Trade Bits PDF

Bilateral Investment
Treaties and Development

Policy-Making
Luke Eric Peterson

International Institute for Sustainable Development
November 2004
Bilateral Investment Treaties

and Development
Policy-Making
Luke Eric Peterson, International Institute for Sustainable Development
November 2004
Bilateral Investment Treaties and Development Policy-Making
2004 International Institute for Sustainable Development and the Swiss Agency for
Development and Cooperation
Published by the International Institute for Sustainable Development
The International Institute for Sustainable Development contributes to sustainable
development by advancing policy recommendations on international trade and investment, economic policy, climate change, measurement and assessment, and natural
resources management. Through the Internet, we report on international negotiations
and share knowledge gained through collaborative projects with global partners, resulting in more rigorous research, capacity building in developing countries and better dialogue between North and South.
IISDs vision is better living for allsustainably; its mission is to champion innovation,
enabling societies to live sustainably. IISD receives core operating support from the
Government of Canada, provided through the Canadian International Development
Agency (CIDA) and Environment Canada; and from the Province of Manitoba. The
institute receives project funding from numerous governments inside and outside
Canada, United Nations agencies, foundations and the private sector. IISD is registered
as a charitable organization in Canada and has 501(c)(3) status in the United States.
Luke Eric Peterson, Associate, International Institute for Sustainable Development
ISBN 1-895536-59-6
International Institute for Sustainable Development
161 Portage Avenue East, 6th Floor
Winnipeg, Manitoba
Canada R3B 0Y4
Tel: +1 (204) 958-7700
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Web site: http://www.iisd.org/
This publication results from a Small Grant received from the Swiss Agency for
Development and Cooperation (SDC), Global Issues and Development Division, as
part of its program of support for IISDs work in Trade and Investment. The text is the
responsibility of IISD alone, and does not necessarily represent Swiss government policy. The generous support of the Swiss government is, however, gratefully acknowledged.
This paper is one of four IISD/SDC papers published in November 2004. The other
papers in the series are: Implications of the Cotonou Agreement for Sustainable
Development in the ACP Countries and Beyond; A Model International Investment
Agreement for the Promotion of Sustainable Development; and A Capabilities Approach
to Trade and Sustainable Development: Using Sens Conception of Development to Reexamine the Debates. All papers can be found on IISDs Web site at http://www.iisd.org
This paper is based upon a larger study commissioned by the Swiss Agency for
Development and Cooperation.
ii
Contents
1. Introduction
2. Bilateral Investment Treaties: What the Treaties Say

2.1 Typical contents
2.2 Provisions on development
2.3 Special and differential treatment
3
3
3
5
3. What the Treaties Do

3.1 Investment treaties and the stimulation of new FDI flows
3.2 Applications of the BIT protections by investors
3.3 Dispute settlement procedures
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4. Investor Usage of the Treaties

4.1 Data on investment treaty arbitrations
4.2 Issues emerging in arbitrations
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5. Development Linkages
5.1 Internationalization of disputes
5.2 Object and purpose of the treaty
5.3 Costs of investment treaty arbitration
5.4 Asymmetries of information
5.5 Uncertainty surrounding the meaning of key treaty provisions
5.6 The right to regulate and to introduce social insurance
programs
5.7 Control over entry/establishment in the host state territory
5.8 Restricting the ability of states to impose social obligations
on investors
5.9 Standards of conduct for bureaucratic and administrative
agencies
5.10 Irreversibility of treaty commitments
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6. Conclusions
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1.
Introduction
As flows of foreign aid to the developing world have stagnated in recent years,
many governments have looked to foreign direct investment (FDI) to make
up the shortfall. According to the United Nations Conference on Trade and
Development (UNCTAD), the overwhelming proportion of recent changes
to domestic laws affecting foreign investment have been designed to promote
greater openness to FDI.1
At the same time, governments have embarked upon an ambitious effort to
conclude international treaties which purport to protect, promote and, in
some instances, remove barriers to foreign investment flows. The international
rules governing FDI first came to broad public notice in the mid-1990s during the OECDs ultimately unsuccessful efforts to negotiate a Multilateral
Agreement on Investment (MAI).
Although the failed MAI generated considerable scrutiny, less attention has
been paid to the broader universe of Bilateral Investment Treaties (BITs) which
have been negotiated worldwide for several decades. The number of BITs
exploded during the 1990s and into the new century. There are now about
2,265 such treaties in existence.2 Most of these agreements have been concluded between a developed and a developing country, owing to their origins
as instruments governing investment into the developing world. An increasingly sizable number, however, are concluded between two developing countries, and even between least developed countries (LDCs).
This paper examines these treaties and their impact upon development policymaking, with somewhat closer focus on the treaty practice of Switzerland and
the United Kingdom.3 Development policy-making here refers to those
1
2
UNCTAD, World Investment Report 2003, United Nations, Geneva and New York, pp.
2021.
UNCTAD, Number of Bilateral Investment Treaties Quintupled During the 1990s,
Media Release TAD/INF/2877, available at: http://r0.unctad.org/en/press/pr2877en.pdf;
UNCTAD, World Investment Report 2003, p. 21. UNCTAD, World Investment Report
2004: The Shift Towards Services, 2004.
For a survey of the UK bilateral investment treaty programme see Luke Eric Peterson, UK
Bilateral Investment Treaty Programme and Sustainable Development, Royal Institute for
policies that a host government holds to be essential to promoting the basic

needs of its citizens (including in relation to access to water and sanitation;
eradication of hunger and extreme poverty; disease eradication; access to
health care; provision of basic education; environmental protection; and
health and safety).4 The paper begins with an examination of what investment
treaties saytheir substantive and procedural provisionsand then offers an
analysis of what the treaties dowhat concrete implications the treaties may
have for developing countries.
For the sake of argument, this paper assumes that FDI can be a positive force
in the domestic economies and development planning of developing countries. This avoids the considerable debate in the literature on the effectiveness
of FDI as an engine for promoting economic development. Yet, even where
FDI is presumed to play a positive role, emerging research questions the effectiveness of bilateral investment treaties as instruments for stimulating such
FDI flows. At the same time, some substantive investment treaty provisions
have been seen to have unanticipated, and potentially worrying, legal and policy implications for host states. Most investment treaties offer an innovative
dispute settlement mechanism that permits foreign investors to mount international arbitrations against host states in cases where the investor alleges that
the treatys provisions have been violated. As will be seen, the number of
treaty-based arbitrations has risen sharply in recent years. While this process is
bedeviled by a lack of clarity and consistency, it can be seen that the treaties
will harbour important consequences for developing countries. This paper
identifies a number of key, emerging development linkages.
International Affairs Sustainable Development Programme Briefing Paper No.10 February

2004, available at: http://www.riia.org/pdf/research/sdp/BinvestFeb04.pdf
Although development is a term susceptible to many definition and interpretations, there
has been considerable international consensus surrounding the eight so-called UN
Millennium Development Goals, which are set out at http://www.developmentgoals.org
2.
Bilateral Investment Treaties:
What the Treaties Say
2.1
Typical contents
Bilateral Investment Treaties have been negotiated since the late 1950s. While
sweeping characterizations would belie the diversity of these treaties, a number
of general features have emerged. The typical modern BIT will include provisions designed to offer certain absolute standards of treatment (for example fair
and equitable treatment); relative standards of treatment (National treatment or
Most-Favoured Nation); protections against expropriation or nationalization;
and recourse to dispute-settlement (state-to-state and investor-to-state). Many
BITs also include provisions allowing for transfer of monies and for some protection from war and civil disturbance.5 A small number of BITs also contain
provisions on the movement of key employees, and prohibiting certain forms of
performance requirements.6 Generally, treaty provisions will only apply to
investments once they have been established in the host state. However, some
treatiesparticularly those championed by the U.S., Canada and Japanmay
extend protections to the pre-establishment phase, i.e., prior to the establishment of the investment in the host states territory.7 In terms of the sectors of the
economy that are covered by the substantive disciplines, it is common for treaties
to cover all sectors, with the exception of those which are expressly carved-out of
the treaty, or exempted from the reach of certain of its provisions.
2.2
Provisions on development
International investment treaties are sometimes said to have set out development as a central objective. This is a view which had been espoused by
5
6
7
UNCTAD, Bilateral Investment Treaties in the Mid-1990s, (United Nations, New York and
Geneva 1998) pp. 73-80.
UNCTAD, BITs in the Mid-1990s, pp. 813; Provisions covering performance requirements are found in some U.S., Canadian and Japanese treaties.
UNCTAD, Admission and Establishment, 1999, pp. 268; This issue is discussed more fully
in the section on development linkages.
governments at the WTOs Working Group on Trade and Investment, and is

attributed, in turn, to UNCTADs work in this area.8 Certainly, any expression of the development intentions of the parties entering into such a treaty
would be relevant for purposes of guiding the legal interpretation of the treaty.
However, examples of treaties which set out development as an objective tend
to come from exceptional bilateral treaties and, more often, from a handful of
regional or multilateral agreements, such as the WTOs General Agreement on
Trade in Services (GATS) or the Lom Convention, rather than the overwhelming number of bilateral investment treaties.
Because treaty practice differs from country to countryand even within
countries over timegeneralizations must be made cautiously. However, the
authors experience of examining more than 150 treatiesincluding a majority of those concluded by Switzerland, the United States, Canada and the
United Kingdom, and a smattering of other treatiessuggests that references
to development are exceedingly rare in treaties pushed by a number of Western
governments with developing countries. For example, investment treaties
signed by the U.K., Canada and Switzerland typically do not refer to development in any contexteither in the preamble to the treaty or in the treatys
substantive provisions.
U.S. BITs do make some references to economic development: Recognizing
that agreement upon the treatment to be accorded such investment will stimulate the flow of private capital and the economic development of the parties,
and agreeing that a stable framework for investment will maximize effective
utilization of economic resources and improve living standards.9 But even
these references are clearly geared to the interests of the foreign investorciting the desirability of enhanced flows and stabilitywithout recognizing the
need for government-intervention or appropriate-regulation as part of a successful development policy.
Just as investment treaties seem to have little to say about developmentapart
from a generalized faith that the treaties will yield investment, which will, in
turn, lead inexorably to developmentreferences to an actual right to development (which some commentators deem to be part of customary international
law); international development law; or a right to regulate for development are
8
See for e.g., Investment Rules For Developing Policies, Communication from Japan,
June 12, 2001, WT/WGTI/W/104, at para 13 and Multilateral Framework for
Investment; an Approach to Development Provisions, Communication from Switzerland,
May 16, 2002, WT/WGTI/W, at paras 1920.
See for example the U.S. BITs with Azerbaijan, Bahrain, Uzbekistan, Croatia, El Salvador,
Georgia, Honduras, Jordan and Albania archived at www.state.gov/www/issues/
economic/bit_treaty.html
even less common.10 This widespread failure to identify development as an

important objective of investment treaties will have important policy repercussions, as will be see in the discussion of treaty object and purpose in section 5.2
below.
2.3 Special and differential treatment

Of course, simply because development is not explicitly articulated as an objective of an investment treaty does not mean that development considerations
might not have guided the drafting of a treaty. So-called special and differential
treatment might manifest itself in a treaty through differentiated obligations,
phased-in commitments, or specially-tailored undertakings for the lesser-developed of the two parties to a treaty. While the occasional multilateral or regional
agreement may have been inspired by a desire to enshrine special and differential treatment, such features appear rare in the general run of bilateral investment
treaties.11 In the authors experience, BITs tend to be highly reciprocal in their
commitmentsthat is, standard treaty provisions will apply to home and host
countries alike.12 In theory, there are potential avenues for some differentiation
of the obligations of developed and developing countrieseven if their use in
practice may be highly circumscribed by the more powerful countrys interest in
keeping differentiated commitments to a minimum.
Several examples where differentiation might occur, include:
a. Developed nations can show sensitivity to treaty-partners at vastly different
stages of development by absolving them from certain treaty obligations. For
example, some early BITs did not impose obligations with respect to national treatment. However, such a rare concession may owe more to the negotiating leverage of a given developing country signatory, than to any broader
development sensitivity on the part of the developed country partner. Thus,
for example, China in its negotiations with the U.K. in the mid-1980s agreed
only to provide national treatment to the extent possible. But, at the same
time, numerous LDCs continued to be signed up to full and binding national treatment commitments in investment treaties with the U.K.13
10 UNCTADs survey of a broader range of BITs yields no examples which reference the right
to development, which many commentators hold to be a tenet of customary international
law. See UNCTAD, International Investment Agreements: Flexibility for Development, UNCTAD Series on Issues in International Investment Agreements, (Geneva and New York
2000), p. 25.
11 UNCTAD, Flexibility for Development, p. 36.
12 This point was underscored in a submission by UNCTAD to the WTOs Working Group
on Trade and Investment, WGTI/77 at para 45.
13 See e.g., U.K. investment treaties from the 1980s to the present day with countries such as
Benin, Burundi, Angola, The Gambia, Laos, Lesotho, Sierra Leone and Uganda.
b. Occasionally, international investment agreements (IIAs)14 will allow parties to shelter existing (or future) measures related to selected industries or
sectors from the reach of particular treaty commitments. Such exceptions
might be entered in the treaty text, or in a separate protocol. For example,
Canadian BITs commonly include an annex where the parties may exclude
existing and/or future measures in designated sectors (e.g., social services)
from the reach of the national treatment obligation.15 Such exceptions are
not common to all investment treaties. For example, none of the Swiss or
U.K. treaties examined by the author exempt social services (such as health
or education) from investment treaties. Indeed, sectoral exceptions of any
kind are quite rare in the treaty practice of the U.K. and Switzerland.
However, the 2002 BIT between the U.K. and Vietnam does contain an
annex that enumerates a series of sectors where existing Vietnamese measures will be exempted from the national treatment duty to U.K. investors.
These include: broadcasting; television; press; cinematic products; telecommunications services; tourism services; banking services; insurance services;
exploitation of gas and oil; and fisheries. The U.K.-Panama BIT goes a step
further in an annex which sets out a number of economic sectors and
activities which are constitutional and legal exceptions to be excluded from
the effect of this Agreement. (emphasis added).16 Second, even where
exceptions are permitted, this presupposes a level of analysis and forethought which some of the least developed countries may not have, given
their resource constraints and their limited experience with these types of
investment rules.17
14 The term IIA is broader than BIT, and encompasses a number of regional or multilateral
instruments on investment in addition to standard bilateral treaties. Although more than
98 per cent of known IIAs will be BITs, (thereby explaining this papers focus upon BITs)
the term IIA is used in these sections because it is typically the small number of regional or
multilateral instruments which contain language on development or offer special and differentiated treatment.
15 Agreement Between the Government of Canada and the Government of Barbados for the
Reciprocal Promotion and Protection of Investment; Agreement Between the Government
of Canada and the Government of the Republic of Trinidad and Tobago for the Reciprocal
Promotion and Protection of Investments; Agreement Between the Government of Canada
and the Government of the Republic of Ecuador for the Promotion and Reciprocal
Protection of Investment, all available at: http://www.dfait-maeci.gc.ca/tna-nac/fipa_
list-en.asp
16 These include: communications; banking; insurance; private-owned public utility companies; energy production; and the right to exploit natural resources, including fishing.
17 UNCTAD, BITs in the Mid-1990s, p. 24.
Such examples are remarkable, of course, because they are so unusual.

Typically, the ability to write such exceptions into a treaty will be circumscribed by the asymmetry of negotiating power between the developed and
developing nation; developed countries typically exert strong leverage in
discussions. The usual practice is for the Western nation to table a negotiating template which hews closely to its established treaty practice with
other nations. Exceptions, where permitted, tend to be few and grudging.18
c. On occasion, treaty exceptions have been designed so as to reserve the right
of one or both parties to accord special incentives or government aids to
stimulate the creation of local industries. A small number of U.K. agreements, and an even smaller proportion of Swiss BITs reviewed by the
author, will permit special treatment for small-scale industriesby derogating from the national treatment obligationprovided that such treatment does not substantially impair or significantly affect the investments of foreigners.19 More often, the treaties will require that host states
treat foreign investors on par with their own nationals and/or investors of
the most-favoured third nationwith no special exceptions for subsidies to
local industries or other forms of exceptions for development purposes.20
d. Another means by which investment treaties might ensure that FDI in the
host state will contribute to domestic development, is to impose certain
responsibilities on investors or the investors home country. Such measures
are exceedingly rare; an UNCTAD research paper on investment agreements and social responsibility prefaced its discussion of the development
obligations of investors and home states, with an acknowledgement that
the subject matter of this paper is conspicuous by its relative absence from
IIAs.21 Indeed, what might be termed investor responsibilities by some,
might be characterized as (ill-advised) performance requirements by othersand might be prohibited under some treaty models (performance
requirements are discussed in section 5.8).
18 UNCTAD, World Investment Report 2004, p. 229.
19 See for example Art.3(4) of the 1990 Switzerland-Jamaica treaty or Art 3(3) of the 1989
U.K.-Guyana treaty.
20 It is quite standard, however, for treaties to make exceptions to national treatment/mostfavoured nation treatment with respect to broader free-trade areas, customs unions, or double-taxation treaties. In other words, an investment treaty between a country which is party
to the World Trade Organization and a party which is a non-WTO member, would not
entitle, by virtue of the MFN clause, the latter party to all rights which the former party is
obliged under the WTO agreements to share with WTO members.
21 Social Responsibility, UNCTAD Series on Issues in International Investment
Agreements, 2001, p. 17.
While BITs can, in theory, be written with an eye towards flexibility for development purposes, it appears uncommon for them to have been crafted in such
a manner. Rather, BITs tend to be highly reciprocal, narrowly focused on
investment protection (rather than development or other policy goals), and
garnished with few exceptions. Although the treaties generally lack development provisions, it would be inaccurate to infer that these agreements will
have little impact upon the efforts of developing countries to pursue domestic
development goals. Instead, as will be seen in the subsequent analysis, the
treaties may have positive benefits for foreign investors, but they could have
negative implications for host governments, insofar as they may circumscribe
the ability of governments to take policy measures designed to promote
domestic development objectives.
3.
What the Treaties Do
3.1
Investment treaties and the stimulation of new

FDI flows
A long-standing rationale for the conclusion of investment treaties has been

their purported usefulness in stimulating new investment flows between the
signatory countries. In essence, there is a straightforward expectation that the
treaties will encourage new investment, which will, in turn, contribute to the
economic development of the host state. Assuming that FDI can contribute
to economic development, it remains questionable whether BITs play a major
role in stimulating those desired FDI flows.
Several former officials involved with U.S. BITs negotiation during the 1980s
have conceded that the treaties were not intended to catalyze new flows, but
rather to protect existing (and subsequent) investments.22 Kenneth
Vandevelde suggests that capital-exporting states may have given priority in
BITs negotiations to states that already were hosts to large amounts of its
investment, so that BITs may be caused by investment flows and not the other
way around.23
Some investment lawyers have highlighted the lack of tangible evidence to
demonstrate investment flows and a link to investment treaties.24 Indeed,
two self-described proponents of the investor protections contained in such
agreements, concede that the agreements may be negatively correlated to
investment flows: with countries like Brazil and Nigeria seeing large investment
22 K. Scott Dudgeon, United States bilateral Investment Treaties: Comments on their
Origin, Purposes and General Treatment Standards, 86 International Tax & Business
Lawyer, Vol. 4, p. 111; Kenneth Vandevelde, Investment Liberalization and Economic
Development: the Role of Bilateral Investment Treaties, 36 Columbia Journal of
Transnational Law, 1998, No. 3, pp. 52425.
23 Vandevelde, Investment Liberalization, 52425.
24 Thomas Walde, with Stephen Dow, Treaties and Regulatory Risk in Infrastructure
Investment: The Effectiveness of International Law Disciplines versus Sanctions by Global
Markets in Reducing the Political and Regulatory Risk for Private Infrastructure
Investment, 34 Journal of World Trade, 2000, No. 2, p. 12.
flows despite shying away from such treaties, while many Central African or
Central American nations have seen little investment despite having entered into
rafts of BITs.25 Similarly, countries such as China and Cuba have seen sizable
flows of investment from countries with whom they have not concluded BITs.26
Recently, the World Banks 2003 Report on the Global Economic Prospects of
the Developing Countries concluded that Even the relatively strong protections in BITs do not seem to have increased flows of investment to signatory
developing countries.27 The Bank relies upon a 2002 study by Mary
Hallward-Driemeier of 20 years of data, which indicates that Countries that
had concluded a BIT were no more likely to receive additional FDI than were
countries without such a pact.28
Notwithstanding these nagging doubts about the impact of investment
treaties upon investment flows, western nations have continued to champion
the agreementsmore likely, due to the enthusiasm of domestic investors for
their protection standards, than as a result of any real evidence to show their
efficacy in increasing FDI flows to developing countries.29 More puzzling,
however, is the enthusiasm of many developing countries to continue to enter
into these treaties with developed statesand increasingly with their counterparts in the developing world.
Even if investment treaties play a relatively marginal role in the stimulation of
new investment, it needs to be asked to what extent the protective function of
the treaties will impact upon the ability of governments to regulate investments in the public interest, including for the furtherance of development
goals.
3.2
Application of BIT protections by investors
In discussions within the WTOs Working Group on Trade and Investment,

opponents of a proposed multilateral agreement on investment often touted
bilateral treaties as more friendly for developing countries. The government
25 Walde and Dow, p. 12, note 32.
26 The China-US relationship is the most notable; On Cuba see: The Contribution of BITs
to Cubas Foreign Investment Program, Jorge F. Perez-Lopez and Matias F. Travieso-Diaz,
32 Law and Policy in International Business, 529.
27 Global Economic Prospects and the Developing Countries 2003, World Bank, p. xvii.
28 Ibid, 129.
29 The International Chamber of Commerce and the Business Roundtable are two influential business groups which have recently hailed the high-level of protections afforded in
these treaties. See Luke Eric Peterson, Key Business Group Wary of WTO Investment
Talks, INVEST-SD Bulletin, May 23, 2003, http://www.iisd.org/investment/invest-sd/
10
of India opined that (bilateral investment treaties) have found favour with
developing countries like India because they do not place any restrictions on
host countries in following their own foreign direct investment policies in the
light of each countrys unique needs and circumstances.30 However, Turkey,
another participant in the WTO discussion, probably came closer to reality
with this comment: Concerning efficiency of protection standards brought
by BITs, there is very little practical experience to make an evaluation of the
use of BITs.31
Indeed, lawyers long recognized that these treaties were crafted in vague, openended terms; in the words of one arbitration lawyer, they are maddeningly
imprecise as to the substantive legal standard to be applied by the tribunal.32
Only through actual arbitration between investors and states will the meaning
of standard treaty obligationsand their implications for developing countriesbe elucidated.33 And, to the extent that this experience can be surveyed,
it tends to disabuse claims that such investment treaties place no restrictions
upon government policy-making by the host state. As the following sections
explain, the number of treaty-based arbitrations has grown significantly in
recent years. So too has the variety of ways in which the treaties may narrow
the policy space available to governments playing host to foreign investment.
Before turning to this experience, however, the next section surveys the procedures for dispute settlement.
3.3
Dispute settlement procedures
An investor-state dispute settlement mechanism became a virtually standard

treaty feature during the 1980s and 1990s, during the period when the overwhelming number of BITs were negotiated.34 The investor and the host
30 Stocktaking of India Bilateral Agreements for the Promotion and Protection of
Investments, Communication from India to the Working Group on Trade and
Investment, April 13, 1999, WT/WGTI/W/71.
31 Turkeys Experience with Bilateral Investment Treaties, Communication from Turkey to
the Working Group on Trade and Investment, WT/WGTI/W/51.
32 William D. Rogers, Emergence of the International Center for Settlement of Investment
Disputes (ICSID) as the Most Significant Forum for Submission of Bilateral Investment
Treaty Disputes, presentation to Inter-American Development Bank Conference, October
2627, 2000.
33 Ibrahim Shihata and Antonio Parra, The Experience of ICSID, ICSID Review, Vol. 14,
No. 2, Fall 1999, pp. 319, 336.
34 UNCTAD, BITs in the Mid-1990s, p. 94; Antonio Parra, ICSID and Bilateral Investment
Treaties, ICSID News, Spring 2000, Vol. 17, No. 1; It must be noted that individual country practices, and even individual treaties, will differ as to the exact nature and scope of the
investor-state dispute settlement mechanism.
11
government typically select one arbitrator each, with the chair of the threemember tribunal chosen by agreement of the two parties. Arbitrators serve
only for a particular case, and can be drawn from the ranks of practicing
investment lawyers. This peculiar system has drawn some criticism for its failure to employ judges who are permanently selected and entirely independentin the sense that their other (including future) clients would have no
stake in the treaty interpretations rendered in an arbitrators quasi-judicial
capacity.35
The arbitration rules of the Washington-based International Center for the
Settlement of Investment Disputes (ICSID) are most commonly referenced in
BITs.36 Often, treaties will offer additional recourse to other sets of rules,
including those of the International Chamber of Commerce (ICC), the
Stockholm Chamber of Commerce (SCC) and, most often, the United
Nations Commission for International Trade Law (UNCITRAL).37 In
instances where more than one set of arbitration rules are available in a treaty,
investors typically enjoy the ability to choose which to use. As a consequence,
this opens the door to so-called rules-shoppingas different arbitration rules
may provide for differing levels of transparency, different applicable law, and
varying levels of post-arbitration judicial review.38
Transparency bedevils the arbitration processwith only the ICSID rules providing for public disclosure of disputes proceeding under their auspices.
Investors can, and do, bring suit under treaties without needing to publicly
disclose their claim against the host government. This lack of public disclosure
raises concerns in an era when investment treaty arbitrations are often seen to
harbour clear and wide-reaching political, social and financial consequences
(see subsequent sections).
35 International Institute for Sustainable Development and Royal Institute for International
Affairs, Investment, Doha and the WTO, Report of September 2003, pp. 911, available at: http://www.riia.org/pdf/research/sdp/Investment%202.pdf
36 These are the ICSID rules and the so-called ICSID Additional Facility rules. See Antonio
Parra, ICSID and Bilateral Investment Treaties, ICSID News, Spring 2000, Volume 17,
No. 1.
37 Antonio Parra, Provisions on the Settlement of Investment Disputes in Modern
Investment Laws, Bilateral Investment Treaties and Multilateral Instruments on
Investment, 12 ICSID Review Foreign Investment Law Journal, 1997, p. 297.
38 Luke Eric Peterson, "All Roads Lead out of Rome: Divergent Pathes of Dispute Settlement
in Bilateral Investment Treaties," in L. Zarsky, ed., International Investment for Sustainable
Development: Balancing Rights and Rewards, Earthscan, 2004.
12
In stark contrast to most domestic court processes, investment treaty arbitrations are not open to the public unless the parties desire otherwise.39
Moreover, decisions and awards rendered by the Tribunal will not always be
publishedalthough an increasing number are released due to growing academic and public interest in this form of dispute settlement. Nevertheless, the
author in his capacity as editor of a specialized news bulletin dedicated to
treaty arbitration, is well aware that not all decisions circulate publiclyeven
if some circulate within the legal fraternity of investment counsel and arbitrators. These grave shortcomings in transparency necessarily preclude a full
accounting and analysis of investment treaty arbitration, however the following section explores what is known about this phenomenon.
39 At the time of this writing, the ICSID Secretariat had issued a discussion paper which
mooted changes to the arbitration rules in order to remove the veto of a single party over
efforts to open up arbitral proceedings. See Possible Improvements of the Framework for
ICSID Arbitration at http://www.worldbank.org/icsid/improve-arb.htm
13
14
4.
Investor Usage of the Treaties
4.1 Data on investment treaty arbitrations
Because investment treaty arbitrations are resolved using a variety of different
arbitral rulesnot all of which provide for public disclosure of claimsthere
can be no accurate accounting of all such disputes.40 Nevertheless, those
investor-state arbitrations that have been brought to the Washington-based
International Centre for Settlement of Investment Disputes are a matter of
public record. And the vast majority of the 85 claims currently pending before
ICSID (at the time of this writing) were brought pursuant to investment
treaties.41 This reflects a trend whereby ICSIDs caseload has shifted in recent
years away from disputes brought pursuant to individual investment contracts
between foreign investors and their host state, and more towards cases that
invoke an international investment treaty.
In addition to these known ICSID arbitrations, there are an unknown number
of claims occurring under other auspices, such as those of the Stockholm
Chamber of Commerce Arbitration Institute or the UNCITRAL ad hoc rules
of arbitration. There can be no comprehensive accounting of all such claims,
even if anecdotal evidenceand ongoing investigationsuncover ever more
such non-ICSID investment treaty arbitrations. That some portion of the
arbitral iceberg remains hidden from view should be a matter of concern given
that investment treaty disputes can have serious public policy implications. As
will be seen in the following section, the sheer variety of disputes that are being
presented to investment treaty tribunals is quite remarkable.
40 See Peterson, All Roads Lead Out of Rome, at note 38 above.
41 Figures are accurate as of November 19, 2004; See http://www.worldbank.org/icsid/
cases/pending.htm
15
4.2
Issues emerging in arbitrations
While some of the earliest treaty claims arose out of clear-cut dispossessions or
destructions of property,42 more recent investor claims pertain to a much
broader range of alleged violations, including treatment at the hands of host
state regulatory, administrative or tax authorities. Although investment treaty
arbitration pre-dates the North American Free Trade Agreement, it does
appear that investors drew inspiration from a series of quite high-profile
investor suits mounted under the investment chapter of the NAFTA in the
late 1990s. The government of Canada stoked fears when it chose to settle an
early NAFTA claim brought by the U.S.-based Ethyl Corporationoffering
millions of dollars in compensation, and reversing a regulatory decision
before an expropriation claim (which sought to challenge a trade ban on a controversial gasoline additive) could be legally resolved by the tribunal.43
Subsequent rulings under the NAFTA and BITs have failed to resolve the
uncertainty which has arisen with respect to the line between legitimate host
government treatment of foreign investors and conduct which violates standard treaty provisions such as those on fair and equitable treatment, national
treatment or expropriation. Encouraged by the legal uncertainty surrounding
the substantive meaning of key treaty rules, foreign investors are turning to
investment treaties with increasing frequencyand in an effort to challenge
an expanding range of government interference.
A sizable number of cases now arise out of disputes involving the privatization
of formerly public utilitiesand may pass judgment on the legitimate scope
of administrative or regulatory oversightin sensitive areas such as electricity
provision, waste management, and water and sanitation services. In at least
nine documented instances, foreign investors which have been awarded concessions to provide water and sewage services in developing countries have run
into conflict with regulatory authorities, and have had recourse to investment
treaty arbitration in an effort to resolve their differences.44 Notwithstanding
42 Asian Agricultural Products Limited v. Democratic Socialist Republic of Sri Lanka, Award
and Dissenting Opinion of June 27, 1990, 6 ICSID Rev. FILJ 526 (1991); and
American Manufacturing and Trading Inc. v. Democratic Republic of Congo Award of
February 21, 1997, 36 ILM 1534 (1997).
43 See discussion of this case in Private Rights, Public Problems: A Guide to NAFTAs
Controversial Chapter on Investor Rights, IISD 2000, pp. 7174.
44 Compaa de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic
(ICSID Case No. ARB/97/3); Aguas Provinciales de Santa Fe, S.A., Suez, Sociedad General
de Aguas de Barcelona, S.A. and Interagua Servicios Integrales de Agua, S.A. v. Argentine
Republic (Case No. ARB/03/17); Aguas Cordobesas, S.A., Suez, and Sociedad General de
Aguas de Barcelona, S.A. v. Argentine Republic (Case No. ARB/03/18);
16
the lack of transparency surrounding these cases, it is clear that some matters
of public import are arising in the (closed-door) arbitrations. Materials related
to one such case, Compaa de Aguas del Aconquija S.A. and Vivendi
Universal v. Argentine Republic, suggest that the investor and the host state
quarreled over such important matters as:
the method for measuring water consumption, the level of tariffs for customers, the timing and percentage of any increase in tariffs, the remedy
for non-payment of tariffs, the right of (the investor) to pass-through to
customers certain taxes and the quality of the water delivered.45
A particularly notorious case has emerged in Bolivia, where a long-term watersupply contract between a consortium led by the U.S.-based Bechtel
Corporation and Cochabamba, Bolivias third largest city, yielded substantial
hikes in local water ratessome bills doubled and amounted to a quarter of
monthly incomesand a legal expropriation by the firm of all public water
supplies. The water project triggered widespread unrest, leading to serious violence and the eventual declaration of martial law. Company executives were
warned by the authorities that their safety could not be guaranteed and they
were forced to flee Cochabamba. Currently, the government and the consortium disagree as to whether Aguas Del Tunari abandoned its concession or was
forced out. The matter is currently being resolved through investment treaty
arbitration at ICSIDwith the investor claiming that Bolivias failure to protect its investment is in violation of the Netherlands-Bolivia BIT. Given that
some of these water sector arbitrations arise out of disputes over water access,
affordability and quality, it is conceivable that they could have implications for
the obligations which host governments may have under international human
rights law to promote a right to wateralthough it remains unclear whether
host governments will choose to raise such rights with the tribunal, and what
weight a tribunal would attach to them.46
Aguas Argentinas, S.A., Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi
Universal, S.A. v. Argentine Republic (Case No. ARB/03/19), Azurix Corp. v. Argentine
Republic, (Case No. ARB/03/30); Azurix Corp. v. Argentine Republic (ICSID Case No.
ARB/01/12); Aguas del Tunari S.A. v. Republic of Bolivia (ICSID Case No. ARB/02/3);
Azurix Corp. v. Argentine Republic (ICSID Case No. ARB/03/30); SAUR International v.
Argentine Republic (ICSID Case No. ARB/04/4); Anglian Water Group v. Argentine
Republic, UNCITRAL arbitration filed in 2003.
45 Compania de Aguas Del Aconquija, S.A. & Compagnie General des Eaux v. Argentine
Republic, ICSID ARB/97/3, Final Award, at para 32.
46 For an in-depth discussion of such issues see Luke Eric Peterson, International Human
rights in Bilateral Investment Treaties and in Investment Treaty Arbitration, 2003, at
http://www.iisd.org/publications/publication.asp?pno=577
17
The majority of known treaty-based water cases involve the Argentine

Republic and are part of a wider category of disputes brought by foreign
investors in relation to that countrys financial crisis. In January of 2002, the
Argentine government took a series of emergency measures, including elimination of parity between the U.S. dollar and the Argentine Peso, as well as the
elimination of the pegging of tariffs in government contracts to inflationadjusted U.S. dollars.47 These measures have squeezed foreign investors who
typically hold extensive U.S.-Dollar denominated debt, and have been forced
to collect tariffs from customers in an increasingly devalued Argentine Peso.48
As of this writing, most public utilities were still forbidden by the government
from raising tariff ratesdespite pressure having been placed upon the
Government by the International Monetary Fund and the various investors.
The government points to the internal social dislocation occasioned by the
financial crisisincluding dramatic increases in unemployment and a precipitous decline in the value of household savings (which were typically in
Argentine Pesos)as grounds for not raising tariffs charged to Argentines for
basic public services. President Nestor Kirchner has warned that rate increases
will not be considered until all foreign contracts can be revised.49
In the interim, large numbers of foreign investors have resorted to arbitration
under treaties concluded between their home states and Argentina in an effort
to obtain compensation for revenues lost during the financial crisis. The first
known case to challenge the emergency measures was brought by a U.S.
investor, CMS Energy, whose investment in a natural gas transportation network was alleged to have been adversely affected by the governments emergency measures.50 CMS alleges that Argentinas measures violate a number of
investment treaty provisions, and in particular, are tantamount to expropriation due to their significant impact upon the companys financial statements.
In 2003, an ICSID tribunal issued a decision on jurisdiction indicating that it
47 The Argentine CrisisForeign Investors Rights, Freshfields Bruckhaus Deringer,
January 2002.
48 The three Suez cases at ICSID fall into this category, as does the second Azurix case at
ICSID, along with the SAUR International claim. In addition, the Anglian Water Group
case under the UNCITRAL rules is understood to relate to the financial crisis.
49 ENDESA, AGBAR, EDF and Suez fined by Argentina, El Pais, Oct. 23, 2003;
Argentina feels the heat as debt-ridden electricity companies warn of blackouts, by Adam
Thomson, The Financial Times, Oct. 28, 2003.
50 Freshfields Bruckhaus Deringer, Annual Report 2002, available at http://www.
freshfields.com/publications/pdfs/annualreport2002.pdf
18
had jurisdiction to examine the claim on its merits.51 Hearings were held on
the merits in August of 2004 and a final decision is expected by January 2005.
Further complicating the difficult task confronting tribunals is that they are
not operating in a vacuum. Several dozen claims have been mounted against
Argentina, and are being resolved by separate tribunals, operating in parallel
which raises the prospect that these arbitrations may yield a succession of different rulings. Already, two parallel investment treaty arbitrations against
another country, the Czech Republic, have generated contradictory rulings
from the two tribunals. As will be explored in more detail in the section on
development linkages, these parallel arbitrations have pinpointed a significant
Achilles heel of this investor-state arbitration process: its failure to consolidate
similar cases under a single dispute resolution body, with the consequent
potential to generate conflicting rulings, and contribute to considerable uncertainty for investors and host states alike.
While Argentina sets the pace in terms of the sheer number of treaty-based
claims which have arisen out of its financial crisis, investment treaties are being
invoked across the whole economic spectrum. Disputes have been seen in relation to the regulation of the broadcasting and audio-visual sectors,52 concessions to exploit precious metals in conflict-ridden nations,53 decisions related
to the environmental zoning of factories,54 licensing of cellular telecommunications,55 regulation of financial services,56 and regulation of the newspaper
publishing industry57to name only a few of the many sectors which have
seen arbitrations launched. Increasingly, treaty arbitration is threatened or
turned to by multinational firms embroiled in some of the largest and most
51 Luke Eric Peterson, Path Cleared for First Challenge to Argentine Emergency Laws to be
Heard on Merits, INVEST-SD News Bulletin, Aug. 1, 2003.
52 Lauder v. Czech Republic and CME v. Czech Republic, arbitrations under the UNCITRAL rules.
53 Miminco LLC and others v. Democratic Republic of the Congo (Case No. ARB/03/14).
54 Lucchetti S.A. and Lucchetti Peru, S.A. v. Republic of Peru (Case No. ARB/03/4).
55 William Nagel v. Czech Republic, arbitration mounted in 2002 under the Stockholm
Chamber of Commerce rules; Ameritech v. Poland, UNCITRAL arbitration mounted in
1996 but settled before tribunal heard the entire case; Telekom Malaysia v. Ghana, UNCITRAL arbitration mounted in 2003; Telenor Mobile Communications AS v. Republic of
Hungary (ICSID Case No. ARB/04/15); France Telecom v. Lebanon, UNCITRAL arbitration mounted in 2002.
56 CSOB v. Czech Republic (ICSID Case Arb/97/4).
57 Mediaprint v. Czech Republic. At the time of writing, this case had not been formally registered.
19
contentious international disputes with foreign governments, including the

Russia-Yukos affair, Zimbabwes controversial land reform policies, South
Africas Black Economic Empowerment Programme, and an Indian joint-venture power project involving U.S. firms Enron, Bechtel and General Electric.58
It must be recalled, also, that some (perhaps significant) portion of investment
treaty arbitration takes place without any public awareness. The following section examines some of the emerging development-policy lessons which can be
gleaned from those cases which are known to be proceeding.
58 Russian, Zimbabwean and South African cases have been threatened, but, as far as can be
determined, had yet to be formally launched as of this writing. However, Bechtel and
General Electric are currently involved in a treaty-based arbitration against India, which has
been reported to be the largest such claim in history. See GE Dares walking away with
Dabhol (and seek legal recourse for its claims of $12 billion from India), India Business
Insight, October 18, 2004.
20
5.
Development Linkages
5.1 Internationalization of disputes
Investment treaties typically provide foreign investors with the ability to bypass local and national legal systems, in favour of international arbitration.
Modern treaties rarely require investors to exhaust their domestic legal remedies, prior to pursuing an international claimin stark counterpoint to international human rights treaties which oblige victims to appeal to local courts
in the first instance.
Even where contracts between an enterprise and a state expressly limit recourse
to local dispute settlement options, this may not restrict foreign investors from
opting for international arbitration in situations where a bilateral investment
treaty has also been concluded by the investors home state and host state.
Several recent ICSID cases have underscored this point by upholding jurisdiction to hear treaty claims, notwithstanding the fact that the foreign investor
was party to a contract which specified that contract claims would be the exclusive province of a given domestic court.59 Often, foreign owners of local firms
or holding companies are free to assert international claims, which tribunals
deem distinctive, due to their having different parties (the foreign owner,
rather than the local firm) and different legal grounds (alleged breaches of the
treaty, rather than breaches of contract). Indeed, in one water privatization disputes against Argentina, the Buenos Aires Government had gone so far as to
insist that company officials waive their right to have recourse to the U.S.Argentina BIT in the event of a disputehowever, an ICSID tribunal held
that this waiver did not prevent the U.S.-based Azurix Corporation (the primary shareholder in the local subsidiary, Azurix Buenos Aires) from mounting
its own international treaty claim for damages.60
59 Compaa de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic
(ICSID Case No. ARB/97/3) Annulment Decision of July 3, 2002, 41 ILM 1135 (2002);
CMS Gas Transmission Company v. Argentine Republic (ICSID Case No. ARB/01/8),
Decision on Jurisdiction of July 17, 2003, 42 ILM 788 (2003).
60 Azurix Corp. v. Argentine Republic, Decision on Jurisdiction, Dec. 8, 2003.
21
Despite their best efforts, governments are finding that, once they have concluded investment treaties containing open offers to investor-state arbitration,
they cannot prevent foreign investors from taking their claims out of the local
legal system. Proponents of this form of international arbitration sometimes
describe it as an important safety valve in the event that foreign investors may
not be able to receive a fair hearing in a host governments courts. Yet, with
provisions on investor-state arbitration written into treaties concluded by
more than 170 nationsincluding virtually all OECD countriesit seems
that the sheer number of countries that have consented to this dispute resolution model far exceeds the number of countries where corruption or inefficiency in the courts would seem to be a serious problem. In any case, the concomitant failure of most modern investment treaties to require exhaustion of
local remedies ensures that foreign investors will rarely need to dip even a toe
into the local court system provided a treaty is at their disposal.
In addition to permitting investors to by-pass local court systems, investment
treaty arbitration also insulates the proceedings from extensive review by local
court systems. Arbitrations under the ICSID rules are wholly exempted from
the supervision of local courts, with awards subject only to an internal annulment process. Meanwhile, arbitrations under other sets of rules may be subject to limited challenge in domestic courts. Such review will typically be circumscribed by laws designed for ordinary commercial arbitrations, and which
may, as a result, accord a higher degree of deference to the findings of the arbitral tribunal.61 As Professor M. Sornarajah has recently noted, if the arbitration was legally sited in a country other than the host state, then there may be
no capacity whatsoever for the host government to challenge the award in its
own legal system.62
Thus, governments acceding to investment treaties need to be aware that these
agreements may serve to internationalize disputes which arise between regulators and foreign investors in sensitive sectors (including media, electricity,
water, financial services, environmental regulation, etc.) and, in so doing,
ensure that foreign investors may detour around domestic legal systems and
laws applicable in that system.
61 In Canada, for example, review of several NAFTA arbitration awards have not yet clarified
under what circumstances courts might show less deference to an investor-state arbitration
(particularly one of some public interest) as opposed to a standard commercial arbitration.
See Luke Eric Peterson, Canadian court declines to set aside award in NAFTA Feldman
arbitration, Dec. 8, 2003, INVEST-SD News Bulletin.
62 M. Sornarajah, Affadavit in Ontario Superior Court of Justice case between The Council of
Canadians, et al. and Canada, Court file No. 01-CV-208141, at para 13.
22
For instance, at the time of this writing, the South African government had
been served with notice that several foreign-owned mining corporations might
bring claims under domestic law for expropriation.63 The firms object to mining legislation inspired by a desire to redress historical economic marginalization
of Blacks and South African minorities, and which imposes various constraints
and obligations upon mining firmsincluding to surrender ownership over
mineral rights, in favour of licences to exploit minerals. For several of the firms
which notified claims in October 2004, this domestic recourse was their only
optionas their home government did not have an effective international
investment treaty with South Africa. At the same time, some foreign-owned
mining corporations will enjoy a separate international avenue thanks to
investment treaties which are in force. Rather than subjecting South Africas
minerals legislation to review by domestic courts, these foreign parties may
appeal to an international arbitral tribunalwhich would operate according
to different applicable laws and standards. One lawyer familiar with a threatened treaty claim against the South African government told the author that
businesses with access to international investment treaty arbitration may be
able to obtain higher levels of compensation for losses due to their ability to
skirt South African legal rules which would take into account historical prejudice against Blacks and minorities when assessing the level of compensation
owed to individuals who have had their property dispossessed by government
action.64
5.2 Object and purpose of the treaty

Another important consideration for developing countries is that many
investment treaties have been drafted in narrow, uni-dimensional terms, with
treaty preambles hailing the need for enhancing economic cooperation and
the creation of a favourable investment climate, and often little else in the way
of broader objectives. While some treaties will take note of broader policy
objectivesbe they sustainable development, environmental protection or
raising standards of livingthis is not the norm. Whats more, narrow preambular language will have an important impact upon interpretation of the
treaty provisions, and the treatys application in the context of disputes
between foreign investors and host states.
Several recent treaty arbitrations have seen tribunals look to these narrow preambles, and, in the absence of any broader treaty objectives, adopt interpretations which err on the side of foreign investors and investments. For example,
63 Nicol Degli Innocenti and John Reed, Foreign mining groups set to sue S Africa for expropriation, Financial Times, Oct.30, 2004.
64 Author interview with confidential source, November 1, 2004.
23
in a recent claim against Chile, the tribunal noted that it would interpret a
treaty provision in the manner most conducive to fulfill the objective of the
BIT to protect investments and create conditions favourable to investments.65 In another recent BIT arbitration, a different tribunal observed that
it was obliged to interpret key treaty rules through the lens of the treatys object
and purpose, which was to create favourable conditions for investments and
to stimulate private initiative.66 And in a third recent treaty-based arbitration,
the tribunal held that a similarly narrow treaty preamble dictated that It is
legitimate to resolve uncertainties in its interpretation so as to favour the protection of covered investments.67
While questions have been raised about the orientation of tribunal membersand the curious fact that practicing counsel for investors may serve as
arbitrators in other investment treaty disputes, thereby having a first-hand
influence in fleshing out key treaty obligationsit is not the case that tribunals
are adopting indefensible readings of a given treatys object and purpose.
Rather, much of the blame lies with governments which have negotiated treaties
with narrow and terse preambular language, notwithstanding the fact that
investment treaty disputes may arise out of investments in sensitive sectors
and in relation to a host of sensitive government functions (taxation, environmental regulation, health and safety measures, etc.). Given the nature of the
disputes which are arising between governments and foreign investors under
investment treaties, it will be important for governments to ensure that investment treaties recognize not only the importance of a favourable investment climate, but also the prerogative of states to regulate in the public interest and
the importance of other policy goals, such as poverty alleviation, environmental protection and sustainable development. More balanced preambles might
help to ensure that tribunals do not view it as legitimate to resolve uncertainties in treaty interpretation so as to favour investor interests.
5.3
Costs of investment treaty arbitration
As investor claims proliferate, the cost of defending against such claims is coming into focus. Developing countriesand particularly the least-developed
countriesought to be cognizant of the financial implications when offering
an open consent to arbitration under a given investment treaty. These costs
can be substantial. While estimates vary, the average cost of hiring three
65 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, Decision on
Jurisdiction, at para 104.
66 Siemens v. Argentine Republic, Decision on Jurisdiction, at para 81.
67 SGS v. Philippines, Decision on Jurisdiction, January 29, 2004, at para 116.
24
arbitrators for an ICSID arbitration can be close to US$500,000.68 Arbitrations

under other rules tend to be even more expensive.69 Meanwhile, fees for legal
counsel may run much higherfor example, the Metalclad Corporation is
reported to have spent some US$4 million on lawyers and arbitrators fees in an
arbitration under NAFTA, and a subsequent court challenge to the arbitral
award.70 The Czech Republic is known to have spent some US$10 million to
defend against two major arbitrations brought in relation to a large broadcasting
enterprise. More recently, the Czech Republic has announced that it will spend
some US$3.3 million in 2004, and US$13.8 million in 2005, to defend against
more than half-a-dozen foreign investment arbitrations (it is unclear what proportion of these claims are contract-based or treaty-based).71
In a recent treaty arbitration, a state-owned Latvian electricity company conceded that it had to reapportion funds earmarked for future investments in
order to cover mounting legal costs in an investment treaty arbitration brought
by a Swedish firm against the Republic of Latvia. Developing countries should
also note that some arbitration lawyers advise investors to open up multiple
legal fronts (arbitration, home and host state court proceedings) so as to add
to the cost and uncertainty of disputesthereby creating an in terrorem
effect that may spur a quicker or more favourable settlement.72
In addition to the costs involved in mounting a legal defence to treaty claims,
the potential damages owing to investors can be substantialdepending upon
the nature of the investment in dispute and the alleged damage. Earlier this
year, the Czech Republic found itself on the losing end of a mammoth
awardamounting to more than a third of a billion dollars (US)which
effectively doubled the countrys public sector deficit and necessitated an
68 Gustavo Carvajal, presentation to workshop on investment, Americas Trade and Sustainable
Development Forum, November 18, 2003, Miami; Shihata and Parra 1999, put the average
figure at US$220,000 in 1999 (excluding lawyers fees). In 2002, ICSIDs daily fee payable to
ICSID arbitrators was increased from $1,100 to $2,000. On this schedule, the average cost
would appear to rise to some $400,000. See Schedule of Fees at http://www.worldbank.org/
icsid/schedule/schedule.htm
69 Ibid.
70 See J.C. Thomas, A Reply to Professor Brower, Columbia Journal of Transnational Law,
Vol. 40, No. 3, 2002.
71 Luke Eric Peterson, Croatian firm invokes investment treaty to challenge Czech eviction
notice, INVEST-SD News Bulletin, Oct. 1, 2004, http://www.iisd.org/pdf/2004/
investment_investsd_oct1_2004.pdf
72 R. Doak Bishop, Sashe D. Dimitroff, and Craig S. Miles, Strategic Options Available
When Catastrophe Strikes the Major International Energy Project, 36 Texas International
Law Journal, No. 4, Summer 2001, p. 668.
25
urgent debate over the appropriate fiscal policy response (i.e., an increase in
taxes, increased borrowing or serious cuts to public spending).73 To date, no
other award has approached this level of damages, and it is important to note
that tribunals rarely award damages that approach the vast sums claimed by
investors at the outset of a case. Nevertheless, sizable compensation orders may
occurand the Czech Republics experience has galvanized the attention not
only of that country, but of others as well.
5.4
Asymmetries of information
Adding yet another layer of uncertainty to this process is the fact that not all
arbitral rulings will be widely publicized. Even where earlier cases and rulings
may be relevant to a subsequent dispute, there is no guarantee that those earlier rulings will be publishedor even widely circulated. Rather, what tends
to happen is that rulings are passed around informally by lawyers and arbitrators working in this field.74 This serves to perpetuate a serious asymmetry of
information between those parties who have the resources to hire one of the
major multinational law firms which handle such cases in larger numbers
and those who lack the resources to hire the best counsel.
Major law firms can also develop a comparative advantage through their
knowledge of investor claims which may have been settled by the parties. This
information can be used subsequently, in an effort to persuade other host governmentsparticularly those with minimal experience of the arbitration
processthat they should settle treaty claims, rather than defend them. One
major firm managed to obtain a settlement from the Russian government in a
claim brought by a U.K. financial services firm which suffered losses during
the Russian financial crisis of the late 1990s.75 Details about this settlement
have never percolated up to the public, however they could be of some utility
to the firm itself, which represents other clients in similar-type claims mounted
against other governments which have undergone financial crises.76
73 Money for CME Could be Raised Through Special Tax KDU-CSL, CTK Czech News
Agency, March 18, 2003.
74 See Luke Eric Peterson, BIT award against Russia being challenged in Swedish appeal
court, INVEST-SD News Bulletin, Oct. 27, 2004, at http://www.iisd.org/
investment/invest-sd/archive.asp
75 See: http://www.freshfields.com/practice/arbitration/experience/idisputes.asp
76 See Freshfields law firm briefing, The Argentine Crisis Foreign Investors Rights,
January 2002, available at: http://www.freshfields.com/practice/corporate/publications/
pdfs/2431.pdf
26
5.5
Uncertainty surrounding the meaning of key

treaty provisions
Investment treaties have been crafted in deliberately vague language, often to cover
the broadest range of investment situations. Only with the recent surge in interest
in these treaties, and their invocation in legal disputes, have tribunals begun to put
flesh upon treaty provisions. Although dozens of tribunals are now grappling with
cases arising out of BITs and the NAFTA, the full policy implications of most
treaty provisions still remains unclear. In late 2002, a NAFTA tribunal noted that
in these early days of NAFTA arbitration the scope and meaning of the various
provisions of Chapter 11 is a matter both of uncertainty and of legitimate public
interest (emphasis added).77 The same holds true for bilateral treaties.
Further complicating matters is the fact that investment arbitration can be
plagued by a troubling lack of consistency in the interpretation of the substantive provisions from one case to the next. This was most clearly illustrated
in relation to two treaty claims mounted against the Czech RepublicCME
v. Czech Republic and Ronald Lauder v. Czech Republicby a broadcasting
firm and its major shareholder. Two separate tribunals examined virtually
identical facts in the CME and Lauder arbitrations, yet reached contradictory
conclusions as to whether the Czech authorities had violated key investment
rules such as those on non-discrimination and expropriation.78 As has been
noted in a previous section, the flurry of claims against Argentina in relation
to its emergency economic measures could provide fertile ground for the sowing of wildly divergent interpretations of treaty provisions. One arbitrator sitting on several of these Argentine tribunals has warned that the systemsuch
as it ishas a potentially fatal flaw: You have the potential, Professor
Brigette Stern warns, for 20 arbitrations, one problem, and 20 solutions.79
Not only can tribunals reach widely divergent conclusions in parallel cases, but
arbitrators are under no strict legal obligation to follow the path charted by
earlier arbitral awards (assuming of course that such arbitral awards have seen
the light of day in the first instance). Although earlier awards will tend to be
persuasive for subsequent tribunals, they do not serve as binding precedentsindeed with conflicting awards having been handed down in cases
such as those against the Czech Republic, it would be impossible for
77 Mondev International Ltd. v. United States of America, Award, October 11, 2002, at
para.159.
78 See Charles N. Brower, A Crisis of Legitimacy, Oct. 7, 2002, reprinted at:
http://www.whitecase.com/article_international_adr_10_7_2002.pdf
79 As quoted in Michael Goldhaber, Wanted: A World Investment Court, The American
Lawyer, Summer 2004, at: http://www.americanlawyer.com/focuseurope/investment
court04.html
27
subsequent tribunals to hew to precedents when they may point in different

directions. Little wonder one well-known Swiss arbitrator has warned that
investment treaty arbitration is in danger of becoming a legal casino.80 As a
method of dispute settlement, investor-state arbitration harbours considerable
uncertainty for host states whose actions will be examined before such tribunals. While well-endowed host states and multinational corporations can
afford to gamble over such high stakes, small investors and small host states are
less able to weather such an expensive and unpredictable form of justice.
Governments can take steps during treaty drafting to minimize some of these
problems. For example, rules for the consolidation of related claims, can
ensure that similar claims are consolidated under the jurisdiction of a single
tribunalso as to reduce the risk that parallel proceedings will lead to divergent rulings. Likewise, governments may look to joint interpretive statements
or amendments as tools for clarifying the reach and implications of certain
investment treaty provisions which have been subject to controversy. Under
the NAFTA regime, the three parties (Canada, U.S. and Mexico) have issued
a statement which clarifies the extent of the provision on minimum standards
of treatmenta provision which had been subject to unanticipated interpretation in early NAFTA investment arbitrations. Additionally, improvements in
dispute settlement may be effected by more detailed treaty provisions, for
example obliging all arbitrations to be conducted in public, and for documents and decisions to be disclosed and published.
5.6
The right to regulate and to introduce social

insurance programs
Investment treaties typically ensure that investors subjected to direct or indirect forms of expropriation will be compensated for their losses. The difficulty
arises in trying to define indirect expropriation. For some time, it has been recognized under international law that so-called creeping expropriationi.e.,
where the host state effectively expropriates an investment by a series of measures that, over time, deprive the investor of its use and enjoymentmay constitute a compensable form of indirect expropriation. It has been less clear,
however, how to treat individual exercises of regulatory oversight which may
deprive an investment of some of its value but which do not amount to a
complete deprivation or where a deprivation is total, but the host state has
acted for a protective purpose for example, to protect the public from environmental harm. Pending investment treaty disputesand even unknown
claims which are proceeding under cover of darknessmay grapple with the
80 Jacques Werner, Making Investment Arbitration More Certain A Modest Proposal,
Journal of World Investment, Vol. 4, No. 5, Oct. 2003.
28
question of to what extent exercises of a governments so-called police powers

(for example to regulate in the interests of environmental protection, public
health, safety, etc.) are exempted from a treatys provisions on expropriation.81
As of this writing, there is no settled approach to cases where investors allege
that certain regulatory measures constitute a compensable form of expropriation. One recent NAFTA tribunal decision, in the case of Marvin Feldman v.
Mexico, noted that some types of valid governmental activity would not be
viewed as expropriation under the terms of the NAFTA, however the tribunal
added that specific determinations would depend upon the specific facts of a
given case. Other cases have underscored that regulations can indeed be characterized in a way that would constitute creeping expropriation.82 A recent
treaty claim by a Spanish investor, Tecnicas Medioambientales Tecmed S.A.,
against the Government of Mexico, held that regulatory decisionsincluding
those dealing with environmental permitting and licensing decisionscan fall
within the scope of what is considered to be a compensable expropriation.83
The Spanish firm had sought compensation as a result of a decision by the
Mexican Governments National Ecology Institute to refuse Tecmed a renewal
of its annual permit to operate the Cytrar hazardous waste confinement facility in Hermosillo. According to news reports and the tribunals own fact-finding, the Cytrar facility was plagued by sit-ins by local residents protesting the
sites technical viability and lack of public participation in decisions regarding
the hazardous waste confinement, as well as legal questions regarding Cytrars
proximity to Hermosillo.84 Tecmed countered that its Cytrar facility was the
target of organized protests designed to achieve a protectionist end: protecting
Mexicos only other hazardous waste storage facility in Mina, near Monterrey.
Notable amongst the tribunals legal findings was this determination:
We find no principle stating that regulatory administrative actions are per se
excluded from the scope of the Agreement (on investment protection), even if
they are beneficial to society as a wholesuch as environmental protection,
particularly if the negative economic impact of such actions on the financial
position of the investor is sufficient to neutralize in full the value, or
81 On the concept of police powers see: M. Sornarajah (1994), The International Law on
Foreign Investment, 2946.
82 Pope & Talbot v. Canada, Interim Award, June 26, 2000, para 99.
83 Tcnicas Medioambientales Tecmed, S.A. v. United Mexican States, ARB (AF)/00/2, available at: http://www.worldbank.org/icsid/cases/laudo-051903%20-English.pdf, at para 121.
84 Talli Nauman, CYTRAR Parent Firm Files World Bank Complaint Against Mexico,
Borderlines, October 24, 2000, http://www.us-mex.org/borderlines/updater/2000/
oct24CYTRAR.html
29
economic or commercial use of its investment without receiving any compensation whatsoever.85
While it is unclear to what extent future tribunals will follow the Tecmed reasoningor that of some other tribunalwhat can be stated with authority is
that tribunals can, and will, assume the jurisdiction to review the treatment of
foreign investors by the host states regulatory and administrative authorities,
and to assess whether this treatment may be deemed to constitute a form of
compensable expropriation. Unfortunately, cases on this question have not led
to clear guidelines as to what, if any, category of bona fide regulatory measures
could be spared such review.
Another type of government policy which may be adversely impacted by treaty
provisions on expropriation is the creation and operation of national social benefits schemes, for example in the area of health. To the extent that provision of
health insurance has been left to individuals or private insurance firms, governments may confront serious obstacles should they decide at a later date to introduce national health insurance schemes along the lines of those employed in
many developed countries. If foreign firms are engaged in the sale of private
health insurance in a given territory, they might seek compensation under treaty
rules on expropriation, in the event that the host government introduces national
schemes which threaten the market share of existing providers.
This is a message which was underscored by a special Commission struck by
the Canadian Government to explore future improvements in Canadas
national health care system.86 While Canada provides health insurance to all
Canadians for most health care needs, the advisors to the Commission cautioned that an extension of these forms of public insurance into new areas such
as dental care, home care or prescription drug insurance, could run afoul of
Canadas commitments under international investment rules.87
By the same token, the introduction of more basic forms of public health
insurancefor instance for hospital care or primary physician carein
85 Tecmed v. United Mexican States, at para 121.
86 The Commission and its report can be found here: www.hc-sc.gc.ca/english/
care/romanow/index1.html
87 This was the message of two separate reports solicited by the Commission. See Jon R.
Johnson, How Will International Trade Agreements Affect Canadian Health Care?,
Discussion Paper No. 22, October 2002, available at: http://www.hc-sc.gc.ca/
english/pdf/romanow/pdfs/22_Johnson_E.pdf and Canadian Centre for Policy Alternatives
Consortium on Globalization and Health, Putting Health First: Canadian Health Care
Reform, Trade Treaties and Foreign Policy Summary Report, October 2002, available at:
http://www.hc-sc.gc.ca/english/pdf/romanow/pdfs/Summary_Globalization_
E.pdf; See also Luke Eric Peterson, How Trade Deals Hurt Policy, Globe and Mail
(Toronto), July 20, 2004, commentary, page A17.
30
developing countries could run afoul of commitments made in bilateral

investment treaties, in the event that foreign investors covered under the treaty
had come to play a role in the provision of private health care insurance and
were subsequently deprived of this market stake.
Thus, the substantial costs which might be incurred by host states contemplating a move towards universal forms of health insurance have the potential
to be increased further by virtue of investment treaty requirements which call
for compensation to be paid to those foreign investors which would stand to lose
their market share in the provision of private insurance. This eventuality signals a worrying feature of these poorly-understood investment treatiesone
which should be studied much more closely before governments in the developing world accede to further investment agreements.
In view of these problems, those intent upon concluding investment treaties
should note that there are ways to enhance the ability of governments to regulate in the public interest or to retain the right to introduce new social insurance programswithout fearing challenge from affected foreign investors.
The discretion of arbitral tribunals may be narrowed through the use of much
more detailed drafting of treaty language. The investment chapters of several
recent U.S. free trade agreements seek to clarify that Except in rare circumstances, nondiscriminatory regulatory actions by a Party that are designed and
applied to protect legitimate public welfare objectives, such as public health,
safety and the environment, do not constitute indirect expropriation.88
Likewise, a recent Japanese BIT with Vietnam seeks to clarify that the imposition of taxes does not generally constitute expropriationand offers several
paragraphs of guidance on the matter to prospective arbitrators.89 Also, treaty
language could be designed to protect the right of governments to progress
towards the provision of universal health insurance, without needing to compensate private insurance firms for any loss of market share.
Meanwhile, it could be clarified that dispute settlementor expropriation
clausesare not applicable where a government introduces a new public
insurance scheme which is designed to promote fundamental policy objectives
such as broadening access to health care.
For the present, governments must be cognizant of the fact that standard investment treaty language on expropriationwhen combined with a right of
investors to investor-state arbitrationmay lead to situations where tribunals
assume jurisdiction to review the legality of a states treatment of that investor.
88 US-Chile FTA, Chapter 10, Annex 10-D, Article 4 (b).
89 See Agreed Minutes of Japan-Vietnam agreement for the liberalization, promotion and
protection of investment, 2003; text available on-line at: Japan-Vietnam Agreement:
http://www.mofa.go.jp/region/asia-paci/vietnam/agree0311.pdf
31
Governments would do well to reflect upon the breadth, and potential implications, of such treaty commitments prior to acceding to them. One eminent arbitrator has warned that the definition of expropriation remains in flux and that
foreign investors ought to pay heed to the warning caveat investor.90 By the
same token, however, such warnings would seem to apply just as stronglyif
not more soto less wealthy developing countries, particularly the LDCs.
5.7
Control over entry/establishment in the host

state territory
One strategy for host states to retain wider discretion in the regulation of their
domestic economy is to refrain from granting foreign investors a right of establishment. Some developing countries insist that their ability to retain control
over entry and admission of new investment is an important tool for development-policy making, allowing for the protection of infant industries and more
generally the elaboration of strategic industrial policy. This point was underscored in discussions at the World Trade Organization.91
Most investment treaties do not extend market access privileges or rights of
establishment to foreign investorshowever recent treaties negotiated by several major trading powers do include some commitments at the pre-establishment stage. For example, the recent practice of Canada, the United States and
Japan has been to accord national treatment or most-favoured nation treatment to investors wishing to establish an investment or to make an acquisition
of an existing enterprise.92 This, in effect, gives any foreign investor the right
to enter and invest, in sectors which are open to domestic investors.
Given that attempts to launch multilateral negotiations on investment at the
World Trade Organization were set back by the collapse of the 2003 Cancun
Ministerial Conference, efforts to gain market access for Western investors in
the developing world are more likely to be pursued at the bilateral level than
at the WTO. With members of the so-called Quad (Canada, U.S., Japan and
EU) all pursuing some form of investment liberalization as part of their
90 L. Yves Fortier, Caveat Investor: The Meaning of Expropriation and the Protection
Afforded Investors under NAFTA, News From ICSID, Vol. 20, No. 1, Summer 2003.
91 Stocktaking of India Bilateral Agreements for the Promotion and Protection of
Investments, WT/WGTI/W/71, April 13, 1999, at para 6.
92 However, decisions taken by host states in relation to questions about establishment are not
always eligible for arbitration under the treatys dispute settlement rules. For instance,
Canada exempts decisions on acquisition from both the investor-state and state-state mechanism, while decisions on establishment are excluded from the reach of the investor-state
mechanism. See Canada-Latvia Foreign Investment Protection Agreement, Article II (4) a
& b.
32
bilateral relations, many developing countries can expect to face individual

requests for market-access commitments.
It is unclear what efficacy such provisions could have in terms of guaranteeing
new FDI flows. However, developing countries should note that under the model
favoured by the Quad countries, any investment which does comewhether
stimulated by the treaty or some other factorwill enjoy a right of entry on par
with domestic firms. This will present problems for the same reasons which have
been voiced in the debate at the WTOnot least, the fact that many countries
lack the capacity to assess which sectors ought to be protected from foreign competition. Indeed, even more advanced economies in Eastern and Central Europe
have been seen to have entered into pre-establishment commitments which have
proven ill-advised in hindsight. Recently, the European Commission intervened
with the United States on behalf of a number of candidates for EU accession, in
order to roll back certain pre-establishment commitments which had been made
in investment treaties between these countries with the United States.93
In the event that pre-establishment commitments are held out as a necessary
component of an investment treaty, developing countries could press for a positive-list approach which would ensure that commitments are only applicable
to specific sectors scheduled by the host state. As wellto the extent that
capacity constraints permitdeveloping country negotiators would be
advised to examine the types of reservations entered into by other countries
(developing and developed) in investment treatiesin order to gain some
indication of sectors which may warrant protection.
5.8
Restricting the ability of states to impose social

obligations on investors
States may screen incoming investors in an effort to select those projects

which best serve the host states broader economic development strategy. In a
closely related vein, states may have important public policy reasons for
imposing conditions and responsibilities upon investors operating in their
territory. However, the narrower economic case for the imposition of so-called
performance requirements upon foreign investors, is mixed. The 2003 UN
World Investment Report concluded that there are valid economic arguments for using performance requirements in some circumstances.94 At the
same time, there is evidence that some performance requirements will prove
inefficient, and lead to higher costs associated with foreign investments.
Ultimately, however, host states would seem best-placed to undertake their
93 This incident is discussed at more length in the section on performance requirements
below.
94 UNCTAD, World Investment Report 2003, p. 119.
33
own assessments as to whether these potential distortionsand the possible

loss of potential investmentswill outweigh the policy objectives underlying the
imposition of performance requirements in a given circumstance.
Some capital-exporting nations have preferred not to leave such decisions in
the hands of host governments. At the multilateral level, the WTO agreement
on Trade-Related Investment Measures (TRIMs) prohibits several types of
performance requirements which host states might impose upon investors.
These include measures which specify a given level of domestic inputs; measures
which place limits on imports or exports by foreign investors; and measures
which limit foreign investors access to foreign exchange. Some countries
including Canada, the United States and Japango further in pushing bilateral investment treaties which prohibit a broader range of performance
requirements than those covered in the WTO TRIMs pact. Canadian BITs
often proscribe domestic content rules, mandatory technology transfers, and
mandatory sourcing from local suppliers.95 Some Japanese BITs also prohibit
rules which dictate that individuals of a given nationality be appointed to executive, managerial or directorial roles; duties to achieve a given level of research
and development in a given territory; and requirements that a regional or world
headquarters be located in the host states territory.96
While close attention has been paid by researchers to the economic impacts of
performance requirementsand to the possibility that requirements may be
inefficient in economic termsless attention has been paid to other social policy objectives which might be advanced through the use of performance
requirements. It is possible that treaty prohibitions against select performance
requirements may hinder government efforts to pursue certain types of social
policies. For example, affirmative action programs, such as South Africas
Black Economic Empowerment program, which are designed to encourage
the economic opportunities of disadvantaged individuals or groups, may run
afoul of performance requirements bans. South Africas BEE scheme is an
effort to boost the prospects of its black majority, along with those of other
ethnic minorities, which suffered systemic discrimination under the Apartheid
system. The government has introduced targets for firms operating in some
sectors, such as mining, requiring divestment of minority stakes to blackowned firms. Scorecards are being used in an effort to reward firms for
achieving progress in areas such as: the appointment of black executives to
95 See for example, Agreement Between the Government of Canada and The Government
of The Republic of Trinidad and Tobago For the Reciprocal Promotion and Protection of
Investments, Art. V (2).
96 See for e.g., Agreement Between Japan and the Socialist Republic of Viet Nam for the
Liberalization, Promotion and Protection of Investment, Article 4.
34
company boards of directors; establishing supplier relationships with local black

firms; and the promotion of employment equity within the firm.97 However,
U.S. business interests have expressed concern that the imposition of such duties
and obligations upon foreign investors amount to performance requirements.98
The problem of reconciling the BEE program with standard investment treaty
disciplines has helped to stall negotiations on a free trade and investment agreement between the United States and the Southern Africa Customs Union.99
5.9
Standards of conduct for bureaucratic and

administrative agencies
In the view of some analysts, investment treaty disciplines can be a catalyst for
good governance. Provisions obliging governments to provide fair and equitable treatment or full protection and security are viewed as important
brakes on arbitrary or opaque government conduct. Reduction of corruption
and of the arbitrary abuse of citizens and investors alike will be a necessary
but not sufficientcondition for development. For instance, observers have
pointed to a lack of transparency and good governance as an enormous drain
on the life-prospects of citizens in many resource-rich developing countries.100
However, sequencing of international commitments and domestic reform will
be an important consideration for under-resourced developing countries.
While entering into binding international law commitments may serve to
focus the minds of government authoritiesin the absence of resources and
capacity to reform domestic governance processes, countries might simply find
that they have agreed to international standards which cannot be met in the
short, or even, mid-term. Indeed, a lack of clarity as to the concrete demands
of certain treaty provisions has led even middle-income developing countries,
such as Chile, to discover that their domestic governance processes sometimes
lack the requisite coordination, coherence and clarity to pass muster upon
review by an investment tribunal.101
97 South Africas Black Economic Empowerment Plans an Obstacle to a US FTA? by Luke
Eric Peterson, INVEST-SD News Bulletin, July 8, 2003.
98 Ibid.
99 Luke Eric Peterson, US-Southern Africa Negotiations Stall; Race-based Affirmative Action
an Obstacle?, INVEST-SD News Bulletin, July 22, 2004, available at:
http://www.iisd.org/pdf/2004/investment_investsd_july22_2004.pdf; Carli Lourens, Delay
in US trade talks may hurt other Sacu deals, Business Day (South Africa), Oct. 22, 2004.
100 See Transparency Internationals Corruption Perceptions Index 2004, at
http://www.transparency.org; Human Rights Watch, Some Transparency, No Accountability,
2004, at www.hrw.org/reports/2004/angola0104
101 MTD Equity Sdn. Bhd. and MTD Chile SA v. Republic of Chile, Decision on
Jurisdiction.
35
Foreign investors have also proven more savvy at playing the arbitration system
when it comes to challenging the administrative process of a host state under
international law. One noted arbitration survey found that well-resourced foreign investors may employ extremely detailed and sophisticated forms of legal
record-keeping in order to catalogue all of their interactions with administrative
officials in case such a record need be adduced in a subsequent dispute.102 At the
same time, poorer host governments may lack the basic infrastructure and foresight to keep similarly detailed records which might buttress their own case in
the event of an arbitration arising at some later date.103
Thus, governments that expose themselves to the possibility of such arbitrations through the conclusion of investment treaties ought to be mindful that
these treaties may entail a higher degree of administrative and infrastructural
record-keeping in relation to foreign investments. Although the author is not
aware of studies which have been undertaken to measure the extent of such
expenses, other studies have calculated that compliance with others types of
international trade agreements can amount to sizable sumsparticularly for
least-developed countries which may have other more compelling public
spending priorities.104
5.10 Irreversibility of treaty commitments

If and when problems arise with respect to investment treaty commitments,
revisions to the treaty will not be practicable or straightforward. Some treaties,
such as the NAFTA, provide for the ability of the parties to issue interpretive
statements which will clarify the intent of the parties, and be binding upon
arbitral tribunals. BITs typically do not expressly provide for such interpretive
statements. Nevertheless, where both parties wish to alter or even terminate a
BIT it would seem to be a prerogative of sovereign nations to do so at any
time.105
102 Dezalay and Garth, Dealing in Virtue: International Commercial Arbitration and the
Construction of a Transnational Legal Order, (University of Chicago Press, 1996), 9395.
103 Ibid.
104 Dani Rodrik, Trading in Illusions, Foreign Policy, MarchApril 2001; Michael J. Finger
and Philip Schulers Implementation of Uruguay Round Commitments: The
Development Challenge (Washington: World Bank Policy Research Working Paper No.
2215, October 1999). While the sums involved differ by orders of magnitude, the concern over misplaced priorities remains valid.
105 See Article 30, of the Vienna Convention for the rules which would give priority to a more
recent agreement to amend or abrogate an earlier treaty. The Convention is available
online at: http://www.un.org/law/ilc/texts/treatfra.htm
36
Of course, many of the reasons why a particular state might wish to amend or
abrogate a treaty will not necessarily be shared by the other state party. For
example, interpretations which deeply encroach upon the ability of host states
to regulate inward investors may not be problematic from the perspective of
capital-exporting nations, which typically serve as the home country of the
investors which will be benefiting from such an overly permissive climate.
Indeed, investment treaties may be considered to be a prerequisiteor downpaymentfor developing countries to gain more favourable market access in
developed countriesoften through the subsequent (or simultaneous) conclusion of a broader free trade agreement.106
Typically, the rights and protections contained in investment treaties are not
easily amended or abrogatedabsent the desire of both parties. Rather, the
tendency has been for host states to adapt as best they can to the more circumscribed policy options which may present themselves where investment
treaties govern the relationship between foreign investors and host states. For
example, the Philip Morris Company is known to have threatened to use the
NAFTA investment chapter to challenge restrictions on packaging of cigarettes proposed by the Canadian government in the mid-1990s. These threats
are widely credited with having convinced Canadian to back away from plans
to impose plain packaging. As far as we know the Canadian government never
contemplated seeking revisions of the treaty in order to ensure that it could
not be used to stifle public health regulations.107
While the concrete meaning of most standard investment treaty protections is
still unclear, host states confronted with the prospect of costly arbitrations, and
potentially onerous damage claims, may be exercising greater caution in their
policy-makingrather than contemplating the even more costly political price
that might be paid for post-facto amendment or abrogation of these treaty
commitments. Once the shoe is onno matter how uncomfortable the fit
the shoe may need to be worn, rather than altered.
106 For example, the U.S. is insisting that a bilateral investment treaty be agreed with South
Korea prior to negotiations on a wider trade pact.
107 Barry Appleton, Testimony before the British Columbia Legislature Special Committee on
the MAI, Hansard, September 30, 1998.
37
38
6.
Conclusions
Investment treaties have been seen to have doubtful impacts upon the stimulation of new foreign direct investment, at the same time they enshrine farreaching rights and protections for those investments which do flow between
home and host country. Dispute settlement is often closed to the public and
not subject to clear rules of precedence. Given the current ambiguity of many
key treaty provisions, foreign investors with deep pockets may be well-advised
to launch creative damage claims when they come into friction with regulators
or government agencies in the host state. In the absence of full information
about how earlier disputes may have been resolved, and in the absence of any
procedural rules which would oblige subsequent disputes to be decided in a
similar fashion, developing countries may be confronted with considerable
uncertainty about the concrete policy implications of the international treaties
to which they have acceded.
As treaty-based arbitrations proliferate, they have raised red flags about the
manner in which standard treaty provisions such as those governing performance requirements or expropriation may be used to circumscribe the regulation of foreign investorseven for important social, cultural, environmental
or public health ends. Treaty rules may make it more difficult to introduce or
extend national benefits schemes (for example, in the area of health) if they
would require existing foreign investors to relinquish a given business line (for
example, health insurance).
Some of the more worrying concerns discussed herein may be assuaged by
arbitral tribunals that reject tenuous and entrepreneurial investor claims.
Nevertheless, given the innumerable uncertainties that are emerging in this
heretofore little-noticed area of international law, developing nations would be
advised to undertake significant due diligence before agreeing to be bound
by further such investment treaties.
39
40
Bilateral Investment Treaties

and Development Policy-Making
This paper looks at the impacts of bilateral investment
treatiesof which there are now over 2,000on
development-oriented policy-making. It assesses the
major elements of concern in the various formulations
of key obligations, and the types of desirable
policies they might prevent.

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Bilateral Investment

Treaties and Development

Luke Eric Peterson

Bilateral Investment Treaties

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

2. Bilateral Investment Treaties: What the Treaties Say

3. What the Treaties Do

4. Investor Usage of the Treaties

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

policies that a host government holds to be essential to promoting the basic

International Affairs Sustainable Development Programme Briefing Paper No.10 February

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

governments at the WTOs Working Group on Trade and Investment, and is

Bilateral Investment Treaties and Development Policy-Making

even less common.10 This widespread failure to identify development as an

2.3 Special and differential treatment

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Such examples are remarkable, of course, because they are so unusual.

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Investment treaties and the stimulation of new

A long-standing rationale for the conclusion of investment treaties has been

Bilateral Investment Treaties and Development Policy-Making

Application of BIT protections by investors

In discussions within the WTOs Working Group on Trade and Investment,

Bilateral Investment Treaties and Development Policy-Making

Dispute settlement procedures

An investor-state dispute settlement mechanism became a virtually standard

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Issues emerging in arbitrations

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

The majority of known treaty-based water cases involve the Argentine

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

contentious international disputes with foreign governments, including the

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

5.2 Object and purpose of the treaty

Bilateral Investment Treaties and Development Policy-Making

Costs of investment treaty arbitration

Bilateral Investment Treaties and Development Policy-Making

arbitrators for an ICSID arbitration can be close to US$500,000.68 Arbitrations

Bilateral Investment Treaties and Development Policy-Making

Bilateral Investment Treaties and Development Policy-Making

Uncertainty surrounding the meaning of key

Bilateral Investment Treaties and Development Policy-Making

subsequent tribunals to hew to precedents when they may point in different

The right to regulate and to introduce social