the Tripartite Agreement among the Common Market for Eastern and Central Africa (COMESA), the East African Community (EAC), and the Southern African Development Community (SADC); (3) the EU–Japan Free Trade Agreement; (4) the ‘Pacer (p. 123) Plus’ negotiations among Australia, New Zealand, and the Pacific Islands Forum developing countries; (5) the Regional Comprehensive Economic Partnership (RCEP) involving the ASEAN countries, Australia, Japan, China, India, Korea, and New Zealand; (6) the Trans-Pacific Partnership (TPP) involving Australia, Brunai Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam; and (7) the EU–United States Transatlantic Trade and Investment Partnership (TTIP).178 These negotiations have the potential to affect international economic activity on a global scale. For example, if successful, it is estimated that the EU–United States negotiations alone would have an impact on 45 per cent of global GDP.179 As of the middle of 2014, none of these negotiations had resulted in final treaty texts, let alone ratified binding international agreements. All, however, are virtually certain to include investment chapters, and those chapters will in all likelihood incorporate and build upon the concepts, rules, processes, and terminology developed by the treatification process launched in the years following World War II. On the other hand, a significant new development is the important role played by regional organizations in investment treaty negotiations, a role that had previously been played by states alone. Thus, for example, in the European Union, as a result of the Treaty of Lisbon, foreign investment is now constitutionally a union, rather than a member state function.180 EU institutions, not the governments of individual states, are responsible for conducting and approving investment treaty negotiations and they are leading the negotiations for the mega-regional organizations mentioned previously. However, pursuant to an EU Regulation adopted in December 2012, existing BITs between an EU member state and a non-member state are to remain in force until a treaty between the European Union and such other state enters into force.181

(m)  Conclusion

Since World War II, the nations of the world have been actively engaged in creating an international law based on treaties, both bilateral and multilateral, in order to remedy the defects perceived by capital-exporting states and their investors in customary international investment law. The process of treatification has proceeded rapidly and will almost certainly continue as countries create an increasingly dense treaty network, despite certain stresses and strains that it has experienced as a few countries have sought to disengage from the regime by denouncing some investment treaties and other countries have sought to renegotiate certain treaty (p. 124) provisions.182 That network has had a growing impact on international investments and on the behaviour of host states towards investments and investors. Its impact seems bound to increase in the future.

4.3  The Objectives of the Movement to Negotiate Investment Treaties

Having reviewed the history of the development of investment treaties, a history that has largely been driven by capital-exporting countries and their nationals and companies, one may well ask: What was the objective of this international law-making during the last half of the twentieth century and the beginning of the twenty-first? An understanding of these objectives is an important element in interpreting the treaty texts and successfully applying them to specific situations. It is to be recalled that Article 31(1) of the Vienna Convention on the Law of Treaties (VCLT)183 provides: ‘A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose’ (emphasis added).

The objects and purposes of investment treaties are often specifically stated in the body of the treaty, its preamble, or related documents. Although specific objectives may vary from treaty to treaty, as a group, contemporary investment treaties appear to share remarkably similar goals. In reviewing investment treaties and their surrounding circumstances, one can identify three orders of objectives: (1) primary objectives; (2) subsidiary objectives; and (3) long-term objectives. The following sections will examine each of these three.

4.4  Primary Objectives of Investment Treaties

Nearly all investment treaties pursue two primary objectives: (1) investment protection; and (2) investment promotion. Thus, most BITs bear the title ‘Treaty Concerning the Promotion and Protection of Investment’, or some variation thereof.184

(p. 125) (a)  Investment protection

The primary motives behind the rapid expansion of international investment treaties were the desire of investors from capital-exporting states to invest safely and securely abroad and the need to create a stable international legal framework to facilitate and protect those investments. Such protection has been aimed at investment risks posed by injurious acts and omissions by host governments themselves and also injurious acts and omissions by other persons in the host country. Without an applicable investment treaty, international investors would be forced to rely on host country law alone for protection, a reliance that entails a variety of risks to their investments. Host governments can easily change their own domestic law after a foreign investment is made, and host country officials may not always act fairly or impartially towards foreign investors and their enterprises. Moreover, host country officials may fail to take action to protect foreign investors and their investments from injurious actions by other persons. Investor recourse to local courts for protection may prove to be of little value in the face of prejudice against foreigners or governmental interference in the judicial process.185 Indeed, these fears were realized in the 1960s and 1970s when numerous instances of interference and expropriation of foreign investments by host country governments occurred. The number of expropriations of foreign-owned property grew steadily each year from 1960 and reached its peak in the mid-1970s.186

The lack of consensus on the customary international law applicable to foreign investments, discussed in Chapter 3, created further uncertainty in the minds of investors about the degree of protection they could expect under international law. To decrease their uncertainty and counter the threat of adverse national law and regulation, the home countries of these investors attempted to conclude a series of treaties that would provide clear rules and effective enforcement mechanisms, at least with regard to their treaty partners. Their primary goal was therefore the protection of investments made by their nationals and companies in foreign countries.

(b)  Investment promotion

A second primary objective of investment treaties is the promotion or encouragement of investment. This objective is based on the assumption that increased investment will further a country’s economic development and prosperity, and that foreign sources of capital and technology can usefully contribute to a country’s economic advancement.

(p. 126) Concluding and maintaining a treaty requires a bargain from which both parties believe they derive benefits. An investment treaty between two developed states, both of whose nationals expect to invest in the territory of the other, would be based on the notion of reciprocity and mutual protection. That is, a host state is induced to grant protection to investors from another country to be assured that the other state will grant similar protection to investors from the host state. However, this bargain would not seem to apply to a treaty between a developed, capital-exporting state and a developing, capital-importing country whose nationals are unlikely to invest abroad. One might therefore ask: Why would developing countries enter into such agreements? Why would they constrain their sovereignty by entering into treaties that specifically limit their ability to take necessary legislative and administrative actions to advance and protect what they perceive as their national interests?187

The answer to this question is that many countries sign investment treaties to promote foreign investment, thereby increasing the amount of capital and associated technology that flows to their territories. The basic assumption in this respect is that treaties with clear and enforceable rules to protect and facilitate foreign investment reduce risk and that such reduction in risks, all things being equal, encourages investment. In the 1980s and 1990s, as other forms of financial assistance became less available from commercial banks and official aid institutions, developing countries increasingly felt the need to promote private foreign investment in order to foster economic development. Investment treaties were seen as one means of pursuing a broader campaign of investment promotion and so developing nations signed them in increasing numbers.188 Thus, an investment agreement between a developed and a developing country is founded on a grand bargain: a promise of protection of capital in return for the prospect of more capital in the future.189

Developing countries have sometimes entered into investment treaty negotiations with the expectation that the capital-exporting country would take affirmative measures to encourage its nationals to invest in the developing country—an expectation no doubt fostered by the word ‘encouragement’ appearing in the titles (p. 127) of most draft treaties. Capital-exporting states, however, have generally refused to agree to any provision obliging them to encourage or induce their nationals to invest in the foreign state. On the contrary, many BITs have terms that encourage or oblige the host country to create favourable investment conditions in its territory.

It should also be noted that some investment treaties have sought to facilitate the entry and operation of investments by inducing host countries to remove various impediments in their regulatory systems. This has clearly been the goal of the Treaty on the Functioning of the European Union, and particularly Article 49 of that treaty, which grants investors from any EU member state a right of establishment, that is, the right to set up business in any other EU member state. Other measures designed to create a single European market for the movement of capital have also supported this goal. The North American Free Trade Agreement pursued a similar purpose, as is clear from the fact that in Article 102(1)(b), one of its stated purposes is ‘to increase substantially investment opportunities in the territories of the Parties’.

4.5  Secondary Objectives of Investment Treaties

Countries often have various secondary objectives in concluding investment treaties. The specific secondary objective pursued by a particular country may vary according to its economic situation, policy goals, ideology, or the state of its international relations. Sometimes such objectives are not stated in the treaty and sometimes government officials may not even be willing to acknowledge them publicly. Among some of the more common secondary goals for concluding investment treaties are the following.

(a)  Market liberalization

In negotiating BITs with developing countries, some capital-exporting states have sought to use the investment treaty as a means to encourage or induce investment and market liberalization within their negotiating partners.190 Moreover, in the view of certain developed countries, BITs can have the effect of liberalizing developing countries’ whole economies by facilitating the entry of investment and creating conditions favouring their operation. In the process of reforming their economies to foster private enterprise, some developing countries have concluded that creating favourable conditions for foreign investment can be integral to their success.191 Although the BITs themselves do not specifically enunciate the goal (p. 128) of investment and market liberalization, it is clear those goals are in the minds of developed country negotiators and are sometimes reflected in background documents.192 This is also a stated goal of certain regional entities and organizations such as the European Union and ASEAN.193

It should be noted that investment promotion, a fundamental objective of developing countries, and investment and market liberalization, a subsidiary aim of developed countries, are separate and distinct goals. Within the context of BITs, for example, host country investment promotion means attracting investment projects that the host country determines are in its best interests. Investment liberalization, on the other hand, is a favourite term of capital-exporting countries that generally means creating a climate in which investors may undertake investments they judge to be in their interests. For example, a host country government might seek to promote investments in its electronics industry if it judged doing so would develop its economy in ways not yet present in the country. At the same time, that country may desire to impede investment in the retail industry if that industry is already served by politically powerful local entrepreneurs who fear foreign competition. In such a situation the developing country, through its treaty relationships and internal legislation, would be following a policy of investment promotion but not of investment liberalization.

(b)  Relationship building

Some developing countries have also been led to sign BITs with developed capital-exporting countries to strengthen their relationship with those countries and obtain the benefits and favours, such as increased trade or foreign aid, that such strengthened relationships may yield. Thus, even though a developing country may not be certain of increased investment flows from its developed-country treaty partner after signing an investment treaty, it may well expect that the treaty will result in closer ties that will lead to increased trade, foreign aid, security assistance, technology transfers, or other benefits. For example, when a left-of-centre government came to power in Uruguay in 2005 after a previous government had signed but not yet ratified a BIT with the United States, the new government (p. 129) renegotiated but ultimately ratified the BIT. The Uruguayan government justified its action on the grounds that ratifying the BIT would protect and strengthen its important export markets in the United States. To the extent that investment treaty provisions are embedded in FTAs, such as those advanced by the United States and Japan, the prospect of improved trade relations as an inducement to agree to investment treaty provisions is quite explicit.

(c)  Domestic investment encouragement

Related to the objective of economic liberalization is the goal of encouraging domestic entrepreneurs, who may be sceptical of their government’s intentions towards private capital, to undertake productive investments. An investment treaty therefore serves as a ‘signalling device’ to the domestic private sector that the government’s intentions towards private capital, both foreign and domestic, are benign in view of the international commitments it has made in the treaty to protect the capital of foreigners.

(d)  Improved governance and a strengthened rule of law

Another secondary purpose for some developing countries in signing investment treaties is to remedy the deficiencies in their own governance institutions and enforcement of the rule of law. Investment treaties thus become international substitutes for domestic institutions.194 The theory underlying this rationale is that developing country authorities and institutions that have prevented themselves from acting in an arbitrary and abusive fashion towards foreign investors by signing a treaty will also be led to avoid arbitrary and abusive actions towards their own nationals. Over time those authorities and institutions may demonstrate improved governance and a heightened respect for the rule of law. Thus, as the Minister of Finance of Uruguay privately explained to a journalist at the time his country ratified its BIT with the United States: ‘We are not signing this treaty for them [ie the United States], we are signing it for us.’

4.6  Long-Term Goals of Investment Treaties

Lawyers, arbitrators, government officials, and corporate executives sometimes view investment treaties solely as being about foreign investment and foreign investors. That view may lead to distortions in understanding and interpreting investment treaty texts. Investment treaties are basically instruments of international relations, and the parties to them—sovereign states, not investors—undertake them in order to further certain long-term goals that may go well beyond the (p. 130) domain of investment. For investors, investment treaties are quite naturally about investments, but for a state that is a party to them they may be about ‘economic cooperation’, ‘economic development’, or ‘mutual prosperity’. A careful reading of investment treaty preambles reveals these long-term objectives. For example, the Preamble to the BIT between France and Argentina195 asserts the parties’ purpose as ‘[d]‌esiring to intensify economic cooperation for the economic benefit of both countries’ and the Preamble to an investment agreement between the Netherlands and the then Czechoslovakia196 states the parties’ aims as ‘[d]esiring to extend and intensify the economic relations between them’ and to ‘stimulate the flow of capital and technology and the economic development of the Contracting Parties’. It is important to place treaty texts within the context of their stated long-term objectives in order to interpret and understand their provisions fully. The importance of this is emphasized by Article 31(1) of the VCLT which requires that such context be taken into account in interpreting a treaty. The arbitral tribunal in the case of Saluka Investments BV v The Czech Republic adopted precisely this approach in interpreting the term ‘fair and equitable treatment’ to take into account the stated long-term objectives as expressed in the Preamble to the previously-quoted Netherlands–Czech and Slovak BIT:

This is a more subtle and balanced statement of the Treaty’s aims than is sometimes appreciated. The protection of foreign investments is not the sole aim of the Treaty, but rather a necessary element alongside the overall aim of encouraging foreign investment and extending and intensifying the parties’ economic relations. That in turn calls for a balanced approach to the interpretation of the Treaty’s substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relations.197

4.7  The Treaty Negotiation Process

Investment treaties do not simply spring into being. They are usually the product of long and hard negotiation between the countries concerned. Those negotiations explain why textual differences occur among investment treaties. It is therefore worthwhile to consider briefly the processes by which investment treaties come into existence. In doing so, one must distinguish the negotiation of BITs from those treaties involving more than two countries.

(p. 131) (a)  Bilateral negotiation processes

Having determined the need for treaty protection for their investors abroad, capital-exporting countries did not immediately proceed to negotiate BITs or FTAs with developing nations. They first devoted considerable time and effort to the preparation of what they called a ‘model treaty’, ‘prototype treaty’, or ‘draft treaty’, to serve as the basis for negotiations with individual developing countries. Preparing the draft treaty usually took significant time and involved intensive consultation with various organizations, including relevant government agencies and representatives from the private sector. For example, preparation of the US model treaty took nearly four years.198 For capital-exporting states, which without exception have been the ones to initiate negotiations, model or prototype treaties have been the basic and essential elements in their attempts to conclude BITs or FTAs. Individual countries have published or otherwise made their prototype or model texts available to the public. For example, the latest model US BIT, the 2012 US Model Bilateral Investment Treaty, can be found at the website of the Office of the US Trade Representative,199 and the 2004 Canadian prototype, known as a Foreign Investment and Promotion Agreement, may also be found online.200 The texts of many of these models have evolved over time. Thus, the model used by the United States at the beginning of the twentieth-first century was not the same as the model that it developed to launch its BIT programme in the 1980s.

The model treaty serves several purposes. First, its preparation is an occasion for capital-exporting states to study the entire question of investment protection, to consult with interested governmental and private sector organizations, and to formulate a national position on the question. The government emerges from this process with a firm idea of the kind of treaty that would be acceptable to various domestic constituencies, knowledge that is essential if a negotiated treaty is to secure the approval and ratification of home country authorities. Second, since the capital-exporting countries wish to negotiate BITs or FTAs with many developing countries, the prototype is an efficient means of communicating to those countries concretely what type of treaty the capital-exporting state seeks. Third, to the extent possible, a capital-exporting state usually wants relative uniformity in its BITs and FTAs with developing countries. Starting all negotiations with the same draft treaty is a way to attain that goal. An additional motivation for the preparation of a prototype is that it gives the capital-exporting state a negotiating advantage, as the party which controls the draft usually controls the negotiation. By preparing a draft BIT or FTA that will become the basis of discussion, the capital-exporting country has, in effect, determined the agenda of the negotiation and has established the conceptual framework within which bargaining will take (p. 132) place. The developing country, at least at the outset, is often placed in a position of merely reacting to the draft.201 After completing the preparation of the prototype, a capital-exporting state often informally makes contact with a developing country to determine its level of interest in concluding a BIT or FTA. When selecting countries to approach for an indication of interest, a developed country considers a variety of factors, including the state of friendly diplomatic relations between the two countries, the extent to which its nationals have already invested in the developing country, whether their nationals can be expected to invest in the host country in the future, and finally, the extent to which the potential host country’s existing economic policies are conducive to foreign private investment.

If a developing country decides to enter into BIT or FTA negotiations with a capital-exporting state, it too must engage in a consultative process among various government agencies and representatives of its private sector to formulate a negotiating position. Often this consultative process is accomplished by creating a team of representatives to carry on the negotiations. Inevitably, the views of individual negotiating team members may differ on many questions with respect to the proposed BIT or FTA. For example, officials of the Central Bank normally oppose treaty obligations that increase demands on the country’s foreign exchange reserves. Others with a different viewpoint, such as representatives of the government’s investment promotion agency, stress the importance of securing new investment for the country and accordingly often urge quick acceptance of the proposed BIT or FTA with as few changes as possible.

A BIT or FTA purports to create a symmetrical legal relationship between the two states, in that it provides that either party may invest under the same conditions in the territory of the other. In reality, an asymmetry exists between the parties to many BITs and FTAs, since one state will often be the source and the other the recipient of most investment flows. This asymmetry affects the dynamics of the BIT negotiation. Recognizing that the BIT essentially defines the developing country’s obligations towards investment from the developed country, the developing country tends to negotiate obligations that are more general than specific, vague rather than precise, and subject to exceptions rather than absolute requirements. On the other hand, capital-exporting countries seek guarantees of protection that are precise and all-encompassing. Thus, for example, a capital-exporting country will want the treaty in all cases to guarantee investors the right to transfer revenues and capital out of an investment. In contrast, a developing country will try to negotiate exceptions in appropriate situations, so that the transfer obligation will not apply, say, if the country is suffering from balance of payment difficulties. Generally, however, negotiations that result in an agreement do not depart significantly from the capital-exporting state’s model.

(p. 133) (b)  Multilateral negotiation processes

The process for negotiating a multilateral investment treaty is usually more complex and lengthy than the process for negotiating a bilateral treaty. This complexity arises from the number of parties at the negotiating table, which usually takes the form of a diplomatic conference. The use of a multilateral forum means that the interests and resulting issues that have to be accommodated are more numerous than in a bilateral setting. Moreover, the existence of more than two parties in the negotiation enables the parties to form blocs and coalitions to increase their influence, a factor that further complicates and lengthens the multilateral process. Then too, a multilateral negotiation usually attracts significant public attention and may invite the intervention of NGOs and other elements of civil society, and they too may increase the difficulty of arriving at an agreement.202

These procedural obstacles, along with more substantive issues discussed in Chapter 1,203 may explain why the nations of the world have yet to conclude a multilateral treaty on investment.

4.8  The Consequences of Investment Treaties

If an important goal of the investment treaty movement has been investment protection and promotion, and a secondary goal has been economic liberalization, one may well ask whether the approximately 3,300 investment treaties negotiated over the past six decades have achieved these goals. To what extent have investment treaties actually protected, liberalized, and promoted foreign investment? The answer to this question is important. The continued vitality of the investment treaty movement and the prospects for creating a global, multilateral legal structure for foreign investment similar to that which exists for international trade will be influenced by how the concerned countries view the benefits and costs of their existing investment treaties.

(a)  Investment protection

It is difficult, if not impossible, to find a methodology that will measure the degree of protectiveness that investment treaties provide. One crude measure is the number of actual arbitration cases that have been brought against host countries. During the last three decades, one of the most significant developments in contemporary international investment law has been the growth of investor–state arbitration to settle investment disputes. According to the World Investment Report 2014, during (p. 134) the period between 1987 and 2013 a total of 568 investor–state treaty arbitrations were brought, virtually all of which involved private investors as claimants and states as respondents.204 In the realm of international investment, investor–state arbitration has become increasingly common, and arbitral awards interpreting and applying investment treaty provisions have become increasingly numerous. For international law firms, investor–state arbitration—once an arcane field of interest to only a few scholars and specialists—has become an established and lucrative area of practice.

The potential costs to a host country for violating their commitments under an investment treaty are great and would seem to serve as a significant deterrent against violating investment treaty commitments. For one thing, the amount of money at stake in investor–state disputes is large, sometimes reaching into hundreds of millions, even billions, of dollars. As a result, in most treaty-based investor–state disputes, a host country faces the risk of having to pay a substantial arbitration award that, in relation to the country’s budget and financial resources, may prove onerous. Whereas the average award in an ordinary international commercial arbitration is less than a million dollars, an award in an investor–state arbitration is usually many times that.205 In fact, significant arbitral awards have been rendered against several states.206 Moreover, the costs of defending an investor–state arbitration can be burdensome, especially for a developing country. In addition to indirect costs, such as the time of government officials devoted to preparing and participating in the case, the direct costs usually consist of two elements: (1) the expenses of legal representation; and (2) a share of the costs of administering the arbitration. The precise amount of such costs will vary depending on the complexity of the case, the amount in dispute, and the extent of time needed to resolve it. In a highly complicated and lengthy case, the costs of legal representation in an arbitration proceeding can be extremely heavy. For example, in CME v Czech Republic, the Czech Republic reportedly spent US$10 million on its legal defence.207 A more typical investor–state case is perhaps International Thunderbird Gaming Corporation v United Mexican States, a NAFTA case decided under UNCITRAL rules in January 2006. There, the total cost of the proceeding was US$3,170,692, including US$405,620 in arbitrators’ fees, US$99,632 in various administrative expenses, US$1,502,065 in Mexico’s legal representation costs, and US$1,163,375 in Thunderbird’s costs of representation.208

(p. 135) The statistics on investor–state arbitration may understate the protective quality of investment treaties. Faced with the potential costs of investor–state arbitration, host countries may well be led to settle disputes rather than litigate them. Many disputes between foreign investors and host countries are resolved through negotiation. Indeed, nearly all investment treaties provide that in the event of a dispute between an investor and the host country, the parties are to engage in consultations and negotiations, often for a specified period of time (six months in many cases), before the investor may seek other remedies. As a result, it is safe to say that virtually all such disputes go through a period of negotiation before reaching settlement or advancing to the stage of formal investor–state arbitration. Because of the confidentiality usually surrounding such settlements, accurate, comprehensive statistics on negotiated settlements of investor–state conflicts are not available. Still, one would suppose that over the last eighteen years such settlements have vastly outnumbered the estimated 568 investor–state arbitrations that have been lodged.

After reviewing the nature and scope of investment treaty provisions, the strength of related enforcement mechanisms, and the actual cases brought against host countries by aggrieved investors, one may conclude that investment treaties have achieved their goal of fostering investment protection. While that protection is not absolute (no legal device provides absolute protection), investors and investments covered by a treaty seem to enjoy a higher degree of protection from political risks than those which are not.

(b)  Investment promotion

In the light of the many variables that influence investment decisions, it is probably impossible to pinpoint the precise effect of an investment treaty on an individual’s decision to invest in a given country.209 Local economic conditions and government policies are probably more important than investment treaties in influencing the investment decision. Indeed, industrialized countries probably sign investment treaties only with those developing countries whose policies and laws are sufficiently protective of, and favourable to, foreign investment.210 Thus, the investment treaty is often a codification, and not a source, of pro-foreign investment policies. On the other hand, by entering into a treaty, an instrument of international law, a signatory country is raising those policies to the level of international law and thereby limiting its ability to change policies easily. Investment treaties therefore have the effect of stabilizing a county’s investment policy and its legal and contractual commitments with individual foreign investors.211

Evidence demonstrating that investment treaties have promoted the flow of significant amounts of capital to developing countries is not entirely convincing and has been the subject of debate. Various studies have concluded that investment (p. 136) treaties do not in fact result in increased investment flows,212 that only some encourage capital flows,213 that they have a very limited impact on economic liberalization,214 and that they may actually lead to reductions in governance quality.215 On the other hand, one can also find evidence to the contrary.216 Given the diversity of their political and economic situations, individual developing countries have no doubt become treaty signatories for one or more of the reasons cited earlier. Some countries have probably been more influenced by some goals than others. While scholars have imputed one reason or another to developing countries for participating in the investment treaty movement, they have usually done so without undertaking specific empirical research into the motives that drove a particular developing country to sign a particular treaty. Opponents of investment treaties have argued not only that developing countries have not attained the benefits they sought but also that the costs to developing countries have been too high. Those costs lie primarily in the restrictions on actions that governments feel compelled to take to protect and strengthen their countries’ environmental, labour, and other standards to improve the lives of their populations. Governments that have taken actions negatively affecting investor interests have found themselves involved in growing numbers of expensive investor–state arbitrations.

More generally, the discussion about the costs and benefits of investment treaties seems to have overlooked an important question: What is the effect of investment treaties upon a country’s cost of capital? Every country must pay a cost for the foreign capital it receives whether this is in the form of debt or equity. The cost that a country must pay for its capital from foreign sources is affected by many factors, one of the most significant of which is investors’ perception of the country’s political risk. The greater a country’s political risk, the higher its cost of capital. If, by signing investment treaties, a country lowers its cost of capital, it may save significant amounts of money. Consequently, in determining whether investment treaties bring net benefits to a country those savings must be weighed against any resulting costs. Thus far, no empirical research has given a definitive answer to this question.

(p. 137) (c)  Economic liberalization

The ideal of economic liberalism holds that the market, not governmental laws and regulations, should determine economic decisions.217 Beginning in the post-World War II period, virtually all developing countries rejected the liberal economic model and relied on their governments to bring about national economic development.218 As a result, their systems were characterized by: (1) state planning and public ordering of their economies and societies; (2) reliance on state enterprises as economic actors; (3) restriction and regulation of the private sector; and (4) governmental limitation and control of international economic transactions, especially foreign investment.219 By the mid-1980s, this approach to development began to lose its hold on the minds and actions of policy-makers, aid agencies, and international financial institutions. Developing countries increasingly privatized their state enterprises, engaged in deregulation, and opened their economies.220 In short, they embarked on a process of economic liberalization. As indicated earlier in this chapter, one of the goals of many countries in negotiating investment treaties, particularly the United States, was to encourage their economic liberalization.

An evaluation of the extent to which investment treaties have achieved the goal of market and investment liberalization depends on one’s definition of liberalization. Two definitional approaches to liberalization present themselves. The first, which could be called the ‘absolutist approach’, seeks to determine how well the actual situation meets the liberal economic model; the second, which could be referred to as ‘the relativist approach’, aims primarily to determine the extent to which a country has moved away from the pre-existing command economy system towards the liberal model.

(i)  An absolutist evaluation of liberalization

With respect to foreign investment, applying an absolutist approach to economic liberalization would mean that foreign investors would not be subject to legal or regulatory constraints whenever undertaking investments in the country concerned. In fact, probably no country, either in the developed or the developing world, has taken the absolutist position.221 Further, investment treaties have not denied countries the right to control the entry of foreign investment.

(p. 138) Many investment treaties make a distinction between the treatment to be accorded an investor in making an investment (pre-establishment) and the treatment to be given after the investment is made (post-establishment). With respect to the former, treaties generally contain a provision to the effect that ‘each Contracting Party shall encourage and create favourable conditions for investors of the other Contracting party to make investments in its territory’.222 Despite the inclusion of such provisions, no investment treaty requires a host country to admit any and all investments proposed by an investor from the other treaty country. Most countries have special laws governing the entry of foreign capital,223 and investment treaties generally provide that host countries may admit investment in accordance with their own laws.224 In effect, no treaty ever guarantees investors of a contracting state access to the markets of other contracting states.225 A common provision is that a host country ‘shall admit investments in conformity with its laws’.226 Consequently, one must conclude that the investment treaty movement generally has not been effective in attaining the goal of absolute investment liberalization, if by that term one means completely opening a country to investment from a treaty partner.227 This is unsurprising when one considers that no treaty has expressly adopted such an objective. Investment and market liberalization are better characterized as the hoped for consequences of a developed country when it enters a treaty. From an absolutist point of view, while the use of investment treaties ‘affirm[s]‌ liberal economic theory’ and supports the adoption (p. 139) of liberalizing policies, the treaties are not actually designed to create a liberal investment regime. In fact, investment treaties are driven more by motives of economic nationalism than they are economic liberalism.228 Indeed, according to one observer, ‘[t]he interventionist measures permitted by the BITs are antithetical to economic liberalism’.229

(ii)  A relativist evaluation of liberalization

Viewing the significant changes in many developing countries over the last twenty years as they have sought to transform themselves into emerging markets,230 it is clear that their economies have experienced significant liberalization, even if they have not attained the liberal ideal. Their laws and regulations governing FDI, in particular, have been liberalized as a general phenomenon. For example, a study by the United Nations Conference on Trade and Development (UNCTAD) found that during the period between 1991 and 2002, ‘1551 (95%) out of 1641 changes introduced by 165 countries in their FDI laws were in the direction of greater liberalization’.231 At this point, it is difficult to determine the precise role that investment treaties played in this liberalization process. A study seeking to correlate the timing and number of investment treaties signed by individual countries with the timing and number of their liberalizing reforms would shed some important light on this question. In general terms, it is interesting to note that during the period measured by the UNCTAD study, investment treaties, particularly BITs, experienced their most significant expansion in number and geographical coverage.232

The link between investment treaties and liberalization may be both direct and indirect. The direct link may be found in some treaty provisions that have a liberalizing effect. For example, in the negotiation of some BITs, capital-exporting states, with varying degrees of success, have sought to protect their nationals and companies from unfavourable discrimination by securing treatment that is no less favourable than the treatment given to investments made by host country nationals or nationals of a third country.

(p. 140) Investment treaties may also have an indirect positive effect on the liberalization of host country economies. Under certain circumstances, the introduction of foreign direct investment can contribute to that liberalization. The demonstrated economic success of particular foreign enterprises, the competitive pressures caused by their presence, a governmental desire to attract even more foreign direct investment, and the demands by national entrepreneurs to secure equal treatment to that given to foreigners all may create strong pressures for change in host country regulatory systems.233 So, to the extent that investment treaties have encouraged foreign investment in developing countries, they have also contributed indirectly and modestly to economic liberalization.

Economic liberalization is a complex process that cannot be brought about by a magic bullet. It requires a host of sound policies, laws, and institutions across a wide domain of human activity. An investment treaty is just one policy instrument among many others that may facilitate the process.

(d)  Conclusion

The nature and sources of international investment law have undergone a significant transformation in a relatively short time. The creation of an increasingly dense network of international investment treaties therefore represents a further step in the development of international economic law and the creation of a global regime for investment.

One important consequence of treatification is that it has increased the importance of international investment law in economic relations to a level that it never enjoyed before. Prior to treatification, international investment law was basically an arcane subject that interested only a few academic international lawyers. It had little practical effect. Today, it has become of immense practical concern to a much wider audience, including the practising bar, environmentalists, NGOs, multinational companies, and governments, both industrialized and developing, who sometimes question the consequences of what they have created over the last five decades. As a result, unlike the situation that prevailed in the mid-twentieth century, government officials, international executives, lawyers, and financiers must increasingly take investment treaties into account in planning, negotiating, undertaking, and managing international investment transactions.


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

2  ‘One turns from the contemplation of the work of contract as from the experience of Greek tragedy. Life struggling against form …’ KN Llewellyn, ‘What Price Contract? An Essay in Perspective’ (1931) 40 Yale LJ 704, 751.

3  The word ‘treatification’, while not recognized by any standard English dictionaries, has been used on rare occasions previously. The origin of this derivation of the word ‘treatify’ may perhaps be found in the 1908 Nobel lecture of the Peace Prize Laureate Frederik Bajer, who urged that a treaty be established to govern the canals between the North and Baltic seas, stating, ‘[T]‌here is a need to “treatify”, if I may coin this expression, the waterways—the French call them “canaux interocéaniques”—which connect the two seas.’ Available at <http://nobelprize.org/nobel_prizes/peace/laureates/1908/bajer-lecture.html> accessed 5 October 2014.

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

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

6  Convention on the Recognition and Enforcement of Foreign Arbitral Awards (concluded 10 June 1958) 330 UNTS 3; 21 UST 2517.

7  P Fischer, ‘Some Recent Trends and Developments in the Law of Foreign Investment’ in K-H Boeckstiegel et al (eds), Völkerrecht, Recht der internationalen Organisationen, Weltwirtschafatsrecht: Festschrift für Ignaz Seidl-Hohenveldern (Carl Heymanns Verlag, 1988) 97. See also ‘Concessions granted to the Merchants of Venice, by the Byzantine Emperors Basilius and Constantinus, Executed in March 991’ in P Fisher, A Collection of International Concessions and Related Instruments (Oceana Publications, 1976) vol 1, pp 15–18.

8  Fischer (1988) (n 7 above) 97. Hansa societies worked to acquire special trade privileges for their members. For example, in 1157 the merchants of the Cologne (Köln) Hansa persuaded Henry II of England to grant them special trading privileges and market rights, which freed them from all London tolls and allowed them to trade at fairs throughout England.

9  Fischer (1976) (n 7 above) vol 1, p xix.

10  R Lillich, Human Rights of Aliens in Contemporary International Law (Manchester University Press, 1984) 8–11.

11  eg the Peace Treaty between Spain and the Netherlands of 1648 provided that the assets of the merchants were not to be seized, not even on account of war, except by judicial process to satisfy debts, other obligations, and contracts. Several treaties between European nations accepted the principles of freedom and security of aliens’ person and property, with the exception of those made by Russia, which granted that treatment to merchants only. Because of such provisions, these treaties were called ‘an international bill of rights’. H Neufeld, The International Protection of Private Creditors from the Treaties of Westphalia to the Congress of Vienna (1648–1815) (Sijthoff, 1971) 98.

12  One of the earliest bilateral treaties to have employed the term ‘the most-favoured-nation’ appears to be have been the Trade Treaty of Nijmwegen (also spelt as Nijmegen or Nimwegen) of 1679 between Sweden and Holland. Since the Treaties of Utrecht of 1713, the term has had regular usage in the treaties of European nations. ibid 29, 110.

13  ibid.

14  Lillich (n 10 above) 2–3.

15  See generally, H Maurits van den Boogert and K Fleet (eds), The Ottoman Capitulations: Text and Context (Istituto per ‘Oriente CA Nallino, 2003). In 1536, Francis I of France and Süleyman I of Turkey signed a capitulation treaty that became the model for later treaties with other powers. It allowed the establishment of French merchants in Turkey, granted them individual and religious liberty, and provided that consuls appointed by the French king should judge the civil and criminal affairs of French subjects in Turkey according to French law, with the right of appeal to officers of the sultan for assistance in carrying out their decisions. During the eighteenth century nearly every European power obtained capitulations in Turkey, and in the nineteenth century such newly established countries as the US, Belgium, and Greece followed suit. The New Encyclopaedia Britannica (15th edn, 2002) vol 2, p 832.

16  B Lewis, The Emergence of Modern Turkey (OUP, 1968) 455.

17  The capitulation system spread widely in the 17th, 18th, and early 19th centuries, when traders from the West extended western influence by a process of infiltration rather than by annexation. ‘Unequal treaties’ soon developed, and such treaties as the Sino-British supplementary treaty (1843) and its later amendments established a system of provincial courts and a British supreme court in China to try all cases involving British subjects while granting no corresponding rights to Chinese residents in Britain. The evils to which the system gave rise were exemplified particularly in Turkey and China. The fact that a foreign consul had jurisdiction in all matters concerning foreign nationals led to encroachments on Turkish sovereignty, and it was even possible for foreign governments to levy duties on goods sold in Turkish ports, eg the 2% duty established on Venetian goods by the treaty of Adrianople in 1454. Foreign powers were also able to set up banks, post offices, and commercial houses on Turkish soil that were exempt from Turkish taxes and were able to compete with local firms. In both Turkey and China, the existence of capitulations led to the development of a class of persons immune from local jurisdiction— protégés of a foreign power, who, because they were employed by foreigners, claimed partial immunity from their own laws and were particularly useful as pawns in diplomatic intrigue. In China, especially, it was possible for fugitives from Chinese justice to seek sanctuary with foreigners. Inevitably, foreigners misused their privileges; their own law was sometimes badly administered, their courts tended to favour their own nationals at the expense of the natives of the countries in which they were living (particularly in China, where there were no mixed courts), and the way was opened for bribery and corruption. In the Chinese treaty ports, a multiplicity of territorial settlements and concessions, practically exempt from local jurisdiction, led inevitably to administrative confusion; each foreign legation had its own, sometimes conflicting, rights. The New Encyclopaedia Britannica (15th edn, 2002) vol 2, pp 832–3.

18  JW Salacuse, ‘Foreign Investment and Legislative Exemptions in Egypt: Needed Stimulus or New Capitulations?’ in LD Michalak and JW Salacuse (eds), Social Legislation in the Contemporary Middle East (Berkeley, 1986) 241–61.

19  On the general history of international law on foreign investments, see M Sornarajah, The International Law on Foreign Investment (3rd edn, Cambridge University Press, 2010) 18–30.

20  See generally G Schwarzenberger, Foreign Investments and International Law (Praeger, 1969) 22–4; A Bagge, ‘Intervention on the Ground of Damage Caused to Nationals, with Particular Reference to Exhaustion of Local Remedies and the Rights of Shareholders’ in Selected Readings on Protection by Law of Private Foreign Investments by International and Comparative Law Center (1964).

21  Lillich (n 10 above) 18–21.

22  R Wilson, United States Commercial Treaties and International Law (Hauser Press, 1960); K Vandevelde, United States Investment Treaties: Policy and Practice (Kluwer Law and Taxation, 1992); R Wilson, ‘Property-Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83; H Walker, ‘Modern Treaties of Friendship, Commerce and Navigation’ (1957–8) 42 Minn L Rev 805.

23  Thus, the US first made bilateral commercial treaties with western Europe, then with Latin America, later with Asia, and still later with Africa. K Vandervelde, ‘The Bilateral Investment Treaty Program of the United States’ (1988) 2 Corn Int’l LJ 201, 203–6.

24  Before the adoption of the bilateral investment treaty programmes, European nations relied predominantly on agreements regarding establishment, trade/commerce, and double-taxation avoidance. For references to such agreements, see KW Hancock, Survey of British Commonwealth Affairs, vol 2: Problems of Economic Policy (OUP, 1940) 278; J Alenfeld, Die Investionsförderungsverträge der Bundesrepublik Deutschland (Atheneum-Verlag, 1971) 2–21; M Banz, Völkerrechtlicher Eigentumsschutz durch Investitionsschutzabkommen (Duncker & Humblot, 1987) 3–17; M Kamyar, ‘Ownership of Oil and Gas Resources in the Caspian Sea’ (2000) 94 AJIL 1, 179–89.

25  K Vandevelde observes that the earliest FCNs were first concluded with important European powers that became major US trading partners, and then were employed as the principal legal basis for establishing commercial relations with newly emerged Latin American republics, and later with other nations in Asia and Africa. Vandevelde (n 22 above) 5.

26  In 1776 the US Congress approved the Plan for Treaties that provided guidance to American negotiators for concluding the country’s first treaties of amity and commerce. See generally Wilson (1960) (n 22 above) 1–26.

27  See generally Vandevelde (n 22 above).

28  ibid 14.

29  A Benton, ‘The Protection of Property Rights in Commercial Treaties of the US’ (1965) 25 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 50, 52.

30  Vandevelde (n 22 above) 15.

31  Benton (n 29 above) 55.

32  For a detailed discussion of property protection provisions, see Wilson (1960) (n 22 above) 105–12.

33  One of the earliest MFN provisions appeared in a US–France FCN; it dealt with the ‘enjoyment of all rights, liberties, privileges, immunities, and exemptions in trade, navigation, and commerce’. Benton (n 29 above) 55.

34  Vandevelde (n 22 above) 16.

35  Vandevelde (n 22 above) 17; Benton (n 29 above) 57–9.

36  Articles of Agreement of the International Bank for Reconstruction and Development (formulated at the Bretton Woods Conference 1–22 July 1944) (opened for signature at Washington 27 December 1945, entered into force 27 December 1945) 2 UNTS 134; 60 Stat 1440; TIAS 1502; 3 Bevans 1390.

37  Articles of Agreement of the International Monetary Fund (formulated at the Bretton Woods Conference 1–22 July 1944) (opened for signature at Washington 27 December 1945, entered into force 27 December, 1945) (1944) 2 UNTS 39; 60 Stat 1401; TIAS 1501; 3 Bevans 1351.

38  General Agreement on Tariffs and Trade (30 October 1947) 55 UNTS 194; 61 Stat A-11; TIAS 1700 (GATT).

39  General Agreement on Tariffs and Trade 1994 (15 April 1994), Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations 17 (1999) 1867 UNTS 187; (1994) 33 ILM 1153.

40  Havana Charter for an International Trade Organization (24 March 1948) UN Doc E/Conf 2/78.

41  W Diebold, Jr, ‘The End of ITO’ (1952) 9(16) Princeton Essays in International Finance, cited in TS Shenkin, ‘Trade-Related Investment Measures in Bilateral Investment Treaties and the GATT: Moving toward a Multilateral Investment Treaty’ (1994) 55 U Pitts L Rev 541, 555.

42  United Nations Conference on Trade and Development: Fair and Equitable Treatment (1999) UNCTAD/ITE/IIT/11 (vol 3) 24 (UNCTAD).

43  Havana Charter for an International Trade Organization (24 March 1948), UN Doc E/Conf 2/78), available at <http://www.wto.org/english/docs_e/legal_e/havana_e.pdf> accessed 5 October 2014.

44  See generally United Nations Conference on Trade and Development: Fair and Equitable Treatment (1999) UNCTAD/ITE/IIT/11 (vol 3) 24–5.

45  See generally ‘United Nations Conference on Trade and Development’ in International Investment Instruments: A Compendium (1996) vol 1, p 3.

46  For a concise overview of the history of US bilateral investment treaties, see the US Supreme Court decision in Sumitomo Shoji America v Avagliano, 457 US 176 (1982). See also JW Salacuse, ‘BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries’ (1990) 24 Int’l Lawyer 655, 656–61.

47  Vandevelde (n 22 above) 17; Benton (n 29 above) 60.

48  Benton (n 29 above) 60–7.

49  ibid 67–72.

50  KS Gudgeon, ‘United States Bilateral Investment Treaties: Comments on their Origin, Purposes, and General Treatment Standards’ (1986) 4 Int’l Tax & Bus Lawyer 105, 108.

51  Vandevelde (n 22 above) 19. Another decided innovation occurred in the Article concerning the settlement of any dispute between the parties as to interpretation or application of an FCN. The disputes that the parties do not satisfactorily settle by diplomacy ‘shall be submitted to the International Court of Justice unless the parties shall agree to settlement by some other pacific means’. R Wilson, ‘Postwar Commercial Treaties of the US’ (1949) 43 AJIL 262, 275.

52  Benton (n 29 above) 72.

53  ibid.

54  Elettronica Sicula SpA (ELSI) (US v Italy) (Judgment) (20 July 1989) [1989] ICJ Rep 15. A subsequent ICJ case based on an FCN treaty was Case Concerning Oil Platforms (Islamic Republic of Iran v United States of America) (Judgment) (6 November 2003) [2003] ICJ Rep 161, in which Iran sought compensation under the 1955 Treaty of Amity, Economic Relations, and Consular Rights between Iran and the US for the destruction in 1987 and 1988 by US warships of three offshore oil platforms owned by the National Iran Oil Company.

55  Vandevelde (n 22 above) 19.

56  ibid.

57  Wilson (n 51 above) 277.

58  Shenkin (n 41 above) 555. See also K Kunzer, ‘Developing a Model Bilateral Investment Treaty’ (1983) 15 L & Pol Int’l Bus 273, 276.

59  For text, see United Nations Conference on Trade and Development, International Investment Instruments: A Compendium (1996) vol 3, pp 273–8.

60  ‘Proposed Convention to Protect Private Foreign Investment: The Introduction’ (1960) 9 J Pub L 115.

61  For the text of the OECD Draft Convention on the Protection of Foreign Property, see (1968) 7 ILM 117. For a survey of the various multilateral efforts to prepare treaties on foreign investment, see F Tschofen, ‘Multilateral Approaches to the Treatment of Foreign Investment’ (1992) 7 ICSID Rev—FILJ 384, 385–6.

62  TW Wälde, ‘Introductory Note, European Energy Conference: Final Act, Energy Charter Treaty, Decisions, and Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects’ (1995) 34 ILM 360, 360 (noting the strong influence of BITs on the trade provisions of a multilateral energy treaty); P Juillard, ‘Le Réseau français des conventions bilatérales d’investissement: A la recherche d’un droit perdu?’ (1987) 13 Droit et Pratique du Commerce Internationale 9, 16 (noting that France based its model BIT on the 1967 Organization for Economic Cooperation and Development (OECD) Draft Convention on the Protection of Foreign Property).

63  Treaty Establishing the European Economic Community, 25 March 1957, 298 UNTS 11.

64  Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, 13 December 2007, [2007] OJ C306/1.

65  Consolidated Versions of the Treaty on European Union and the Treaty on the Functioning of the European Union [2010] OJ C83/1. Treaty of European Union, Art 1 states: ‘The Union shall be founded on the present Treaty and on the Treaty on the Functioning of the European Union (hereinafter referred to as ‘the Treaties’). Those two Treaties shall have the same legal value. The Union shall replace and succeed the European Community.’

66  TFEU, Art 26(2).

67  See generally A Reinisch, ‘The EU on the Investment Path—Quo Vadis Europe? The Futue of EU BITs and other Investment Agreements’ (2013) 12 Santa Clara J Int’l L 111.

68  UNCTAD, World Investment Report 2014 (2014) 223.

69  FA Mann, ‘British Treaties for the Promotion and Protection of Investments’ (1981) 52 BYIL 241; P Juillard, ‘Les Conventions bilatérales d’investissements conclues par la France’ (1979) 106 Journal du Droit International 274; J Karl, ‘The Promotion and Protection of German Foreign Investment Abroad’ (1996) 11 ICSID Rev—FILJ 1; M Bos, ‘The Protection of Foreign Investments in Dutch Court and Treaty Practice’ (1980) 3 Int’l L in the Netherlands 221; W Van de Voorde, ‘Belgian Bilateral Investment Treaties as a Means for Promoting and Protecting Foreign Investment’ (1991) 44 Studia Diplomatica 87; Y Matsui, ‘Japan’s International Legal Policy for the Protection of Foreign Investment’ (1989) 32 Japanese Annual of Int’l L 1.

70  M-Ch Kraft, ‘Les Accords bilatéraux sur la protection des investissements conclus par la Suisse’ in D Dicke (ed), Foreign Investment in the Present and a New International Economic Order (Westview Press, 1987) 72–95; N Huu-tru, ‘Le Réseau suisse d’accords bilatéraux d’encouragement et de protection des investissements’ (1988) 92 Revue Générale de Droit International Public 577; OM Maschke, ‘Investitionsschutzabkommen: Neue vertragliche Wege im Dienste der Österreichischen Wirt-schaft’ (1986) 37 Österreichische Zeitschrift für Öffentliches Recht und Vö1kerrecht 201.

71  International Chamber of Commerce, Bilateral Investment Treaties for International Investment (1980).

72  The similarity is attributed to the fact that some European countries seemed to have emulated the German BIT model. ‘Reforming the International Legal Order: German Legal Comments’ in T Oppermann and E-U Petersman (eds), Tübinger Schriften zum internationalen und europäischen Recht, Band I (Duncker & Humblot, 1987) 37.

73  Paper Prepared by the General Counsel of the World Bank and Transmitted to the Members of the Committee of the Whole, SID/63-2 (18 February 1963) 3 in ICSID, History of the ICSID Convention (1968) vol 2, part I, at 73.

74  Note by the President of the Executive Directors, R 61-128 (28 December 1961) in ICSID, History of the ICSID Convention (1968) vol 2, part I, at 4–6.

75  ICSID Convention (n 5 above).

76  List of Contracting States and other Signatories of the Convention (as of 11 April 2014), available at <https://icsid.worldbank.org/apps/ICSIDWEB/icsiddocs/Documents/List%20of%20Contracting%20States%20and%20Other%20Signatories%20of%20the%20Convention%20-%20Apr%202014.pdf> accessed 24 March 2015.

77  Report of the World Bank Executive Directors on the ICSID Convention, Doc ICSID/2 in ICSID, History of the ICSID Convention (1968) vol 2, part II, at 1072–4.

78  ICSID clauses were added to several other early treaties, by reference to the Convention in subsequent protocols. See eg Netherlands–Cote d’Ivoire BIT of 1965 and the Protocol thereto of 1971. R Dolzer and M Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995) 130.

79  See <https://icsid.worldbank.org/apps/ICSIDWEB/icsiddocs/Documents/List%20of%20Contracting%20States%20and%20Other%20Signatories%20of%20the%20Convention%20-%20Apr%202014.pdf> accessed 24 March 2015. As of April 2014, of 159 states that signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 150 states had deposited their instruments of ratification and attained the status of contracting state (see n 76 above). Three member states have denounced the Convention and withdrawn from ICSID: Bolivia in 2007, Ecuador in 2010, and Venezuela in 2012.

80  BM Cremades, ‘Arbitration in Investment Treaties: Public Offer of Arbitration in Investment-Protection Treaties’ in R Briner and K-H Böckstiegel (eds), Law of International Business and Dispute Settlement in the 21st Century: Liber amicorum Karl-Heinz Böckstiegel (Carl Heymanns Verlag, 2002) 158.

81  ICSID Convention (n 5 above).

82  ICSID, List of Concluded Cases, available at <https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/AdvancedSearch.aspx?cs=CD28> accessed 12 January 2015 (listing concluded cases in chronological order).

83  ibid.

84  UNCTAD, World Investment Report 2014 (2014) 124.

85  ICSID, ICSID 2013 Annual Report (2013) 5.

86  ICSID, List of Concluded Cases (n 82 above).

87  For a thorough analysis of the ICSID Convention and ICSID arbitration rules, see C Schreuer, The ICSID Convention: A Commentary (2nd edn, Cambridge University Press, 2009).

88  A donor state’s foreign aid to developing countries is a function of numerous factors, including strategic, commercial, political, and humanitarian considerations. P Hjertholm and H White, ‘Foreign Aid in Historical Perspective: Background and Trends’ in F Tarp (ed) Foreign Aid and Development: Lessons Learnt and Directions for the Future (Routledge, 2000) 99–100. As a result, it is difficult to know precisely the impact of a donor country’s aid policies on its BIT negotiations with a specific aid recipient. From the point of view of a recipient country, one indicator of the quality of aid is the percentage that is ‘untied’, ie not required to be spent on acquiring goods and services from the donor country. It is interesting to note that European countries whose aid was the least ‘tied’ were among the countries that had concluded the largest number of BITs in 1981. In that year, when the percentage of untied aid given by the US was only 33%; Germany, with untied aid of 74%, had signed 49 BITs; Switzerland, with untied aid of 50%, had signed 33 BITs; the Netherlands, with untied aid of 57%, had signed 16 BITs; and Sweden, with untied aid of 84%, had signed 8 BITs. UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998) 159–217.

89  Vandevelde (n 22 above) 29–45; PB Gann, ‘The U.S. Bilateral Investment Treaty Program’ (1985) 21 Stan J Int’l L 373; Gudgeon (n 50 above) 107–11; JW Salacuse (n 46 above) 655–75.

90  For a listing of all US BITs currently in force, see the website of the US Department of State, at < http://www.state.gov/e/eb/ifd/bit/117402.htm> accessed 4 October 2014.

91  UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998) 185–6.

92  JW Salacuse, ‘From Developing Countries to Emerging Markets: A Changing Role for Law in the Third World’ (1999) 33 Int’l Lawyer 875, 875–7.

93  AJ Pappas, ‘References on Bilateral Investment Treaties’ (1989) 4 ICSID Rev—FILJ 189, 194–203.

94  UNCTAD, World Investment Report 2008 (2008) 14.

95  UNCTAD, World Investment Report 2002: Transnational Corporations & Export Competitiveness (2002) 8.

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

97  ibid 222–5.

98  Agreement for the Promotion and Protection of Investments (PRC–Thailand) (12 March 1985), available at <http://investmentpolicyhub.unctad.org/Download/TreatyFile/786> accessed 5 October 2014; Agreement regarding the Encouragement and Protection of Investment (Egypt–Morocco) (14 May 1997) available in Arabic at <http://investmentpolicyhub.unctad.org/Download/TreatyFile/1093> accessed 12 January 2015.

99  Free Trade Agreement (US–Canada) (2 January 1988), (1988) 27 ILM 281.

100  ibid 373–80.

101  North American Free Trade Agreement (US–Canada–Mexico) (17 December 1992), (1993) 32 ILM 289 (NAFTA).

102  UNCTAD, World Investment Report 2014 (2014) 123.

103  League of Arab States (1982). ‘Unified Agreement for the Investment of Arab Capital in the Arab States’, Economic Documents, No 3 (Tunis: League of Arab States).

104  The agreement has been ratified by all member states of the League except Algeria and the Comoros. The text of the ‘Unified Agreement for the Investment of Arab Capital in the Arab States’ is available in (2004) 1(4) Transnat’l Disp Man.

105  J Salacuse, ‘Arab Capital and Trilateral Ventures in the Middle East: Is Three a Crowd?’ in M Kerr and A Yassine (eds), Rich and Poor States in the Middle East (Westview Press, 1982) 129–63.

106  Unified Agreement, Art 9(2).

107  WB Hamida, ‘The First Arab Investment Court Decision’ (2006) 7 JWIT 699, 702.

108  Mohamed Abdulmohsen Al Kharafi & Sons Co v Libya (Award) (22 March 2013), available at <http://italaw.com/cases/documents/2199> accessed 5 October 2014. See D Rosert, ‘Libya Order to Pay US$935 to Kuwaiti Company for Canceled Investment Project’ Investment Treaty News (IISD), 19 January 2014.

109  Charter of the Organization of the Islamic Conference, adopted at Dakar, Senegal 14 March 2008, available at <http://www.oic-oci.org/is11/english/Charter-en.pdf> accessed 5 October 2014.

110  Charter of the OIC, Art 3(2).

112  Hesham Taalat M Al-Warraq v The Republic of Indonesia (Award on Respondent’s Preliminary Objections to Jurisdiction and Admissibility of Claims) (21 June 2012).

113  The ASEAN Declaration (Bangkok Declaration), 8 August 1967, 1331 UNTS 243, available at <http://www.asean.org/news/item/the-asean-declaration-bangkok-declaration> accessed 5 October 2014.

114  Available at <http://www.asean.org/archive/publications/ASEAN-Charter.pdf> accessed 5 October 2014.

115  ASEAN Charter, Art 3. S Chesterton, ‘Does ASEAN Exist? The Association of Southeast Asian Nations as an International Legal Person’ (2008) 12 Sing YBIL 199.

116  ASEAN Charter, Art 1(5).

117  The ASEAN Agreement for the Promotion and Protection of Investments of 1987 (1988) 27 ILM 612, available at <http://www.asean.org/communities/asean-economic-community/item/the-1987-asean-agreement-for-the-promotion-and-protection-of-investments> accessed 5 October 2014.

118  Chi Oo Trading Pte Ltd v Government of the Union of Myanmar, ASEAN Case No ARB/01/1 (Award) (31 March 2003), (2003) 42 ILM 3, 540.

119  Framework Agreement on the ASEAN Investment Area, 7 October 1998, available at <http://www.asean.org/images/2012/Economic/AIA/other_document/Framework%20Agreement%20on%20the%20ASEAN%20Investment%20Area.pdf> accessed 12 January 2015.

120  M. Sornarajah, ‘Review of Asian Views on Foreign Investment Law’ in V Bath and L Nottage (eds), Investment Law and Dispute Resolution Law and Practice in Asia (Routledge, 2011) 242–8.

121  2009 ASEAN Comprehensive Investment Agreement, signed by the Economic Ministers at the 14th ASEAN Summit in Cha-am, Thailand, on 26 February 2009, available at <http://www.asean.org/images/2012/Economic/AIA/other_document/Framework%20Agreement%20on%20the%20ASEAN%20Investment%20Area.pdf> accessed 5 October 2014.

122  ACIA Preamble. ACIA, Art 47 provides that upon its entry into force the 1987 and 1998 investment agreements are terminated.

123  ASEAN, ‘Highlights of the ASEAN Comprehensive Investment Agreement’ (ACIA), 26 August 2008, available at <http://www.asean.org/resources/publications/asean-publications/item/asean-comprehensive-investment-agreement> accessed 5 October 2014.

124  ACIA, Art 42.

125  Agreement establishing the ASEAN–Australia–New Zealand Free Trade Area, Cha-am, Phetchaburi, Thailand, 27 February 2009, entered into force 1 January 2010, [2010] ATS 1, Ch 11.

126  Agreement on Investment of the Framework Agreement on Comprehensive Economic Cooperation between the People’s Republic of China and the Association of Southeast Asian Nations, Bangkok, 15 August 2009, available at <http://fta.mofcom.gov.cn/inforimages/200908/20090817113007764.pdf> accessed 5 October 2014.

127  V Bath and L Nottage, ‘The ASEAN Comprehensive Investment Agreement and “ASEAN Plus”—The Australia-New Zealand Free Trade Area (AANZFTA) and the PRC-ASEAN Investment Agreement’, Legal Studes Research Paper No 13/60, Sidney Law School, University of Sidney, September 2013, available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2331714> accessed 5 October 2014.

128  Treaty Establishing a Common Market between the Argentine Republic, the Federal Republic of Brazil, the Republic of Paraguay, and the Eastern Republic of Uruguay (signed 26 March 1991, entered into force 19 November 1991), (1991) 30 ILM 1041.

129  Protocol of Colonia for the Promotion and Reciprocal Protection of Investments in Mercosur (17 January 1994) MERCOSUR/CMC/DEC No 11/93 (Colonia Protocol).

130  Protocol of Buenos Aires for the Promotion and Reciprocal Protection of Investments Coming from Non-Mercosur State Parties (5 August 1994) MERCOSUR/CMC/DEC No 11/94 at preamble (Buenos Aires Protocol), available at <http://www.sice.oas.org/trade/mrcsrs/decisions/dec1194e.asp> accessed 5 October 2016.

131  Colonia Protocol (n 129 above) Art 11(1); Buenos Aires Protocol (n 130 above) Art 4.

132  Treaty Establishing the Common Market for Eastern and Southern Africa (5 November 1993), (1994) 33 ILM 1067.

133  S Flatto, ‘Too Much of a Good Thing?: Reassessing the Proliferation of African Regional Agreements’ (2007) 30 Suffolk Transnational Law Review 407, 415.

134  Current members include: Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, the Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe. Former members include: Angola, Lesotho, Mozambique, Tanzania, and Namibia.

135  M Oduor, ‘Resolving Trade Disputes in Africa: Choosing between Multilateralism and Regionalism: The Case of COMESA and the WTO’ (2005) 13 Tul J Int’l Comp L 177, 189.

136  ibid 189–90.

137  YMA Abebe et al, ‘International Legal Developments in Review: 2007 Regional and Comparative Law’ (2008) 42 Int’l Lawyer 863, 875.

138  ibid.

139  COMESA Treaty, Art 3(3).

140  COMESA Treaty, Art 81.

141  COMESA Treaty, Arts 159–162.

142  North American Free Trade Agreement between the Government of the United States of America, the Government of Canada and the Government of the United Mexican States (17 December 1992), (1993) 32 ILM 289 (NAFTA).

143  T Levy, ‘NAFTA’s Provision for Compensation in the Event of Expropriation: A Reassessment of the Prompt, Adequate and Effective Standard’ (1995) 31 Stan J Int’l L 423–53.

144  The text of the ECT may be found in The Final Act of the European Energy Charter Conference (12 December 1994) AF/EECH en 1, reprinted at (1995) 34 ILM 373. For an extensive discussion of the provisions of the Energy Charter Treaty, see TW Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer Law International, 1996).

145  The Legal Counsel of the International Energy Agency, a principal adviser to the European Energy Charter Conference, has stated that the investment provisions of the ECT ‘resemble provisions in bilateral investment treaties although their drafting has not been based on any single negotiating party’s treaty practice’. Legal Counsel of the IEA, The Energy Charter Treaty: A Description of Its Provisions (1994) 15. For a comparison of the ECT’s investment provisions with the BITs, see JW Salacuse, ‘The Energy Charter Treaty and Bilateral Investment Treaty Regimes’ in Wälde (n 144 above) 321–48.

146  For a listing and summary of such cases with links to available awards, see <http://www.encharter.org/index.php?id=213&L=0L50A> accessed 6 October 2014.

147  Dominican Republic–Central America–United States Free Trade Agreement Implementation Act 2005 (PL 109-53, 119 Stat 462). See generally, JR Hornbeck, ‘The Dominican Republic-Central America-United States Free Trade Agreement’ (CAFTA-DR) (Congressional Research Service 2008).

148  The full text of the Agreement may be found on the website of the US Trade Representative, at <http://www.ustr.gov>. See also, VHW Wang, ‘Investor Protection or Environmental Protection? “Green” Development Under CAFTA’ (2007) 32 Col J Envir L 251; MB Baker, ‘No Country Left Behind: The Exporting of US Legal Norms Under the Guise of Economic Integration’ (2005) 19 Emory Int’l LJ 1346.

149  CAFTA-DR, Ch 10, Art 10.5(a).

150  CAFTA-DR, Ch 10, Art 10.5(b).

151  See Investor–State Dispute Resolution Under DR-CAFTA, available at <http://www.whitecase.com/idq/fall_2007/ia2/> accessed 6 October 2014. For one of the first investor–state cases to arise under its provisions, see Railroad Development Corp v Guatemala, ICSID Case No Arb/07/23 (Award) (29 June 2012). See also CAFTA-DR Investor-State Arbitrations, available at <http://www.state.gov/s/l/c33165.htm> accessed 24 March 2015.

152  For the text of the various FTAs concluded by the US, see the website of the US Trade Representative at <http://www.ustr.gov/trade-agreements> accessed 6 October 2014.

153  Agreement on the Establishment of a Free Trade Area (signed 22 April 1985, entered into force 19 August 1985). US Dept of State, Treaties in Force: A List of Treaties and Other International Agreements of the United States in Force on January 1, 2007, available at <http://www.state.gov/e/eb/tpp/bta/fta/fta/index.htm> accessed 6 October 2014.

154  Agreement on the Establishment of a Free Trade Area (signed 24 October 2000, entered into force 17 December 2001). US Dept of State, Treaties in Force (n 153 above).

155  Agreement on the Establishment of a Free Trade Area (signed 14 September 2004, entered into force 1 August 2006). US Dept of State, Treaties in Force (n 153 above).

156  US–Chile Free Trade Agreement (signed 6 June 2003, entered into force 1 January 2004). US Dept of State, Treaties in Force (n 153 above).

157  US–Singapore Free Trade Agreement (signed 6 May 2003, entered into force 1 January 2004). US Dept of State, Treaties in Force (n 153 above).

158  M Yasushi, ‘Economic Partnership Agreements and Japanese Strategy’ (2006) 6(3) Gaiko Forum 53.

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

160  General Agreement on Tariffs and Trade: Multilateral Trade Negotiations Final Act Embodying the Results of the Uruguay Round of Trade Negotiations (15 April 1994), (1994) 33 ILM 1125.

161  Agreement on Trade-Related Investment Measures (15 April 1994) 1868 UNTS 186 (TRIMs).

162  General Agreement on Tariffs and Trade (30 October 1947) 55 UNTS 194; 61 Stat A-11; TIAS 1700 (GATT).

163  ibid Art XI.

164  Indonesia—Certain Measures Affecting the Automobile Industry WT/DS54/15 of 7 December 1998, available at <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds54_e.htm> accessed 5 October 2014.

165  General Agreement on Trade in Services (15 April 1994) UNTS 183; (1994) 33 ILM 1167 (GATS).

166  JW Salacuse, ‘Towards a New Treaty Framework for Direct Foreign Investment’ (1985) 50 Journal of Air Law and Commerce 969.

167  World Bank, ‘Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment’ (1992) 31 ILM 1363.

168  SJ Rubin, ‘Introductory Note for International Legal Materials’ (1992) 31 ILM 1363.

169  IFI Shihata, ‘Introductory Note of September 25, 1992’ in Legal Framework for the Treatment of Foreign Investment: Volume II (1992) 31 ILM 1367.

170  OECD, ‘Multilateral Agreement on Investment: The Original Mandate’, available at <http://www.oecd.org/daf/mai/intro.htm> accessed 6 October 2014. See also G Kelly, ‘Multilateral Investment Treaties: A Balanced Approach to Multinational Corporations’ (2001) 39 Col J Transnat’l L 483.

171  N Bray, ‘Politics and Policy: France Remains Obstacle to Global Investment Plan’ Wall Street Journal in Europe, 15 October 1998, 2.

172  After considerable struggle, the members of the WTO meeting at Doha in November 2001 agreed to include the subject of foreign investment on the agenda of its next round of trade talks, known commonly as the Doha Round. With respect to investment, the work plan for the round approved at the Ministerial meeting in November 2001 recognized ‘the case for a multilateral framework to secure transparent, stable and predictable conditions for long-term cross border investment, particularly foreign direct investment that will contribute to the expansion of trade’. Ministerial Declaration (adopted 14 November 2001) ¶ 20, World Trade Organization Ministerial Conference (9–14 November 2001). This was, however, dropped from the Doha Round pursuant to the ‘July 2004 Package’ which decided that ‘no work towards negotiations on any of these issues will take place within the WTO during the Doha Round.’ See ‘Decision adopted by the General Council on 1 August 2004’ (2 August 2004) WT/L/579, available at <http://www.wto.org/english/tratop_e/dda_e/draft_text_gc_dg_31july04_e.htm#invest_comp_gpa> accessed 12 January 2014.

173  For discussion of this approach, see J Salacuse, ‘Towards a Global Treaty on Foreign Investment: The Search for a Grand Bargain’ in N Horn and S Kröll (eds), Arbitrating Foreign Investment Disputes: Procedural and Substantive Issues (Kluwer Law International 2004) and J Salacuse (n 166 above) 1007–10. See also G Kelly, ‘Multilateral Investment Treaties: A Balanced Approach to Multinational Corporations’ (2001) 39 Col J Transnat’l L 483, who argues that international human rights law should be applied to foreign investors in return for their right to invest.

174  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).

175  Tratado de Libre Comercio entre México y Costa Rica, El Salvador, Guatemala, Honduras y Nicaragua (5 December 2011).

176  UNCTAD, World Investment Report 2013 (2013) 106.

177  UNCTAD, World Investment Report 2014 (2014) 118.

178  ibid 118–22.

179  ibid 120.

180  Treaty on the Functioning of the European Union, Consolidated Version of the Treaty on the Functioning of the European Union, 26 May 2012, [2012] OJ C326/47, Arts 206 and 207. See generally Reinisch (n 67 above).

181  Regulation (EU) 2019/2012 of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries [2012] OJ L351/40, Art 3.

182  See Ch 1, section 1.6.

183  Vienna Convention on the Law of Treaties (22 May 1969) 1155 UNTS 331; (1969) 8 ILM 679; 63 AJIL 875; UN Doc A/Conf.39/27 (1969) (VCLT).

184  Treaty Concerning the Reciprocal Encouragement and Protection of Investment (US–Armenia) (23 September 1992), S Treaty Doc No 103-11 (1993); Treaty Concerning the Promotion and Reciprocal Protection of Investments (Federal Republic of Germany–Poland) (10 November 1989), (1990) 29 ILM 333; Agreement for the Promotion and Protection of Investments (Indonesia–UK) (27 April 1976), Treaty Series No 62. Similarly, the Energy Charter Treaty, Part III is entitled ‘Investment Promotion and Protection’.

185  UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998) 114–18. The UN identified 875 distinct acts of governmental taking of foreign property in 62 countries during the period between 1960 and 1974. D Piper, ‘New Directions in the Protection of American-Owned Property Abroad’ (1979) 4 Int’l Trade LJ 315, 330.

186  This question assumes that the developing country is not expecting other benefits from its developed country treaty partner, such as increased foreign aid or enhanced security guarantees, which are extraneous to a BIT relationship.

187  UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998) 85.

188  JW Salacuse and NP Sullivan, ‘Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain’ (2005) 46 Harv Int’l LJ 67; J Salacuse, ‘Toward a Global Treaty on Foreign Investment: The Search for a Grand Bargain’ in N Horn and S Kröll (eds), Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Issues (Kluwer Law International, 2004) 51.

189  The Deputy US Trade Representative stated the US goals in negotiating BITs as follows: The BIT program’s basic aims are to:

  1. (1)  protect U.S. investment abroad in those countries where U.S. investors’ rights are not protected through existing agreements;

  2. (2)  encourage adoption in foreign countries of market-oriented domestic policies that treat private investment fairly; and

  3. (3)  support the development of international law standards consistent with these objectives.

J Lang, Keynote Address (1998) 31 Corn Int’l LJ 455, 457.

190  See generally Salacuse (n 92 above) 875–7.

191  See eg Investment Treaty with Albania (US–Albania) (11 January 1995), S Treaty Doc No 104–19 (1995). In the message from the President of the United States transmitting the Treaty between the Government of the United States of America and the Government of the Republic of Albania Concerning the Encouragement and Reciprocal Protection of Investment with Annex and Protocol Signed at Washington on 11 January 1995, President Clinton stated: ‘The bilateral investment treaty (BIT) with Albania will protect U.S. investment and assist the Republic of Albania in its efforts to develop its economy by creating conditions more favorable for U.S. private investment and thus strengthen the development of its private sector.’

192  Investment protection and investment liberalization are also distinct concepts. Investment liberalization refers to facilitating the entry and operation of foreign investments in the host country. Investment protection refers to protecting the investment, once it has entered the country, from actions by governments and others that would interfere with investor property rights and the functioning of the investment in general. For example, in launching negotiations for a Multilateral Agreement on Investment in September 1995, the OECD mandate called for ‘a broad multilateral framework for international investment with high standards of liberalisation of investment regimes and investment protection’. OECD, Multilateral Agreement on Investment: Launch of the Negotiations: 1995 CMIT/CIME Report and Mandate, available at <http://www.oecd.org/daf/mai/intro.htm> accessed 6 October 2014.

193  See eg the ASEAN Comprehensive Investment Agreement, Art 1(a) which states as a treaty objective ‘the progressive liberalization of the investment regimes of member states’.

194  T Ginsburg, ‘International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance’ (2005) 25 Int’l Rev L & Econ 107–23.

195  Accord entre le Gouvernement de la République Française et le Gouvernement de la République Argentine sur l’encouragement et la protection réciproques des investissements (Agreement between the Argentine Republic and the Republic of France for the Promotion and Reciprocal Protection of Investments) (signed 3 July 1991, entered into force 3 March 1993) 1728 UNTS 298.

196  Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of The Netherlands and the Czech and Slovak Federal Republic (signed 29 April 1991).

197  Saluka Investment BV v The Czech Republic, UNCITRAL (Partial Award) (17 March 2006) ¶ 300.

198  Vandevelde (n 23 above) 210.

200  Available at <http://ita.law.uvic.ca/documents/Canadian2004-FIPA-model-en.pdf> accessed 6 October 2014.

201  For a discussion of this negotiating problem, see J Salacuse, The Global Negotiator (Palgrave Macmillan, 2003) 39–42.

202  For discussion of a multilateral treaty process that successfully resulted in the creation of the Energy Charter Treaty, see J Doré, ‘Negotiating the Energy Charter Treaty’ in Wälde (n 144 above) 137–53. For a description of the OECD’s failed process to negotiate the Multilateral Investment Agreement, see C Devereaux, RZ Lawrence, and MD Watkins, Studies in US Trade Negotiation (Washington, DC: Institute for International Economics, 2006) 135–86.

203  See Ch 1, section 1.6.

204  World Investment Report 2014 (n 68 above) 124.

205  N Rubins, ‘The Allocation of Costs and Attorney’s Fees in Investor–State Arbitration’ (2003) 18 ICSID Rev—FILJ 109, 125 (observing that whereas 58% of commercial arbitration claims brought to the ICC in 1999 were for less than US$1 million, the average claim for ICSID cases in 1997 was US$10 million).

206  eg arbitral tribunals rendered awards of US$353 million against the Czech Republic, US$71 million against Ecuador, US$824 million against Slovakia, and US$133.2 million against Argentina.

207  International Institute for Sustainable Development, ‘Czech Republic Hit with Massive Compensation Bill in Investment Treaty Dispute’, Investment Law and Policy Weekly News Bulletin, 21 March 2003.

208  Int’l Thunderbird Gaming Corp v United Mexican States (26 January 2006), NAFTA Ch 11 Arb Trib Arbitral Award 68, 72.

209  K Vandevelde, ‘Investment Liberalization and Economic Development: The Role of Bilateral Investment Treaties’ (1998) 36 Col J Transnat’l L 501, 524–25.

210  ibid 523.

211  ibid 522–55.

212  See eg M Hallward-Driemeier, ‘Do Bilateral Investment Treaties Attract DFI? Only a BIT … and They Could Bite’, World Bank Working Paper No 3121 (June 2003).

213  Salacuse and Sullivan (n 188 above) 67–130, concluding with regard to US BITs that there is a strong correlation between the existence of a US BIT with a developing county and increased capital flows to the developing country concerned but indicating that the evidence is much less strong with respect to BITs concluded with other OECD countries.

214  Vandevelde (n 209 above).

215  Ginsburg (n 194 above) 107–23.

216  SE Graham, ‘FDI in the World Economy’, IMF Working Paper wp/95/59, Washington, DC (2005); E Graham and E Wada, ‘Foreign Direct Investment in China: Effects on Growth and Economic Performance’ in P Drysdale (ed), Achieving High Growth: Experience of Transitional Economies in East Asia (OUP, 2001); EJ Borensztein, ‘How Does Foreign Direct Investment Affect Economic Growth?’ (1998) 45 J Int’l Econ 115; R Lensink and O Morissey, ‘Foreign Direct Investment: Flows, Volatility and Growth’, Paper presented at the Development Economic Study Group Conference, University of Nottingham (April 2005) 5–7.

217  IBRD, ‘World Development Report: The State in a Changing World’ (1997).

218  JW Salacuse, ‘From Developing Countries to Emerging Markets: A New Role for Law in the Third World’ (1999) 33 Int’l Lawyer 877–80.

219  ibid 882–6.

220  Even the US, which strongly supports the liberal economic model, restricts or limits the ability of foreigners to invest in certain areas, including commercial aviation, telecommunications, and maritime industries. Moreover, several states restrict the ability of foreigners to own real estate. RH Cummings, ‘United States Regulation of Foreign Joint Ventures and Investment’ in DN Goldsweig and RH Cummings (eds), International Joint Ventures: A Practical Approach to Working with Foreign Investors in the U.S. and Abroad (American Bar Association, 1990) 137, 139.

221  See eg Agreement for the Promotion and Protection of Investments (India–UK) (14 March 1994), (1995) 34 ILM 935, 940 Art 3(1).

222  See generally JW Salacuse, ‘Host Country Regulation and Promotion of Joint Ventures and Foreign Investment’ in Goldsweig and Cummings (n 220 above) 107–36 (explaining how host countries regulate joint ventures and the effect of such regulation on their operation and formation) and JW Salacuse, ‘Direct Foreign Investment and the Law in Developing Countries’ (2000) 15 ICSID Rev—FILJ 382.

223  See eg Agreement for the Promotion and Reciprocal Protection of Investments, (Hungary–UK) (9 March 1987), 1990 UKTS 44 (Cm 1103) Art 2.1; reprinted in (1989) 4 ICSID Rev—FILJ 159, 160 (‘Each Contracting Party … subject to its right to exercise powers conferred by its laws, shall admit … capital [of the other contracting party]’).

224  Vandevelde (n 209 above) 511.

225  See eg Investment Agreements in the Western Hemisphere: A Compendium (14 October 1999) (‘The most representative clause reads as follows: Each Contracting Party shall promote, in its territory, investments of investors of the other Contracting Party and shall admit such investments in accordance with its laws and regulations’), available at <http://www.ftaa-alca.org/ngroups/ngin/publications/english99/compinv1.asp> accessed 2 April 2009.

226  Professor Vandevelde has concluded:

BITs are very limited tools for liberalization. Access provisions are subordinate to local law; nondiscrimination provisions apply only post establishment of investment and are subject to exceptions; security is afforded against certain types of state interference, but generally not against private interference; dispute provisions apply only to public, not private, disputes; and transparency provisions are rare.

Vandevelde (n 209 above) 514.

227  K Vandevelde, ‘The Political Economy of a Bilateral Investment Treaty’ (1998) 92 AJIL 621, 633. According to Vandevelde, a liberal economic model of a BIT would do a better job reflecting ‘investment neutrality’ (ie state non-intervention in cross-border investment flows) and ‘market facilitation’ (enabling the state to correct market failures) (ibid 633–5). As they stand now, however, BITs are more about ‘protecting the interests of home state investors and preserving the political prerogatives of the host state’ than they are about improving economic efficiency (ibid 634).

228  ibid 634.

229  JW Salacuse, ‘From Developing Countries to Emerging Markets: A New Role for Law in the Third World’ (1999) 33 Int’l Lawyer 875–90.

230  UNCTAD, Latest Developments in Investor–State Dispute Settlement (2005) 20 UN Doc UNCTAD/WEB/ITE/IIT/2005/2, available at <http://www.unctad.org/en/docs//webiteiit20052_en.pdf> 20, accessed 17 Janaury 2015; see also IBRD, ‘World Development Report 2005: A Better Investment Climate for Everyone’ (2004) 111–12.

231  UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998) 159–217.

232  Egypt is an excellent example of this phenomenon. During the time of President Gamal Abdel Nasser, the country was virtually closed to foreign investment. After his death, the Sadat government took a first tentative step towards liberalization by seeking only Arab capital in 1971 and then foreign investment in 1974. Gradually, both policy and law evolved to the point where Egypt was encouraging all private investment, both foreign and domestic. JW Salacuse, ‘Back to Contract: Implications of Peace and Openness for Egypt’s Legal System’ (1980) 28 Amer J Comp L 315. See also JW Salacuse, ‘Foreign Investment and Legislative Exemptions in Egypt: Needed Stimulus or New Capitulations?’ in L Michalak and JW Salacuse (eds), Social Legislation in the Contemporary Middle East (University of California Press, 1986) 241.

233  On the discussion about complexities of developing a liberal investment climate, see generally World Development Report 2005: A Better Investment Climate for Everyone (2004).