ICSID/BIT arbitration: a weapon for foreign investors

Bilateral investment treaties (BITs) provide a potentially very powerful weapon to foreign investors whose investments are negatively affected by the activities (or inactivity) of States and State entities. The advent of BIT arbitration since the 1980s means that foreign investors can think beyond the dispute resolution options previously available to them (contract, tort, local or foreign courts or arbitration under the investment contract) to a new species of right and forum – international law rights enshrined in a treaty that provides for an international law arbitration.

In the late 1980s, a Hong Kong investor in a Sri Lankan shrimp farm discovered a new weapon in disputes with States or State entities – the bilateral investment treaty. The Hong Kong investor relied on the rights set out in a Hong Kong/Sri Lanka BIT to obtain an arbitral award requiring Sri Lanka to compensate it for damage caused to its investments in Sri Lanka. This discovery, coupled with the subsequent growth in the number of BITs entered into, now provides investors with a new and potentially very significant weapon in any case where a State or State entity causes loss to its investments. Indeed, if the investment contract submits disputes to the State’s own courts, an arbitration under a BIT may be the only effective action available to a wronged investor.

A BIT is a treaty entered into between two States providing for the promotion and protection of the investments of the nationals of each State in the territory of the other State. They are usually entered into between capital-exporting nations and capital-importing nations as part of trade negotiations. Foreign investors can investigate whether any BIT applies in their case through the ICSID website. In relation to BITs between the EU Member States ("intra-EU" BITs) the recent judgment of the CJEU in the Achmea case is likely to have significant consequences for the world of intra-EU BIT arbitration (click here for more) (the judgment does not, however, affect BITs between EU Member States and non-EU Member States which, within the EU, are subject to Regulation 1219/2012).

The usual preconditions to relying on a BIT are that (a) the claimant is a national of another country with which the State has a BIT, and (b) the claimant has made an “investment” in the State. Many BITs allow the claimant to be someone other than the company that made the actual investment, for example the parent company of the actual investor, a shareholder in the investor or a company merely related to the investor. Most BITs include a broad definition of “investment” and typically they provide that every kind of asset may constitute an “investment” and provide examples such as property rights, shares, claims to money or performance under a contract and intangible rights. If these preconditions are satisfied, a number of rights and causes of action in international law may be available to the claimant against the offending State.

BIT arbitration may be commenced concurrently with an action under the investment contract. However, this may result in any related actions being stayed in the BIT arbitration pending resolution of the action under the investment contract.

Common rights and causes of action under BITs

There are a number of typical BIT rights and causes of action:

• “Fair and equitable treatment” and treatment pursuant to the minimum standard required by international law.

These standards allow a tribunal to assess the “fairness” of a host State’s actions. In general terms they have been construed as requiring host States to maintain stable and predictable investment environments consistent with an investor’s legitimate expectations and previous commitments. Such standards may often be supplemented by more precise prohibitions on, for example, “arbitrary or discriminatory” measures.

• Most favoured nation treatment

BITs frequently guarantee treatment to investors that is not less favourable than that which the host State affords to investors of another country or to host State nationals. This extends to protections under BITs concluded between the host and third party States. This guarantee can be crucial in cases where the relevant BIT contains a lacunae.

• Expropriation

Most BITs prohibit expropriation of investments. This will normally extend to both direct takings and indirect or “creeping” expropriation.

• Full protection and security

This standard is typically interpreted as obliging a host State to take reasonable steps to prevent the physical interference with, or destruction of, real property.

• Transfer provisions

The free transfer of funds relating to investments located in a host State is frequently protected.

• Umbrella clauses

Some BITs place an obligation on a host State to observe any other obligation entered into in relation to investments. It has been contended that this provides a basis upon which an investor can argue that a State’s violation of an investment contract can be elevated to a BIT breach. However, the exact effect of such clauses is a matter of some debate.

Remedies for breach of a BIT

BIT tribunals can award damages, interest and costs. A tribunal may order the cessation of the offending actions, although tribunals are generally reluctant to make such an order except in the clearest cases.

In contrast to normal arbitral awards, failure by a State to honour a BIT award may amount to a further breach of the BIT, entitling the claimant’s home country to take diplomatic action (e.g. retaliation or an ICJ action) against the offending State.

Dispute resolution options

BITs frequently provide a choice of dispute resolution mechanisms to an investor. Commonly, the choice will include resolution by:

• the courts of the host State;
• an arbitral institution - in this regard, most treaties provide for the dispute to be referred to ICSID; and/or
• an ad hoc arbitration - most commonly to be conducted under the UNCITRAL rules.

Where ICSID is available, it will usually represent the most favourable option for an investor due to advantages such as the likelihood of obtaining an impartial tribunal, the ease of enforcement of awards under the ICSID convention and the potential for pressure to be brought on the offending State to satisfy any award as a result of ICSID’s connections to the World Bank. Additionally, ICSID awards tend to be published to the international community on ICSID’s website shortly after they have been rendered. The possibility that a State could be outed for investor-unfriendly activities on ICSID’s own website will often be cause for concern for a State.

BITs commonly do not contain an express choice of law clause. In such circumstances, tribunals have generally regarded the applicable law as being the relevant BIT standards and international law.