This article is writtten by Kshitij Pandey, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.com.

Introduction

Bilateral Investment Treaties

A Bilateral investment treaty is an agreement between 2 countries which establishes some terms and conditions and gives investors and companies the right to invest in  another state. It mainly protects the investors rights to invest in the other country and reduces the risks associated with these investments by laying down the rules of investment. The first kind of investment treaties between countries were Friendship, Commerce and Navigation Treaties (FCNs). FCN requires the host state to treat foreign investments on the same level as investments from the other state. The second generation of these treaties are Bilateral Investment Treaties (BITs), which set forth actionable standards of conduct that applied to governments in their treatment of investors from other states.

The world’s first Bilateral Investment Treaty was signed between Pakistan and Germany in the year 1959. At present, there are a total 2896 Bilateral investment treaties made between various countries of which 2,339 BITs are in force according to the data given by United Nations Conference on Trade and Development. India signed its first BIT with the UK in the year 1994 and has since signed 86 BITs with various countries.

Purpose of the Bilateral Investment Treaty

The main purpose of a Bilateral Investment Treaty (BIT)is to stimulate foreign investments by reducing political risk. BITs protect the investors and the company by imposing conditions on the controlling behaviour of the host state and thus, preventing undue interference with the rights of the foreign investor. The main conditions are: 

1. Restricting expropriation of investments by the host state;
2. Impose obligations on host states to accord fair and equitable treatment (FET) to foreign investment and not to discriminate against foreign investors and companies;
3. Allowing repatriation of profits;
4. Allowing individual investors to bring cases against host states also called investor-state dispute settlement. 

Necessary ingredients of the Bilateral Investment Treaty

The most important and common clause/ingredients in a BIT  between most countries are: 

• Preamble 

Most BITs mention preamble at the beginning, during which the contracting parties state their intentions and objectives when concluding the agreement.

• Scope 

It lists the circumstances and limits or expands the scope during which the treaty won’t apply.

• Investments (Definitions)

Most BITs define “investment” during a broad and open ended manner, covering not only the capital that has crossed borders, but also practically all other forms of assets of an investor within the territory of the host country. A lot of countries have included a classic definition of “investment “in their BIT’s, covering “every asset” owned or controlled by an investor of another party. This is often typically complemented by an illustrative list of assets included within the definition. However, some countries including India have adopted a narrow definition of investment. For instance, India’s BIT  of 2016 adopts an ‘enterprise-based’ definition of investment. It limits the scope of the BIT to investors with a ‘substantial and real business presence in India’ which are ‘under the particular control of foreign investors’. 

• Fair and Equitable Treatment (Standard of Treatment) 

A Fair and Equitable Treatment (FET) provision, which is usually featured in BITs, protects a far off investor’s rights against the host state and prevents interference with the investor’s legitimate expectations. An FET is capable of sanctioning legislative and administrative actions of the host state. 

• Most Favoured Nation

An MFN provision assures an investor treatment not less favourable than that to the opposite foreign investors claiming under other investment treaties concluded by an equivalent host state. In other words, it provides a level-playing field for all foreign investors by prohibiting the host state from discriminating against investors from different countries This clause thus helps at liberalizing investment flows. 

• Expropriation 

This clause states that the host state is prohibited from confiscating privately-owned property, apart from public purposes, in accordance with due process of law and with compensation. 

• Monetary transfer provisions

This clause allows funds concerning investments to be freely transferred by foreign investors, which also includes protection against exchange restrictions. 

• General Exceptions

This clause provides the regulatory autonomy to host countries to affect the threats to big national interests. It Starts with the words “nothing during this agreement precludes…,”. 

• Investor- state dispute settlement

The investor-state dispute settlement (ISDS) provision in BITs acts as a protection for the foreign investors by submitting the dispute to arbitration if any foreign investor alleges breach of the substantive obligations thereunder BIT. An investor could have recourse to International arbitration whose rights under the BIT are violated, often under the auspices of the ICSID (International Centre for the Settlement of Investment Disputes), instead of suing the host State in its own courts.

The importance of a well drafted Bilateral Investment Treaty

A well drafted Bilateral Investment Treaty is mainly used to attract Foreign Direct Investments (FDI). The treaty helps in building trust, confidence and promotes healthy cooperation between the 2 countries. As discussed, it helps in streamlining an uninterrupted flow of foreign investment by the foreign investors and the companies by following a set pattern of terms and conditions. 

The main ingredients as mentioned above, are the most important clauses that are common in almost all the countries model Bilateral Investment Treaties with minor adjustment and fine-tuning in favour of their respective countries. 

Thus all the necessary clauses should be mentioned with proper information regarding the agreement should be provided with the vested interests of both the countries in as follows-

1) BITs should provide that foreign companies are entitled to be treated as favourably as their local competitors and other foreign companies. Foreign investors are also entitled to the most favoured nation (MFN) treatment where they will not be discriminated against by the other investors.

2) BITs should institute limits on the expropriation of investments and allow foreign investors to receive their compensation. Expropriation can occur only in accordance with law of nations standards—that is, for a public purpose, during a nod discriminatory manner, under due process of law of law, and amid payment of prompt, adequate, and effective compensation. 

3) BITs should include additional broad guarantees of treatment for investors in accordance with the law of nations. Host countries typically promise “fair and equitable treatment” and “full protection and security” for investments, and promise to not engage in “arbitrary” or “discriminatory” decision making. 

4) BITs should give foreign investors the right to transfer funds into and out of the host country at once employing a market rate of exchange. It covers transfers related to investment, interests, proceeds from liquidation, repatriated profits and infusions of additional financial resources after the initial investment has been made. 

5) BITs should limit the power of host governments to need foreign investors to adopt inefficient and trade distorting practices. For instance, performance requirements, like local content or export quotas, are often prohibited. 

6) BITs should give investors a right of action—that is, the proper to submit an investment dispute with the host government to international arbitration. Disputes under BITs are going to be governed by the terms of the relevant treaty and law of nations, and not necessarily by the law laid out in contracts associated with the investment.

The implications of not drafting a proper Bilateral Investment Treaty

It is no secret that Bilateral Investment Treaties play a very important and strategic role for the investment making opportunities of a country. Hence, it becomes very crucial to draft a perfect BIT with all the necessary clauses as very high stakes are involved in these treaties which could affect both the economy and the image of a country.

If a BIT is not properly drafted or leave any necessary clause unattended, there can be serious implications like-

1. Deputes- By far the most common occurrence. BITs contain an arbitration clause submitting their claims to a neutral arbitration tribunal, predominantly the International Centre for Settlement of Investment Disputes (ICSID), another alternative being arbitration under the United Nations Commission on International Trade Law (UNCITRAL). The arbitral Awards given by the ICSID are binding on the parties and not subject to any court or other appeal, provided that an award can be annulled by a 2nd ICSID tribunal instituted.
2. Image- If a country is blamed for  providing unfair investment terms or has breached one of its clauses, the political and economic image of the country in front of most of the countries gets tarnished. The country then is labelled as a non- investor friendly state and also not capable of committing themselves to any treaty or agreement.
3. Economic impact- With the political image already tarnished, it could also lead to a severe economic impact. With low FDI, it can impact the economic growth rate or GDP of any country with little or no foreign investment.

Law 

As discussed, improper drafting can lead to various implications which could harm both the parties most commonly the disputes. Under BITs, disputes are quite unique because they give a basis for claims by a private person or company against a number of countries. In a BIT arbitration, the tribunal under the varied institutions primarily adjudges behaviour of the host States towards a far-off investor. The International Centre for Settlement of Investment Disputes (ICSID), International Chamber of Commerce International Court of Arbitration (ICC) and Stockholm Chamber of Commerce (SCC) are preferred arbitration institutions by the parties.

During a Bilateral investment treaty arbitration, the principles or law regarding the BIT arbitration which are followed by the arbitrators are:

1. Most arbitrational tribunals have to recognize the parties’ autonomy during this respect.

• Article 42(1) of the ICSID Convention provides that “[t]he Tribunal shall decide a dispute in accordance with such rules of law as could also be agreed by the parties.” 
• Article 33(1) of the UNCITRAL Arbitration Rules says: “[t]he arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute.” 
• Article 22(1) of the Arbitration Rules of the Stockholm Chamber of Commerce, for its part, provides that “[t]he Arbitral Tribunal shall decide the merits of the dispute on the idea of the law or rules of law prescribed by the parties.” 

1. Article 42(1) of the ICSID Convention also gives the parties considerable liberty to decide the ‘rules of law’ as against a whole system of law which will govern their relationship, namely, any national system like the law of the host State, selected rules of that system, rules common to certain legal systems, general principles of law or law of nations etc.
2.  Mainly in the arbitration tribunal, the law of the host State is given more regard as to the agreement, where the investor’s rights and obligations could also be governed by specific instruments or by the system of the host State more generally, sometimes combined with a regard to law of nations. During this context, law of nations may apply either directly, possibly in conjunction with the law of the host State, or indirectly as incorporated into the chosen domestic law. 

Jurisprudence 

As discussed, various countries are embroiled into disputes with their failed BIT. Many landmark and famous cases have been decided by the arbitration tribunals in regard to BIT there are as follows: 

1.  In India, the first BIT arbitration case was in the year 2004 which is Capital India Power Mauritius I and Energy Enterprises (Mauritius) Company v. India, (ICC Case No. 12913/MS, Award dated 27-4-2005 (ICA)). Here, the power plant was in Maharashtra and various investor states like the United Kingdom, Netherlands, and companies like General Electric invoked the BIT arbitration against India under the India-Mauritius BIT. They alleged that India committed expropriation of their interest in the power station by the Indian Government. The alleged claims were however settled and India had to catch up on losses. 
2.  One of the most important BIT related cases in India was the White Industries Australia Limited v. Republic of India (IIC 529 (2011), 30th November 2011), the company entered into a contract with the Coal India Limited, a public sector undertaking for developing of coal mines in Piparwar (Erstwhile Bihar, now Jharkhand), India. White Industries alleged that thanks to an inconceivable delay at the hands of the Indian judiciary spanning around 9 years, the corporation had incurred huge losses and there has been a breach of treaty guarantee. one among the interesting facets of the said case was while passing the award, the tribunal held that there had been a breach of guarantee to supply ‘effective means to say claims’, a guarantee which wasn’t present within the India-Australia BIT and was drawn from India-Kuwait BIT. The award made India pay approximately USD 4 million as damages and legal cost.
3. Another case is of Louis Dreyfus Amateurs SAS v. India, (PCA Case No. 2014-26, Award dated 11-9-2018 (PCA)) where a dispute arose after termination of the agreement by Haldia Bulk Terminals Private Limited (‘HBT’). Louis Dreyfus initiated an investment arbitration claim against India under the India-France BIT alleging that the termination of HBT almost devastated the investment. However, UNCITRAL arbitral tribunal reportedly dismissed the claim by the French investor, Louis Dreyfus Amateurs SAS (“LDA “), against India the Permanent Court of Arbitration held that to invoke jurisdiction of the tribunal by an investor in an indirect investment, the investor shall hold a minimum of 51% ownership so as to fall within the protection granted by the BIT.
4. Another landmark BIT case in India was of Union of India v. Khaitan Holdings (Mauritius) Limited & Ors. (CS (OS) 46/2019, I.As. 1235/2019 & 1238/2019) where, Khaitan Holdings (Mauritius) Limited (“Defendant Company”), a Mauritian entity, made investments in the mobile telecommunication entity called Loop Telecom and Trading Limited (“Loop”), in India. Loop was awarded 21 mobile telecoms licenses which in 2012, the Supreme Court of India cancelled. In 2013, supported its shareholding interest in Loop, the Defendant Company brought a claim for compensation under the Mauritius–India BIT for losses suffered. which was dismissed by the Telecom Disputes Settlement and Appellate Tribunal (TDSAT).  Thereafter, the Respondent requested the Permanent Court of Arbitration (PCA) for the appointment of the Presiding Arbitrator. The Union of India filed a suit within the supreme court of Delhi against the Defendants seeking various declaratory reliefs. The main question arose whether an Indian court should grant an anti-arbitration injunction restraining arbitration proceedings initiated under a BIT? 

The  Supreme Court held their ruling in favour of the Defendants Khaitan Holdings (Mauritius). 

• Firstly, the Court observed that the question whether the cancellation constitutes expropriation giving rise to a claim for compensation, falls within the competence of the arbitral tribunal and not the Court.
• Secondly, the Court examined whether Loop’s invocation of the TDSAT’s jurisdiction barred the remedies of the Defendant Company as a shareholder under the BIT. albeit the Court noted that the Licenses and therefore the Defendant Company’s investment in Loop were subject to Indian laws, the Court held that the BIT was a self-contained instrument governed by public law of nations. The Court opined that the BIT isn’t subject to interpretation and adjudication under domestic laws, and held that any interference by national courts with BIT dispute mechanisms would defeat the aim of the BITs.

1. An important case especially associated with arbitrators jurisdictional limits was BG Group PLC v. Republic of Argentina (Case No. 12–138) where The petitioner sought enforcement of a billboard hoc award rendered under the UNCITRAL Rules during which the arbitrators found that they had jurisdiction – notwithstanding a provision within the applicable BIT that disputes must first be submitted to Argentina courts – because Argentina’s post-2001 emergency legislation, which limited investors’ access to courts, rendered this local litigation requirement “absurd and unreasonable”. The Supreme Court reversed the appellate decision below, which had denied enforcement finding that the arbitrators’ finding of jurisdiction exceeded their authority.
2.  Another international case was of Occidental Exploration & Production Company v. The Republic of Ecuador (A3/2005/1121, [2005] EWCA Civ 1116),.where, a dispute arose between Occidental Exploration & Production Company (Appellant) and therefore the Republic of Ecuador (Respondent), arbitration proceedings were commenced in London under UNCITRAL Rules, in accordance with the 1993 Bilateral Investment Treaty (BIT) between the USA and therefore the Republic of Ecuador. A gift was rendered and subsequently challenged by the Respondent pursuant to sections 67 and 68 of English Arbitration Act 1996 (the Act). After a careful examination of the relevant jurisprudence, the Court concluded that there was no basis for suggesting that an English court, within the context of an English award, could be prohibited from defining the scope of the arbitrators’ jurisdiction. In reaching this conclusion, the court was influenced by the character of the BIT, under which two States had deliberately agreed to confer rights intended to be enforceable by private persons. Consequently, the appeal was dismissed.

Conclusion

Bilateral Investment Treaties have been a very good source of creating investment opportunities with various countries. However, its clauses and procedure are not immune to disputes if not drafted well. Various countries have different BIT related policies which are favourable but also unfavourable for some at the same time. India ‘s Model BIT in 2016 provided a new outlook of future investment treaties by narrowing the concept of investment and giving an array of discretionary powers to the host state., in spite of all this, Bilateral investment treaties have been a great tool for all the countries to make their next step in this era of globalisation.

References

Online database

• SCC Online
• JSTOR
• Kluwer Arbitration Law BLog
• Westlaw

Websites

• https://unctad.org
• https://www.mondaq.com/india/international-trade-investment
• https://www.trade.gov/bilateral-investment-treaties
• https://www.sidley.com/en/us/services/global-arbitration-trade-and-advocacy
• https://www.lexology.com/library
• https://www.americanbar.org/groups/business_law/publications
• https://nyulaw.libguides.com

Other Sources

1. The 2016 Model Indian Bilateral Investment Treaty: A Critical Deconstruction

By Prabhash Ranjan and Pushkar Anand, North-western Journal of Law and Business

2. Bilateral Investment Treaties 1995–2006: Trends in Investment Rulemaking, UNCTAD

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