Info Service on WTO and Trade Issues (Sept15/09)
23 September 2015
Third World Network
International trade, investment
accords, increasing controversies
Published in SUNS #8094 dated 17 September 2015
Geneva, 16 Sep (Andrew Cornford*) -- With the proliferation of bilateral
and plurilateral international trade and investment agreements, and
increasing controversies over their provisions for dispute settlement,
two recent proposals on settling investment disputes have begun to
attract attention and consideration in national and international
One proposal, a stand-alone model draft for a bilateral investment
treaty, has been mooted by India, and has been attracting domestic
and international attention and comment.
Another recent proposal is from the Global Economic Governance Programme
of the Oxford University Blavatnik School of Government.
This two-part article reviews major provisions of international investment
treaties, often with special attention to their historical development,
and reviews the draft model treaty mooted by the Government of India,
a key developing country that is both trying to attract foreign investment
for development, and that also has enterprises investing abroad, as
well as some ideas outlined in proposals published by an academic
institution in a developed country.
Coverage and procedures for dispute settlement in international agreements
on investment and trade are proving increasingly controversial.
The current controversy reflects contentious issues in two ongoing
plurilateral negotiations, on the TPP (Trans- Pacific Partnership)
and TTIP (Transatlantic Trade and Investment Partnership) agreements.
The targets of contention include provisions designed to achieve regulatory
convergence among the participants in the negotiations regarding subjects
such as environmental regulation and intellectual property rights.
Moreover, the rules agreed under these agreements will increase the
scope for private investors to bring suits against governments for
future losses imputed to changes in regulation and other official
actions under the procedure known as Investor-State Dispute Settlement
Accords on investment and trade have proliferated in recent years.
The coverage of such accords has expanded over the years and now often
includes not only domestic regulations which bear on foreign investment
- the subject of investment treaties - but also issues traditionally
treated as part of cross-border trade.
The first bilateral investment treaty was concluded between the Federal
Republic of Germany and Pakistan in 1959. By the end of the 1980s,
more than 300 such treaties had been signed between advanced and developing
economies (Guertin,1990: 122).
By 2006, there were 2,400-2,600 bilateral investment treaties in place,
most of them between advanced and developing countries but several
also between developing countries (Lowenfeld, 2008: 554). By 2014,
the total had risen to more than 3,200 (UNCTAD, 2013: 2).
However, there are indications of dissatisfaction among a number of
parties to such treaties, particularly developing countries: this
has in some cases led to declarations of intention to modify the terms
of the treaties or actually to withdraw from them.
Major subjects raised in the controversy over such treaties are worth
examining against a model bilateral investment treaty put forward
in India which contains provisions clearly designed to avoid common
criticisms of such accords.
This model treaty is the government's reaction to a recent proliferation
of cases in which investors initiated potentially costly arbitral
proceedings against India (Krishnan, 2015).
Investment treaties were a sequel to earlier agreements covering similar
issues such as Friendship, Commerce and Navigation Treaties.
Their development accompanied the absence of consensus concerning
the rights of external investors and the appropriate treatment of
different parties during a period of proliferating expropriations.
Owing to the overlap between foreign investment and domestic regulation,
demands for compensation may be triggered not only by partial or complete
expropriation but also by the direct and indirect effects on foreign
investors of host countries' regulations more generally.
OUTLINE OF THE INDIAN MODEL TREATY
The classification of subjects in investment treaties varies but the
coverage of most treaties is fairly standard. The Indian model treaty
is distinguished by the extent to which it emphasises and spells out
the obligations of investors. Less emphasis is given to promotion
and protection of investment.
Articles 1 and 2 cover definitions, scope and general provisions.
The scope is notable for the detailed specification of the investors
and investments which are covered by the treaty and of those which
Articles 3-7 treat major obligations of the two parties to an investment.
Article 3 treats the obligations of the parties under international
law and regarding the observance of due process. Article 4 prescribes,
subject to certain qualifications, national treatment for investors.
Article 5 prescribes rules for deciding whether a measure constitutes
expropriation and is thus eligible for claims under this heading.
The article explicitly excludes from claims non-discriminatory regulatory
actions by a Party that are designed and applied to protect legitimate
public welfare objectives such as public health, safety and the environment.
Article 6 covers the conditions under which current and capital cross-border
transfers of funds are allowed.
Article 7 covers the entry and temporary sojourn of personnel connected
to the investment.
Articles 8-13 cover legal obligations of investors and investments
as well as those of the investor's home state.
Articles 9-13 are fundamental to the operation of the treaty. Article
9 concerns the obligation against corruption. The obligation as to
disclosure in Article 10 covers complete information regarding activities,
structure, financial situation, performance, relationships with affiliates,
ownership, governance, and various other matters.
Article 11 contains the obligation to comply with the host state's
laws on taxation. Under compliance with the law of the host state
(Article 12) are specified laws on wages, employment, labour rights
and social security, on the environment and the conservation of natural
resources, on human rights, and on consumer protection and fair competition.
Under Article 13, investors and investments are to be subject to civil
actions for liability in the judicial process of their home state
for acts and decisions in the home state where these lead to damage,
personal injuries, or loss of life in the host state.
Article 14, the longest of the model treaty, covers settlement of
disputes between an investor and a party (in other words, the controversial
subject of Investor-State Dispute Settlement (ISDS)).
Article 14 sets out procedural obligations such as the exhaustion
of local remedies which must be met before submission of the dispute
to external arbitration, the appointment of the arbitrators for the
arbitral tribunal, prevention of conflicts of interest involving the
arbitrators, the burden of proof and governing law, counterclaims
against the investor and investment, the distribution of the costs
of the arbitration, and restrictions on diplomatic exchanges between
the parties to the dispute.
Article 15 deals with disputes between the parties over the interpretation
and application of the treaty. Articles 16-17 specify the general
and security exceptions which can be invoked by the respondent state.
Article 18 specifies procedures to be met when general exceptions
Articles 19-23 cover miscellaneous matters: relationship with other
treaties, denial of benefits to entities lacking for various reasons
the status of bona fide foreign investors and investments, consultations
and periodic reviews, amendments, and entry into force.
Article 24 specifies the duration of the treaty - ten years unless
there is an agreement on renewal - and allows for termination if one
party gives the other notice six months in advance of its intention
DEFINITION OF ELIGIBLE INVESTORS AND INVESTMENTS
Investment treaties typically begin with a broad definition of the
investors and investments admitted to the host country. Some treaties
(such as most of those involving the United States as one of the parties)
specify national treatment amongst the conditions for entry, i. e.
entry for foreign investors and investments on the same terms as those
available for residents, while specifying exceptions from such treatment
for certain sectors or activities such as airlines, cabotage, telecommunications
Other treaties provide for entry in accordance with the host party's
legislation and regulations. The latter is the approach of the WTO
General Agreement on Trade in Services (GATS).
An important feature of investments eligible for admission is the
extent (if any) to which it includes different categories of financial
instrument. Many bilateral investment treaties include portfolio as
well as direct investments under the heading of entry.
The coverage of the Indian model treaty is directed at investors rather
than financial instruments. Thus, "investment" is defined
as "an Enterprise in the Host State, constituted, organised and
operated in compliance with the Law of the Host State and owned or
controlled in good faith by an Investor" (Article 1).
The definition of investment continues by specifying "for clarity"
that investment does not include various financial assets amongst
which are specified "portfolio investments" as well as "any
other claims to money that do not involve the kind of interests or
operations set out in the definition of Investment in this treaty".
This approach would appear to exclude the liberalisation of capital
movements from the obligations of the model treaty. The approach would
distinguish the treaty's obligations from those in many other treaties
which accommodate such liberalisation.
Such exclusion might be justified as being in accord with the recently
more accommodating stance of the IMF towards countries' management
of capital movements. This stance reflects acknowledgement by the
IMF that the management of capital flows can be a reasonable part
of policies designed to control the destabilising impact which capital
flows can have on countries' macro-economies (Cornford, 2014: 2-4).
Bilateral investment treaties generally list some activities or sectors
excluded from the coverage of the treaty. These may comprise various
activities of the government, taxation, and other national laws and
regulations designed to promote or protect the public interest.
The Indian model treaty contains broad provisions under this heading.
These include general protection for the governments' legal and regulatory
authority (including changes and other reforms): "Nothing in
this Treaty shall be interpreted to restrict the rights of either
Party to formulate, modify, amend, apply or revoke its Law in good
faith. Each party retains the right to exercise discretion with respect
to regulatory, compliance, investigatory matters, including discretion
regarding allocation of resources and establishment of penalties"
Such protection for governmental authority means that in the design
and drafting of new laws there is no need for apprehension on the
part of the host country that external parties will use bilateral
investment treaties as vehicles for nullifying, or restricting the
impact of, reforms and regulations (an effect aptly described as "regulatory
The Indian model treaty excludes from applicability government procurement,
subsidies and grants, services supplied in the exercise of government
authority (services supplied neither on a commercial basis nor in
competition with one or more service suppliers), taxation measures,
the issuance of compulsory licences granted in relation to intellectual
property rights (their revocation, limitation, or creation), and commercial
contracts between a Party to the Treaty and an Investment or Investor
THE "TAKING" CONCEPT
The early history of the claims of cross-border investors against
host states concerns principally cases of partial or total expropriation
or nationalisation, often of oil or petroleum interests. Moreover,
the character of international arbitration of disputes between such
parties was strongly influenced by the decisions of an international
tribunal, established in 1981, to adjudicate claims between United
States parties on one side and the government of Iran and Iran state-owned
entities on the other.
The establishment of this tribunal was part of a settlement, the Algiers
Accord, negotiated through the intermediation of the government of
Algeria, which also covered the following issues: the release of United
States hostages; the return to Iran of a major part of Iranian financial
assets in banks in the United States which had been frozen by the
American government; the termination of litigation against Iran and
Iranian entities in the United States; and the establishment of a
fund in a Security Account in the Netherlands from which United States
claims against Iran recognised by the tribunal would be satisfied
(Lowenfeld, 2008: 542-543).
During a lengthy period, which for minor cases lasted well into the
new millennium, the Iran-United States Tribunal adjudicated cases
involving not only expropriation but also commercial disputes about
payments not made, contracts terminated or not fulfilled, and letters
of credit dishonoured or drawn on wrongfully. In cases not involving
expropriation or nationalisation, the Tribunal generally accepted
as part of the basis for its decisions the concept of "taking".
This was defined in the 1961 Sohn and Baxter Draft Convention on State
Responsibility as follows (Lowenfeld, 2008: 546): "(a) A "taking
of property" includes not only an outright taking of property
but also any such unreasonable interference, use, enjoyment, or disposal
of property as to justify an inference that the owner thereof will
not be able to use, enjoy, or dispose of the property within a reasonable
period of time after the inception of such interference. (b) A "taking
of the use of property" includes not only an outright taking
of the property but also any unreasonable interference with the use
or enjoyment of the property for a limited period of time".
"Taking" thus defined covers many different categories of
commercial dispute other than outright expropriation or nationalisation.
Prior to the Iran-United States Tribunal what could and what could
not be subjects of investment disputes eligible for arbitration or
legal settlement had lacked definition. The range and volume of the
Tribunal's work has contributed to the evolution of law on international
investment and to entrenching the concept that such law applies not
only to disputes between states but also between states and other
In the context of the precedents of the work of the Iran-United States
Tribunal for subsequent investment disputes, it is important to remember
that a task of the Tribunal was to decide what constituted a contract
eligible for adjudication, since the Tribunal was not adjudicating
on the basis of the terms of a pre-existing Treaty or international
agreement. As already discussed, the Indian model treaty carefully
defines what is covered by Investment.
NATIONAL TREATMENT/FAIR AND EQUITABLE TREATMENT
National Treatment is designed to assure foreign suppliers of goods
or services treatment no less favourable than that accorded to domestic
suppliers. National Treatment can cover conditions of entry or market
access as well as regulatory treatment to a foreign supplier in a
country's market or only the latter.
According to the approach of the WTO General Agreement on Trade in
Services, National Treatment is designed to equalize post-entry conditions
of competition for domestic and foreign suppliers. In many bilateral
investment treaties, especially those in which the United States is
a party, national treatment is an obligation on conditions for entry
as well as on post-entry treatment.
However, National Treatment does not guarantee minimum standards of
treatment to foreign suppliers even when no discrimination can be
shown. Fair and Equitable Treatment is designed to assure that a minimum
international standard of behaviour will apply to a foreign supplier.
Examples of cases where such a minimum standard has not been applied
might be administrative delays which hinder the start of projects
or other investments after the receipt of a license or a successful
bid by a foreign supplier.
The problem with Fair and Equitable Treatment is that, unlike the
case for National Treatment, there is no agreed standard of comparison
which will serve as the basis for judging whether it has been met.
In 2001, the absence of such a standard led the Free Trade Commission
created by the North American Free Trade Agreement (NAFTA) to issue
an interpretation of the Minimum Standard of Treatment in Accordance
with International Law which includes the following: "The concepts
of ‘fair and equitable treatment' and ‘full protection and security'
do not require treatment in addition to or beyond that which is required
by the customary international law minimum standard of treatment of
The interpretation went on to add: "A determination that there
has been a breach of another provision of the NAFTA, or of a separate
international agreement does not establish that there has been a breach
of [the Article containing these standards]" (Lowenfeld, 2008:
This still means that the contents of Fair and Equitable Treatment
depend on the interpretation of the applicability of customary international
law to the case under consideration.
The obligation of National Treatment in the Indian model treaty is
post-entry (Article 4). It is also hedged with specified exceptions.
These include laws and measures of regional and local government;
wide discretion for decisions regarding law enforcement; and the extension
of financial assistance by a party in favour of its investors or investments
in pursuit of legitimate public purposes such as the protection of
public health, safety and the environment.
There is no reference in the Indian model treaty to Fair and Equitable
Treatment as such. However, under Standard of Treatment (Article 3),
each party is not to subject Investments of Investors of the other
party to measures which constitute the following: (i) denial of justice
under customary international law; (ii) unremedied and egregious violations
of due process; and (iii) manifestly abusive treatment involving continuous,
unjustified and outrageous coercion or harassment.
There is also a clause similar to the analogous one in NAFTA's Minimum
Standard "that a determination that there has been a breach of
another provision of the treaty does not establish that there has
been a breach of the model treaty's Standard of Treatment."
The Indian model treaty contains extensive lists of exceptions designed
to provide free scope for government action by the host state as well
of subjects off limits for dispute settlement.
According to the General Exceptions of Article 16: "Nothing in
this Treaty precludes the Host State from taking actions or measures
of general applicability which it considers necessary to the following":
the protection of public morals and the maintenance of public order;
ensuring the integrity and stability of the financial system; remedying
serious balance-of-payments problems and exchange-rate and external
financial difficulties; ensuring public health and safety; protecting
and conserving the environment; improving working conditions; securing
legal compliance for laws relating to deceptive and fraudulent practices
and defaults; protecting personal privacy; and protecting national
treasures and monuments. Moreover, measures taken by local bodies
and authorities are covered by the General Exceptions.
In addition to General Exceptions, the Indian model treaty specifies
Security Exceptions which cover the disclosure of information considered
by a party contrary to its essential security interests or the taking
of actions considered necessary for the protection of its essential
security interests (Article 17).
Measures for the protection of a party's essential security interests
are to be imposed on a non-discriminatory basis (Annex 1). The defence
of a measure or measures as being justified by Security Exceptions
is to be non-justiciable and not open to review by an arbitral tribunal
established to settle disputes under the model treaty.
Most bilateral investment treaties contain most-favoured-nation (MFN)
clauses which, as in the case of their analogues for cross-border
trade, guarantee treatment to foreign investors covered by the treaty
at least equal to that granted to foreign investors from any other
country. However, MFN clauses in investment treaties may be subject
to specified exclusions of varying degrees of comprehensiveness (Lowenfeld,
The approach of the Indian model investment treaty is simply to exclude
MFN treatment. Such an exclusion enables India to provide differential
benefits to foreign investors according to such features of its relations
with the investors' home states as the scale of incoming investment
from this source.
Expropriation has historically been at the heart of the development
of rules on the treatment of international investment. In disputes
on the subject before 1945, the so-called Hull Doctrine jostled with
the Calvo Doctrine (Lowenfeld, 2008: 472-473 and 475-480).
The Hull Doctrine was summarised in a statement of the United States
Secretary of State (in a letter to the President of Mexico in 1938)
as follows: "The Government of the United States readily recognises
the right of a sovereign state to expropriate property for public
purposes... it has been stated with equal emphasis that the right
to expropriate property is coupled with and conditional on the obligation
to make adequate, effective and prompt compensation."
The Calvo Doctrine drew on the writings of Carlos Calvo, a nineteenth-century
Argentine jurist, who maintained that under international law aliens
had no rights greater than those of a country's citizens. This could
lead to the argument that property owners should be incorporated under
the laws of the host country, in the process renouncing all forms
of protection on the part of their home country.
During the period from 1945 until the early 1970s, there was a wave
of expropriations and nationalisation linked to decolonisation, Communist
rule in Eastern Europe and elsewhere, and a resurgence of nationalism
in Latin America. This was accompanied by debates in the United Nations
culminating in the 1974 adoption of a Charter of Economic Rights and
Duties of States.
Article 2 of the Charter included the following rights: "1. Every
State has and shall freely exercise full permanent sovereignty, including
possession, use and disposal, over all its wealth, natural resources
and economic activities ... 2. Each State has the right ... (c) To
nationalize, expropriate or transfer ownership of foreign property
in which case appropriate compensation should be paid by the State
adopting such measures, taking into account its relevant laws and
regulations and all the circumstances that the State considers pertinent.
In any case where the question of compensation gives rise to a controversy,
it shall be settled under the domestic law of the nationalizing State
and by its tribunals, unless it is freely and naturally agreed by
all the States concerned that other peaceful means be sought on the
basis of the sovereign equality of States and in accordance with the
principle of free choice of means".
On a track parallel to but separate from the debates in the United
Nations, the Convention on the Settlement of Investment Disputes between
States and Nationals of Other States established the International
Centre for the Settlement of Investment Disputes (ICSID) within the
World Bank. ICSID provides a forum for the settlement of investment
disputes between parties from home and host countries which have accepted
Private investors are explicitly included amongst the parties eligible
to initiate disputes. In 1978, ICSID established the Additional Facility
to deal with arbitration and conciliation between host states and
investors in cases where the Convention could not be deployed because
either the host state or the home state of the investor was not a
party to the Convention.
Widespread ratification of the Convention, though a gradual process,
took in more than 150 countries by the beginning of the new millennium.
However, recently as part of their re-evaluation of the costs and
benefits of bilateral investment treaties, a number of developing
countries have announced their intention to withdraw from the Convention.
The concept of expropriation lacks precise definition. It clearly
overlaps with "taking" (discussed above). Indeed, it could
be argued that in practice expropriation is a sub-category of "taking".
Bilateral investment treaties refer to "expropriation or nationalisation",
"expropriation direct or indirect", and "expropriation
through measures tantamount to expropriation".
Some of these terms are clearly designed to include measures constituting
creeping expropriation within the treaties' provisions on expropriation
(Lowenfeld, 2008: 559).
Central to the concept of "taking" is interference in the
business activities of the foreign investor or investment.
But this leaves open for interpretation in particular cases the question
of whether the interference has been sufficiently serious to qualify
In actual cases under NAFTA the argument for expropriation has sometimes
been rejected in favour of the lesser failure to accord investor or
investment Fair and Equitable Treatment.
Importantly, in view of the controversy surrounding the TTIP, in legal
rulings regulation has not necessarily been associated with a deprivation
of ownership rights sufficiently severe to qualify as expropriation
(Lowenfeld, 2008: 560-563).
[* The above is the first part of a two-part article contributed by
Mr. Andrew Cornford of the Observatoire de la Finance in Geneva. The
second part will appear in a forthcoming issue of SUNS.] +