BILATERAL

INVESTMENT TREATIES
• BIT’s concept arose in 1980, consisting of laws that protected a state’s
investment in another state.
• BITs were signed during this era by advanced and developing
countries where capital-exporting countries were developed states
and capital was imported from developing countries.
• These BITs are capable of strengthening foreign investment-related
customary rules of international law.
• The roots for the present BITs are the treaties of FCN signed during
17th and 18th century.
• U.S., UK, and Japan entered into FCN treaties after World War II.
• These FCN treaties were intended in the post-
World War II period to promote and protect foreign investment.
• BIT highlights that states should provide complete protection to FDI in
its territory and the issue was raised in AAPL v. Sri Lanka.
In this case, a British business experienced loss as a result of Sri
Lanka’s government intervention. The firm approached the arbitration
tribunal and argued that the standard of strict liability should be
implemented and that the state is solely responsible for it. The
arbitration tribunal placed the responsibility on the Sri Lankan
government to pay compensation to AAPL, but refused to apply strict
norms of liability.
• In the modern age, together with local legislation, the BITs have
become a source of FDI protection and promotion, and these BITs are
called Lex Specilais, meaning unique legislation regulating foreign
investment.

• Based on the principles implemented in the BITs, many instances such as

Aminoil case and Sedco case have been chosen by the arbitration tribunal.
• In such instances, the tribunal of claims held that BIT was an precise
measure of the contracting parties integrating customary international law
to safeguard FDI.
• First BIT was signed between Germany and Pakistan in 1959 called the
“Investment Promotion and Protection Treaty,” which came into force in
1962.
• This treaty became a foundation for other BITs.
• Situation changed --- in 21st century.
• In the original phase, BIT consisted of the usual principle of
international law that was on the point of disappearance, but now it
has gone further and included certain treatment standards that have
become a cause of multiple regional contracts.
• The concept behind signing BIT is to safeguard FDI in all conditions as
agreed by the parties, when BITs entered between developed and
developing countries .
• In 18th century ---- on basis of FCN --- U.S. entered ---- many bilateral
treaties ----- with friendly states.
• These treaties dealt only with trade ---- did not cover direct
investment by corporations.
• These treaties ---- protection to individual aliens as trade was
largely conducted by the individual traders in overseas.
• Although FCN treaties did not cover foreign investment, it has
developed certain values such as treatment of aliens, liberty of worship
and travel within the host state, as well as proper process and
procedural rights in civil and criminal instances.
• Thus, post World War –II investment treaties ----- signed ---- on basis
of FCN treaties.
• Principles like Most Favoured Nation ( MFN)Treatment ( level of treatment
given by one state to another in international trade ---- a principle of WTO) ,
National Treatment ---- included in current BITs.
• Chapter 11 of NAFTA also adopted the provisions of FCN treaty to regulate
FDI in state party territory.

GROWTH OF BIT ---- REASONS :-

• Promotion of FDI, and failure to conclude MAI (Multilateral Agreement on
Investment) to protect FDI.
• World Bank ----- IMF ----- encourages states to conclude BITs.
• Issues ----- sovereignty, exploitation of natural resources, nationalization of
foreign investments, control of home states on its investment in host states
----- not answered by regional instruments.
• This compelled states to conclude BITs.
• BIT provided opportunity for both developed and developing states to
set out definite rules and regulations which would apply to their own
citizen’s investment in their respective territory.
• BARCELONA TRACTION CASE(BELGIUM VS. SPAIN) ----- ICJ ----- held ----- urgent
need for rapid devt. Of effective means to protect FDI which can be met by
BITs.
Court also held ------ Due to the development of foreign investment by
people or corporations which are moving revolutionary , but foreign
investment regulations are not prepared to deal with such revolution. BIT
can bridge the divide between developing and developed nations, and this
demonstrates how BIT plays a major part in FDI’s free flow.
• During 1970s --- States signed less no. of BITs.
• By the end of 1979, there were nearly 100 BITs signed.
• BITs were discovered during the 1970s with the distinctions between
capital-exporting nations and capital-importers.
• During this era, developing countries borrowed loans from global
bodies for industrialization and growth of infrastructure that impacted
the balance of payments that had led to financial crisis .
• The developing countries were fully indebted to the developed
nations by the early 1980s and were unable to repay the quantity of
debt ---- defaulted.
• To overcome this ----- capital exporting states ---- especially U.S. ----
negotiated with developing states ----- U.S. adopted BIT
programmes.
• U.S. investors began influencing the U.S. government in 1970 to
conclude BITs , as a consequence of which the U.S. government
signed BITs in 1977.
• The concept behind the signing of the BIT---- to provide legal basis to
safeguard their investments in host state, and to maintain their
investment conflicts away from host-state inner politics.
• But it was not adopted by the US government as it opposed the
outward flow of capital from the US to other countries.
• In 1982, the US concluded its first BIT with Egypt, and by the end of
1987 there were almost 265 BITs between developed and
developing countries.
• 1990s ---- many BITs ---- concluded ---- and by the end of this period,
nearly 1857 BITs were signed including developed and developing
states like China, India, Argentina, Brazil and OECD member states.
• International Investment Agreements (IIA) ----- increased ----- due to:-
a) The government’s political commitment to economic liberalism
and the global flow of products, services and investments that paved
the way for FDI promotion in the 1990s.
b) No alternative to FDI for developing states to develop their
economy.
• FDI flourished.
APPROACHES OF BIT :-
a)Incentive approach :-
• When BITs are framed, they always include an incentive clause to
attract more FDI in host countries.
Eg :- Cheap labour, low import duties, etc.
• May be for limited period depending on BITs.
• Best eg :- China ----- gives more importance to incentives based FDI
and as a result of which it is able to attract more FDI to compete with
developed state in global economy.

b)Market approach :-
• Decisions concerning the entry and operation of MNCs in the host
state are handed over to MNC managers, but the host state regulatory
agencies will control the misuse of economic powers, stabilize
currency, environmental protection, and loans and security concerns.
• Today, foreign investors prefer a market-oriented system where they
can invest according to the prevailing conditions in host countries.

c)Mixed approach :-
• Here, many states adopt middle path between incentive approach and
market approach.
• Generally, this approach is based on market oriented approach where
host states relied on market forces to attract FDI into their economy.
• But, the Investment Promotion Board finally decides the policies related to
FDI.

PRINCIPLES IN BIT :-
• National treatment.
• Most Favoured Nation Treatment (MFN)
• Fair and equitable treatment.

a) Principle of extra-territorial jurisdiction:-

 Empowered home states to apply this principle on nationals in
territory of host state.
 Implemented in China, Japan, Thailand, Iran, Egypt, Morocco, Turkey and other
parts of Ottoman Empire, Asia.
Not practiced in Latin America.
Acc. To this principle, through numerous bilateral trade agreements and
arbitral awards, the “STATE RESPONSIBILITY” principle is created.

b) Principle of Diplomatic Protection Clause :-

MNCs sign investment contracts to safeguard their interest in the host
state with other countries.
MNCs as a legal personality can approach their home state that can step into the
shoes of businesses and seek diplomatic protection in the host state, but before
exercising the right to diplomatic protection, MNCs must exhaust all available
local remedies in the host state to seek investment protection.
Diplomatic protection is a restricted way to resolve investment
conflicts involving MNCs.
In Republic of Guinea v. Democratic Republic of Cango, commonly referred to as
Ahmadou Sadio Diallo Case ------ ICJ decided on the scope of customary
principles of international law. In defending shareholders’ rights, the tribunal,
affirming Barcelona case judgment held that international law acknowledges
separate personality of MNCs as it exists under municipal law, and the state of the
corporation can make claims on its behalf.

c) Principle of natural security clause:-

The word domestic security involves severe financial crisis that can be used as a
protection in BITs to safeguard the host state economy.
 This clause will help the host government expropriate FDI and impose constraints
on repatriation (returning money back to one’s own country) of FDI revenues.
 In Enron Corp. Vs. Argentine Republic ---- held by the ICSID tribunal------
Object of the treaty ----- to apply the provisions of BITs during the
economic crisis to safeguard signatory rights. The parties will use the
“financial crisis” clause to escape commitments while interpreting BIT. But
this will impact investor rights and may prevent investors from investing in
the future.

d) Principle of FDI risk clause:-

Fluctuation in exchange rate .
Inflation & recession.
Double taxation risk ,
Legal disputes,
Lack of proper communication facility, etc.
e) Principle of Incentive Clause :-
Attract FDI , and such incentives must preserve an equilibrium
between economic devt. and its adverse impact on economy,
incentives and subsidiary can be used interchangeably.

f) Principle of tax clause :-

 Tax incentive measures will always influence the investment decision
especially in export-oriented MNCs.
The foundation for these tax regulations is Business Tax Code of
Conduct 1997, which states that members shall not introduce harmful
tax measures and should remove the existing harmful tax measures.
g) Principle of Investor-State Arbitration Clause :-
ICSID Convention ---- highlighted that the consent of parties to refer
the dispute to the tribunal is very much necessary.
A clause related to arbitration shall be included in BITs and investors
can accept the arbitration clause by submitting their claims even
without including the arbitration clause in BITs.
 The validity of a unilateral arbitration clause which is called as
‘arbitration without privity’was first upheld in Southern Pacific
Properties Limited v. Egypt.
1990 ----- dispute between Sri Lanka and U.K. ---- first award passed
by ICSID ---- by exercising jurisdiction on arbitration clause in BITs.
Proved successful.
h) Principle of FDI Entry Procedure :-

• i) Planning stage:- A preliminary stage where project must be

approved by the authorities of host state.
• ii) Feasibility study stage: -Before investing in host state, the investor
must study about the situation prevailing in host state especially
about economic factors.
• iii) Implementation stage: - Proper mechanism must be adopted
while implementing the project.
• iv) Operating stage: -Once it is confirmed that it is feasible to work in
host state, the project will be operated by the investors.
FOLLOWING THINGS BITs MUST LOOK INTO :-

• Legal statement pertaining to application of home state laws for

project approval
• Letter of approval from state agencies
• Applications to protect IPRs related to FDI
• Letter of approval for setting up of joint venture with domestic
partner
• Labour contracts
• Documents related to investment insurance and financing contracts
with private and public institutions .
i) Principle of Repatriation Clause.

DURATION AND TERMINATION OF BITS :-

Entered into force for a stipulated period and depends upon the
instruments of ratification.
Usually, BITs will be in force from 5 to 30 years or until it is
terminated.
But there are certain foreign investments which will be protected
even after termination of BITs depending upon the will of the parties.