Bilateral investment treaties

What Are Bilateral Investment Treaties?

A bilateral investment treaty (BIT) is an international agreement between two countries that sets out the terms and conditions for private foreign direct investment (FDI) made by investors of one state in the territory of the other. These treaties are a crucial component of international investment law, aiming to promote and protect cross-border investments by establishing a stable and predictable legal framework for investors. Bilateral investment treaties typically define what constitutes an investment, specify the standards of treatment for such investments, and provide mechanisms for resolving disputes.

History and Origin

The concept of international agreements to protect foreign investments began with Friendship, Commerce, and Navigation (FCN) treaties, which largely focused on trade and navigation but also included some provisions for foreign property rights. However, the modern bilateral investment treaty emerged after World War II, driven by developed countries seeking to safeguard their investments in developing countries from risks like expropriation.

The world's first modern bilateral investment treaty was signed between Germany and Pakistan on November 25, 1959.,⁵ This landmark agreement set a precedent for future BITs by focusing exclusively on investment protection and introducing key provisions for investor rights.⁴ The number of bilateral investment treaties grew modestly in the 1960s and 1970s, but saw a significant acceleration in the 1980s and 1990s as more countries sought to attract foreign capital and integrate into the global economy.³ Today, over 2,500 BITs are in force globally, connecting most countries. For a comprehensive overview of these agreements, the United Nations Conference on Trade and Development (UNCTAD) maintains extensive resources on International Investment Agreements.

Key Takeaways

• Bilateral investment treaties are agreements between two countries protecting investments made by one country's investors in the other.
• They aim to reduce investment risk by providing legal safeguards and a predictable investment climate.
• Key provisions often include fair and equitable treatment, protection against expropriation, and mechanisms for investor-state dispute settlement.
• BITs help facilitate capital flows and encourage cross-border investment.
• While designed to protect investors, they face criticisms regarding their impact on host state regulatory autonomy and public policy space.

Interpreting the Bilateral Investment Treaty

Bilateral investment treaties establish a set of substantive protections and procedural rights for foreign investors. Key standards commonly found in BITs include:

• Fair and Equitable Treatment (FET): This broad standard requires host states to treat foreign investments fairly and transparently, protecting investors from arbitrary or discriminatory actions.
• National Treatment (NT): This provision obliges the host state to treat foreign investors and their investments no less favorably than it treats its own investors in like circumstances.
• Most Favored Nation (MFN): The MFN clause ensures that investors from one treaty party receive treatment no less favorable than that accorded to investors from any third country.
• Protection from Expropriation: BITs typically prohibit the direct or indirect expropriation of investments unless it is for a public purpose, non-discriminatory, conducted under due process, and accompanied by prompt, adequate, and effective compensation.
• Free Transfer of Funds: Investors are usually guaranteed the right to freely transfer capital, profits, and other funds related to their investment out of the host country.
• Investment Protection and Security: This generally requires host states to provide full physical protection and security for foreign investments.

Perhaps the most distinctive feature of many bilateral investment treaties is the provision for international arbitration through investor-state dispute settlement (ISDS). This mechanism allows an investor who believes their rights under the BIT have been violated to initiate arbitration proceedings directly against the host state, often under the auspices of bodies like the International Centre for Settlement of Investment Disputes (ICSID), rather than suing in the host state's domestic courts.,²

Hypothetical Example

Consider "InvestCo," a company from Country A looking to build a solar power plant in Country B. Country A and Country B have a bilateral investment treaty in place. InvestCo is concerned about the sovereign risk of investing a large sum in Country B, especially the possibility of policy changes or even nationalization.

Thanks to the bilateral investment treaty, InvestCo has specific assurances. The BIT guarantees that Country B will provide "fair and equitable treatment" to InvestCo's investment and that any expropriation would require prompt, adequate, and effective compensation. If Country B were to suddenly change its renewable energy policies in a way that specifically targets foreign solar investors from Country A, or if it were to seize InvestCo's assets without proper payment, InvestCo could invoke the BIT's provisions. This would allow InvestCo to pursue a claim against Country B through international arbitration, providing a layer of security beyond what domestic courts might offer. This reduces the overall investment risk for InvestCo, making the project more attractive.

Practical Applications

Bilateral investment treaties serve as foundational instruments in facilitating global investment. They provide a predictable and stable environment for foreign investors, encouraging them to deploy capital across borders. For developed countries seeking to expand their corporate presence internationally, BITs offer legal recourse and protection for their overseas assets. For host countries, particularly developing nations, BITs can signal a commitment to investor protection, helping to attract much-needed foreign direct investment (FDI) and stimulate economic growth.

These treaties are frequently cited in discussions surrounding trade agreements and international economic policy. The existence of a robust network of bilateral investment treaties also plays a role in risk management strategies for multinational corporations, as they can rely on the treaty's provisions to mitigate political risks. The International Centre for Settlement of Investment Disputes (ICSID), a World Bank institution, is a primary forum for resolving disputes that arise under these treaties, providing an established mechanism for investor-state arbitration.¹ The Office of the United States Trade Representative (USTR) also actively engages in developing and implementing investment policy through bilateral investment treaties, as detailed on their Investment page.

Limitations and Criticisms

Despite their role in promoting investment, bilateral investment treaties have faced significant criticism, particularly concerning their impact on the regulatory autonomy of host states. A primary concern revolves around the investor-state dispute settlement (ISDS) mechanism, which allows private corporations to challenge government regulations (e.g., environmental, health, labor laws) in international tribunals. Critics argue that this can chill legitimate public policy initiatives if governments fear costly arbitration claims.

Some argue that BITs can prioritize investor profits over public welfare, potentially undermining a country's right to regulate in the public interest. There are also concerns about the transparency of ISDS proceedings, the consistency of arbitral decisions, and the potential for large monetary awards against developing countries. In response to these criticisms, there has been a global push for the reform of international investment agreements to ensure a better balance between investor protection and the public policy space of states. UNCTAD provides ongoing analysis and proposals for the reform of International Investment Agreements to address these concerns.

Bilateral Investment Treaties vs. Free Trade Agreements

While both bilateral investment treaties (BITs) and Free Trade Agreements (FTAs) are international agreements that facilitate economic exchange, their primary focus differs significantly. A BIT is specifically designed to promote and protect cross-border investments between two countries. Its provisions exclusively deal with the treatment of foreign investment, including aspects like fair treatment, protection from expropriation, and dispute resolution for investors.

In contrast, a Free Trade Agreement is a broader accord that primarily aims to reduce or eliminate tariffs and other trade barriers between signatory countries. While many modern FTAs include dedicated chapters on investment that offer similar protections to those found in BITs, their scope extends to goods, services, intellectual property, and often labor and environmental standards. Therefore, while an FTA might contain investment provisions, its core purpose is to liberalize trade, whereas a bilateral investment treaty's sole purpose is investment facilitation and protection.

FAQs

Q: What is the main purpose of a bilateral investment treaty?

A: The main purpose of a bilateral investment treaty is to promote and protect foreign direct investments by establishing a predictable and stable legal framework. It reassures investors that their assets will be treated fairly and protected from risks like arbitrary government actions or uncompensated expropriation.

Q: Who benefits from bilateral investment treaties?

A: Both the investing country's companies and the host country can benefit. Investing companies gain legal protection and reduced risk management for their overseas assets. Host countries, particularly developing countries, can attract more foreign direct investment due to the enhanced legal security offered to investors.

Q: What is Investor-State Dispute Settlement (ISDS)?

A: ISDS is a mechanism often included in bilateral investment treaties that allows a foreign investor to bring a claim directly against a host state before an international arbitral tribunal if the investor believes the state has violated its obligations under the treaty. This provides an alternative to seeking redress in the host country's domestic courts.