Regarding Rights

Academic and activist perspectives on human rights

An Introduction to Investment Treaty Law and Arbitration

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By Anthea Roberts,

Centre for International Governance & Justice, RegNet

High profile cases in which corporations have taken states to arbitration, such as the case brought by tobacco company Philip Morris against Australia, have drawn public attention to an area of treaty law that has until recently been poorly understood except by a small club of experts. This blog provides an introduction to investment treaty law. A subsequent blog will discuss some of its more contentious aspects.

What is investment, and why seek to protect it?

Unlike trade in goods, where traders can stop trading at any time or redirect their sales, investment usually involves long term transfers of capital, potentially leading to long term benefits. Take building a power plant: an upfront investment is required, with the prospect of long term operation and profits running over many years, but it may take years before the initial investment has been paid off and the operator begins to turn a profit from the investment.

Investment can be crucial in building and running basic infrastructure, for example, by setting down pipelines, generating energy, and arranging for proper waste disposal. During periods of aggressive privatization in the 1990s, many developing and middle income countries turned to foreign corporations to finance investments, including in public infrastructure. Sometimes foreign corporations expressed concern about investing because of the possibility of government mistreatment, such as host governments nationalising their assets without paying compensation, or discriminating against them either de jure or de facto.

To resolve this dilemma, states needed a way to credibly commit to foreign investors that they would not treat them poorly after they invested. Making such credible commitments is not straight forward. Contract protection under national laws was considered inadequate because the host state could change its domestic law at will. There was also a perception that local courts  might not impartially adjudicate disputes involving foreign companies, particularly if those disputes were with the government. The foreign investor might rely on their home state to take up their case on the international plane under the doctrine of diplomatic protection, but the home state might not want to get involved or might run the case poorly.

So, this is where investment treaties came in …

Investment treaties are international agreements under which states as treaty parties bind themselves vis-à-vis each other. States parties cannot unilaterally change a treaty, unlike the capacity of states to unilaterally change their domestic law. And through a unique feature, these treaties permit cases to be brought directly by foreign investors against states, instead of investors having to rely on their home states to make a claim on their behalf.

Typically, investment treaties contain two main types of provisions:

(1) Investment Protections: these are substantive provisions that set out the standards by which one state promises to treat the investors of the other state. Commonly investment treaties include promises not to expropriate without paying compensation, not to discriminate against investors compared to nationals and other foreigners, and not to treat investors unfairly or inequitably.

(2) Investor-State Arbitration: this is a procedural mechanism to deal with disputes about whether the state has complied with the treatment standards provided for in the treaty. This mechanism typically permits investors to bring claims directly against the host state in an international arbitral tribunal. The procedure for investor-state arbitration is modelled on international commercial arbitration. It typically provides for three arbitrators: one selected by the investor, one selected by the host state, and the final one selected by agreement of the parties or arbitrators, or appointment by an international institution like the World Bank’s International Centre for Settlement of Investment Disputes.

There are three important points to note about investment treaties

Firstly, they are hybrid agreements. Investment treaties are public international law agreements because they involve a treaty relationship between states. They engage important public law considerations about the ability of a state to regulate actors within its territory – much like constitutional or administrative law. The cases brought by investors under the terms of these treaties are, however, arbitrated according to rules largely developed in the private law sphere of international commercial arbitration. Thus the field represents a hybridization of legal principles from these different areas of law.

Secondly, these treaties are asymmetrical. In most treaties, there is some symmetry about the rights and obligations involved: state A promises to do X and state B promises to do X – they have reciprocal rights and obligations. Investment treaties look symmetrical in theory but are often asymmetrical in practice. As a matter of form, state A promises to protect investments of nationals from state B and to allow state B nationals to bring claims against it. State B promises the reverse. This looks equal. But many investment treaties, particularly historically, have been signed between state A, a capital exporting state, and state B, a capital importing state. As capital is going in one direction, claims are also likely to go in one direction. This leads to inequality: the capital importing state promises to protect investors from the capital exporting state and exposes itself to arbitration, but the capital exporting state is not similarly exposed because it is unlikely to have foreign investors from the capital importing state within its territory.

Thirdly, the bilateral nature of most investment treaties reflects the fact that early attempts to reach a globally inclusive multilateral agreement failed – capital exporters and capital importers couldn’t arrive at an agreement. Capital exporters therefore decided to target individual states, focusing their efforts on bilateral treaties. The first bilateral treaty was signed by Germany and Pakistan in 1959. From 1959-1990, about 385 new investment treaties were signed. Between 1990 and 2010, more than 3500 new investment treaties and free trade agreements containing investment chapters (such as NAFTA) were signed. This field of law exploded in the 1990s and 2000s, but it is only now that the public is becoming more aware of these treaties.

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