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The overwhelming merits of bilateral investment treaties.

The merits of bilateral investment treaties are substantial, indeed, overwhelming. There are essentially two reasons that support that conclusion.

The first turns on the substantive standards for the treatment of foreign investment embodied in bilateral investment treaties and, in a few, very important multilateral treaties, the Energy Charter Treaty and NAFTA. The second reason turns on procedures for the settlement of disputes arising under those treaties.

I. SUBSTANTIVE STANDARDS

For some two hundred years, standards of treatment of foreign investment were in acute dispute. Companies and citizens of countries that generated capital surpluses, such as Great Britain and France, invested some of that capital abroad. Those investments were, in the large, to the benefit of capital importing countries, which needed capital to develop. They were, in the large, to the benefit of the foreign investors who received dividends on their investments. Yet disputes sometimes arose over the treatment of foreign investments in host countries. The foreign investor could seek recourse in the courts of host countries but sometimes found, or believed, that that recourse was ineffective or unjust. The foreign investor alternatively could seek the intervention of the government of the country of which he was a national. Sometimes such diplomatic espousal was forthcoming and effective, sometimes not. Often the investor's government would decline to extend its protection because it apprehended that doing so would be prejudicial to its relations with the host country of the investment. Yet occasionally the protection extended on behalf of the investor was so vigorous as to be disproportionate to the interests at stake, as in the Venezuelan blockade imposed by European states at the turn of the 20th Century.

Capital exporting countries maintained that there was a minimum standard of treatment enjoyed by all aliens and their property. Capital importing countries maintained that aliens and their property were entitled not to a minimum standard but, at most, to a national standard, that is, to no more than nationals of the host state enjoyed or suffered. Calvo famously expounded the latter position. The Soviet Union, which during the Russian Revolution expropriated the property of its citizens without compensation, maintained that foreign nationals were equally entitled to nothing for the taking of their property, a contention unpopular with the thousands of Frenchmen who had bought Tsarist bonds. When Mexico nationalized its oil industry in the 1930's to the pain of major oil companies and their stockholders, asserting that they were entitled to no more compensation than Mexican law afforded Mexican nationals, a notable exchange ensued between Secretary of State Hull and the Foreign Minister of Mexico. Hull contended that foreign investors were entitled to the minimum standard of prompt, adequate and effective compensation. His Mexican counterpart replied with arguments congenial to Calvo.

After the Second World War, this confrontation was renewed, as illustrated by expropriations by Iran, Libya and other states, and the reaction of capital exporting countries thereto.

Capital importing states raised the issue in the United Nations under the banner of "permanent sovereignty over natural resources." A commission of that title prepared a draft resolution that came up for consideration in 1962 at the Seventeenth Session of the U.N. General Assembly. I was then the legal adviser of the U.S. Delegation. It fell to me, together with the legal adviser of the British Delegation, to negotiate the draft resolution with the spokesmen of developing countries. The upshot was a resolution adopted with the support of a very large majority, despite vigorous opposition by the then Communist Bloc. The resolution contains repeated assertions of permanent sovereignty over natural resources. But these recitals were balanced by the recognition that "capital imported ... shall be governed by the terms thereof, by the national legislation in force, and by international law." Expropriation required "appropriate compensation" in accordance with national and international law. The resolution, 1803 (XVII), further provided that "[f]oreign investment agreements freely entered into by, or between, sovereign states shall be observed in good faith," thus requiring the observance of agreements with foreign investors. In all, this was a relatively balanced resolution, which recognized that the treatment of foreign investment was subject to international as well as national law. It represented an effort to accommodate the distinctive positions of capital importing and capital exporting states.

But after that, confrontation replaced accommodation. Subsequent General Assembly resolutions on "Permanent Sovereignty over Natural Resources" excluded the governance, even the relevance, of international law, and attracted consequential opposition of capital exporters. That trend culminated in the adoption by the General Assembly in 1974, at the initiative of Mexico, of the "Charter of Economic Rights and Duties of states." That Charter excluded international law in the treatment and taking of foreign property and asserted the sole governance of the domestic law of the host state as interpreted and applied by its courts. The industrialized democracies voted against the Charter. They also entered their reservations to resolutions espousing a "New International Economic Order." That "Order" was seen to be a maneuver by OPEC to evade responsibility for the suffering of the populations of developing countries brought about by OPEC's cartel-induced oil prices. At that juncture, the outlook for universal agreement in this sphere seemed hopeless.

Yet at the very time of the adoption of the Charter of Economic Rights and Duties of States--which did not purport to be an expression of customary international law and could hardly have been, opposed as it was by the industrialized democracies--the tide was beginning to turn. Universal, multilateral agreement in a single instrument remained unattainable not only in the United Nations but even in the OECD.

But what is extraordinary is the cascade of bilateral investment treaties that thereafter vaulted over and bridged the great gulf between the positions of developed and developing countries.

By the terms of these bilateral investment treaties, foreign investment is assured fair and equitable treatment, full security and protection and no less than national and most-favored nation treatment. The foreign investor is assured of management authority and control. The terms of commitments entered into in respect of the foreign investment are to be observed. If there is a taking by the state of the foreign investment, by means direct or indirect, the state is treaty-bound to pay prompt, adequate and effective compensation.

Some twenty-eight hundred bilateral investment treaties have been concluded, most of them in the last two decades, and some seventeen hundred of them are in force. Initially they were proposed by capital exporting governments of Western Europe and agreed to by capital importing governments of the Third World. But over the years, bilateral investment treaties (BITs) have proliferated remarkably. They now run not only between North and South, but between East and West. There are more than six hundred South-South BITs, that is, bilateral investment treaties between developing countries. China is party to multiple BITs as is Russia.

There are few areas of international law and life that have been the subject of some twenty-eight hundred concordant treaties; most-favored nation provisions come to mind, but it is not easy to call up another. In view of that immense number of treaties and the predominant, pervasive consistency of their terms, there is room for the view that they have reshaped the body of customary international law in respect to the treatment and taking of foreign investment. That is to say, it may be maintained that certain core provisions of BITs, such as those providing for fair and equitable treatment and for prompt, adequate and effective compensation, by the fact of being prescribed in some twenty-eight hundred treaties, have seeped into the corpus of customary international law, with the result that they are binding on all states including those not parties to BITs. That thesis has a measure of support in more than one arbitral award.

Be that as it may, the first great merit of bilateral investment treaties is their well-nigh universal promulgation of enlightened standards for the treatment and taking of foreign investment. Will this remarkable level of near universal agreement, bilaterally expressed, last? That remains to be seen. There have been a few well publicized defections in recent years in Latin America. But the fact that former capital importing states, such as China, Kuwait, Singapore, the United Arab Emirates, and Saudi Arabia, increasingly are capital exporting states, may suggest that the standards of bilateral investment treaties will be generally maintained.

II. PROCEDURAL STANDARDS

The second great merit of bilateral investment treaties is their provisions for dispute settlement. If a dispute arises under the treaty between the two States Parties, the International Court of Justice normally is given jurisdiction to resolve it. That is a traditional provision and a sound one, though adherence to that Court's jurisdiction is a refreshing departure for some parties to BITs. What is far from traditional is that, if there is a dispute between the foreign investor and the host State, the foreign investor is normally authorized by the terms of the BIT to pursue a direct, binding international arbitral remedy against the government of the host State, through the World Bank's International Centre for Settlement of Investment Disputes--"ICSID"--or otherwise.

This extraordinary innovation displaces the uneven intervention of states in exercise of their right of diplomatic protection of the interests of their nationals by according the foreign investor standing under international law, by virtue of the treaty, to pursue arbitration against the host state. While there was significant precedent for such direct arbitral recourse in a number of concession agreements and other contracts between states and aliens concluded in the course of the twentieth century, institutionalization of this arbitral right in BITs--and in ICSID's Washington Convention--was one of the most important progressive developments in the procedure of international law in all its history. It is a development that is consistent with the advancement of human rights internationally, including the right to own and enjoy the use of property. It is consonant with broader international trends that have dethroned the State as the sole subject of international law. By now, ICSID has registered more than two hundred arbitral cases, and disputes under BITs have given rise to quite a number of ad hoc and other arbitral proceedings as well.

Yet today international arbitration of investment disputes has produced its critics. They claim that the process is asymmetrical: investors can require states to arbitrate claims against the state but the state cannot require investors to arbitrate claims against them. They claim that international arbitral panels treat the government and the investor on the same plane and hence fail to take due account of the consideration that the state acts for the public good and must enjoy a right to regulate for the public good. Some critics even maintain that the international arbitral process is biased because those who serve as arbitrators are not tenured, they may have acted as counsel in investment cases, and because they may be influenced by the prospect of further arbitral appointments. Arbitral awards may conflict and there is no tenured court of appeals to sort out conflicts.

These charges are as colorful as they are misconceived.

The international arbitral process, placed in context, is not asymmetrical. The host state may be able to bring a counterclaim against the investor. But much more than that, the government of a state has many means, legal and not, for bringing pressure to bear upon the foreign investor. The government has not only the police power; it has the police. It can bring the weight of its bureaucracy, and its politicians, to bear. It can prescribe, delay, decree, tax, incite, and strangle. For the foreign investor to be able to require international arbitration of disputes goes only some way to right a balance that usually inclines in favor of the host government. One does not hear that the United States Court of Claims is asymmetrical because it is the forum for claims against the Government of the United States.

Naturally international arbitral tribunals place the litigants on the same plane. Equality of arms is the essence of the judicial and arbitral process. To assume that the government of every state acts in ways that necessarily promote the public good, and that the foreign investor does not, is to make assumptions that do not necessarily comport with the facts.

To assume that a tenured court, national or international, is objective, while international arbitral tribunals are not, is also dubious. There are tenured courts in too much of the world that are incompetent, subject to political influence, or corrupt. The preference of foreign investors not to subject their disputes to local courts is shared by thousands of commercial contractors the world over.

An international arbitrator of ability and integrity will decide the case on the basis of the facts and governing law. That the vast majority of international arbitral awards are unanimous suggests the integrity of the process. I may say on the basis of my experience as a judge and as an arbitrator that achieving the requisite measure of objectivity depends above all on the character of the individual, and not on whether he or she is tenured, or whether he or she has acted as counsel, and not on whether there may be prospect of further arbitral appointments.

Criticism of international investment arbitrators on grounds of inherent conflict of interests are, in some cases, proxies for attack on a process that is uncongenial to revivalist proponents of a New International Economic Order. If investment arbitrators are prone to favor the investor, how can so many dismissals of claims on jurisdictional grounds be explained? Why are cases often won by defendant governments?

If the governments of the world preferred an international investment court to arbitration, or saw a need for a court of international arbitral appeals, they could constitute one; they have not. When a great many states concluded the Energy Charter Treaty, they could have opted for a court but they chose arbitration between investors and host state. Does that suggest that those states were unaware of their interests? Can it really be supposed that the states of North and South, East and West, developed and developing, of virtually all political complexions and economic models, have been misguided in concluding some twenty-eight hundred BITs? By the end of 2006, there were 679 BITs running between developing countries. Were these developing states, contracting with each other, acting not in their own interests but in the interests of the multinational corporations?

My conclusion is that we should treat the noise about the inequities and iniquities of the international arbitral process, and about the pernicious standards and procedures of bilateral investment treaties, for the nonsense that it so largely is.

The BIT arbitral process leaves room for improvement, as human institutions do. But it is a beneficent, progressive process that deserves commendation rather than condemnation.

Remarks at Suffolk University Law School, October 31, 2008

Judge Stephen M. Schwebel
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Author:Schwebel, Stephen M.
Publication:Suffolk Transnational Law Review
Date:Jun 22, 2009
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