Foreign Investment (FI) is one of the major sources of economic development and can exist in different forms such as; Foreign Direct Investment (FDI), Portfolio Investment, Commercial Loans etc. FIs are generally very susceptible to risks and thus require special protection. For instance, a Foreign Investor (investor) who incorporates a company in the Host–State -because of such long term commitment – may not be able to forfeit such an investment and leave the Host-State at will. Therefore, for FI in any State to be promoted, assurances of long term investment protection and certainty must be made.
Bilateral Investment Treaties (BITs) thus emerged as a means of achieving the protection and certainty gravely lacking and desperately needed under the Foreign Investment Law. Simply put, a BIT is an agreement between two independent States, guaranteeing one State-party (Home-State), that its nationals (the investors), investing in the other state-party’s environs (Host-State), would be accorded certain standard of treatment during the investment period. Additionally, they permit settlement of investment disputes between Investors and defaulting Host-States in International Investment Tribunals (Investor-State arbitration).
This first of a 3 series article makes a synopsis of BITs regime. As a first step, a sketch of the history and rationale behind the adoption of BITs is drawn. At this point emphasis is made on the pre-BIT regime to expound the importance and reason behind the rampant adoption of BITs. Following this is a summary of the actors involved in a BIT, as well as the principles, structure and content of a typical BIT.
It should be noted that this part of the series does not aim at addressing the criticisms or lapses in the BITs regime neither is the Regime portrayed as perfect. It merely gives an insight to the regime and lays a foundation towards understanding the contemporary issues surrounding it.
History And Rationale Behind The Adoption Of Bits: The Pre-Bits Era
Before the advent and usage of international investment treaties, Investors were protected under Customary International Law. This era was however plagued with a lot of uncertainties. For example, the remedies available to aggrieved investors were restricted to the local remedies available in the Host-States and Diplomatic Protection (also known as State-State dispute). Most investment disputes were therefore settled in the Host-State’s domestic courts and were only in exceptional cases- after the exhaustion of local remedies- taken to international tribunals through diplomatic protection. This was very unwelcome because even if the national laws of a Host-State were capable of providing adequate protection to an investor (which most times were not), such laws are very vulnerable to change -for instance if there is a change in government- and consequently largely unreliable.
Furthermore, Diplomatic Protection entailed that aggrieved investors were protected by their Nations (Home-States). Thus, when an investor was aggrieved, the Home-State intervened and initiated the dispute on the investor’s behalf. The downside to this Protection is that the dispute becomes a dispute between States, leaving the investor at the mercy of the Home-State.
Consequently, in the bid to circumvent this rather cumbersome and unreliable dispute settlement techniques, States began entering into BITs granting investors right to bring direct claims against a defaulting Host-States (instead of going through their Home-States or exhausting local remedies) in international investment tribunals (Investor-State arbitration).
It is worth mentioning that during this era, before the prevalent adoption of BITs, various abortive efforts to establish a multilateral investment agreement, such as the International Trade Organisation (ITO) and the Multilateral Agreement on Investment (MAI) were made. The failure to achieve a multilateral investment agreement further occasioned the emergence of international investment treaties as the primary source of rules governing FIs. The initial investment treaties which emerged to afford protection to investors were the “Treaties of Friendship, Commerce and Navigation” and have currently evolved into the contemporary BITs.
The BITs brought greater security and certainty in foreign investment law. Asides the investment protections provided in the BITs, one of their most attractive features is that they are binding for a long period of time (usually between 10-20 years) and cannot be altered without the mutual consent of both parties.
Presently, the International Investment Regime is comprised of over Three Thousand Two Hundred (3,200) international agreements, of which BITs constitute more than Two Thousand Eight Hundred and Sixty 2,860 of them. A lot of States even have Model BITs which serve as a guide or precedent for negotiating new BITs. Nigeria for one, has presently concluded BITs with Twenty-Two different countries.
Actors Involved In Bits
The major actors involved a BIT are:
The “Host-State”– the State where the investment is made. It usually consists of developing States.
The “Home-State”– the State of the foreign investor i.e. the capital exporting State. It comprises mostly of developed States.
The “Investors”– These are the citizens of the Home-State who are investing in the “Host-States”. They comprise mostly of multinational companies/corporations.
The “Impacted Non-State Actors”– These are the group of people who are not direct parties to the BITs but are affected by the activities of the investors.
The “Arbitration Tribunals”– These are responsible for the resolution of disputes arising under the BITs.
Principles Of Bits
The principles enshrined in the BITs are; encouragement of FI, protection of FI, and liberalization of the market.
Contents And Structure Of Bits
Although BITs may differ in language, most of them tend to adopt similar structures and provisions. The contents of a BIT can substantively be divided into two parts;
- Substantive Rights-
These refer to the standard/quality of treatment required to be given to the investors. They include:
- a) National Treatment (NT) clause- this assures foreigners equal treatment with the nationals of the Host-State.
- b) Minimum Standard Treatment clause- assures investors fair and equitable treatment (FET) and full protection of their investments.
- c) Assurances against expropriation without compensation and due process.
- d) Provisions guaranteeing free repatriation of profits
- e) Most Favoured Nation Treatment (MFN) clause- assures investors equal treatment with all other investors from third-countries.
- Dispute Settlement Procedure-
In addition to these substantive rights, the BITs also provide for procedures for settlement of investment disputes such as:
The BITs provide for the arbitral rules to be adopted by tribunals in settlement of investment disputes. Some of these rules include; The International Centre for Settlement of Investment Dispute rules (ICSID- which is the most prominent), The United Nations Commission on International Trade Law (UNICITRAL), International Chamber of Commerce (ICC) and the Stockholm Chamber Of Commerce (SCC).
Furthermore, BITs sometimes provide for the applicable laws in which the terms of the BITs are to be interpreted.
Selection of arbitrators
BITs also provide for procedures in which arbitrators are to be selected. Usually they provide that arbitrators are selected by the parties involved in the dispute. Each party is usually permitted to choose an arbitrator, while a third one, is selected by the arbitrators chosen by the parties (preferably the parties also take part in choosing the third arbitrator).
The failure to accomplish a multilateral investment agreement and the increasingly desperate need for foreign investment protection (especially in developing countries to boost their economy) has led to the proliferation of International Investment Treaties -most especially BITs- as the major source of Foreign Investment Law. Although this Regime is laced with a lot of controversies, it is without doubt that the BITs have brought a degree of certainty and security to International Investment Law.