GEO

Expediency of Concluding Bilateral Investment Treaties

28 January, 2013

 

Georgia has signed the Bilateral Investment Treaties (the "BIT") with 23 countries.[1] According to the Minister of Economy and Sustainable Development of Georgia, Giorgi Kvirikashvili, negotiations on signing such treaties are planned with 32 other states.[2]

As the general public is under-informed on this issue, in this blog we tried to explain what is the BIT, what is its purpose, and how expedient it is to conclude such treaties. It turned out that there is no unambiguous opinion on the benefit from such treaties, and in case of disorderly functioning of respective state institutions it can even inflict damage on the country.

The BIT is executed between two countries, by which they undertake obligation not to breach the rights of investors originating from the signatory state, not to expropriate their investment, and not to discriminate them against other (their own or originating from third countries) investors, etc.[3]

Such treaties usually contain dispute resolution mechanisms through the international investment and arbitration tribunals, by which the investors are entitled to appeal unlawful conduct of states and request compensation of damages independently and by bypassing the internal courts.

Unprecedented number - 46 - of international arbitration disputes was reported in 2011 arising out of investment treaties, following which a total number of such disputes has reached 450. Majority of these disputes accounts for the International Center for Settlement of Investment Disputes (ICSID - 279 cases) and the United Nations Commission on International Trade Law (UNCITRAL - 126 cases).[4] Out of other dispute examination institutions, the Stockholm Chamber of Commerce has considered 21 cases, the International Chamber of Commerce (ICC) - 7, and the Cairo Regional Center for International Commercial Arbitration and the London Court of International Arbitration - 1 each.[5]

Out of 11 cases considered on merits in 2011, 4 were resolved in the states' favor, and 7 in the favor of investors. Accordingly, by the end of 2011, out of total number of cases publically available and considered and resolved on merits, 55% were resolved in the states' favor, while 45% - in favor of investors.[6]

ICSID is the mostly used institution in case of investment disputes, and one of the reasons of such popularity is that unlike other arbitration institutions, the enforcement of its awards is directly mandatory for the states[7], not requiring the procedure under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards implying the enforcement of arbitral awards through the country's domestic courts, usually associated with additional time and costs.

Notably, last year ICSID has imposed on Ecuador the payment of unprecedented amount in the history of investment disputes - 1 billion 769 million 625 thousand USD - in favor of the US company Occidental Petroleum Corp for the breach of US-Ecuador BIT.[8]

It is noteworthy as well that in recent years the discontent of Latin American states towards ICSID has grown. The President of Ecuador Rafael Correa has stated in May 2009 that ICSID is a manifestation of colonialism.[9]In June of the same year, the Presidents of Bolivia and Ecuador stated at the UN conference that ICSID must dissolve.[10] In January 2012, Venezuela became the third country (after Ecuador and Bolivia), which has denounced the  ICSID Convention.[11]

The first BIT was signed in 1959 between Germany and Pakistan. By the end of 1960's the number of such treaties has reached 75, by the end of 1980's - 389,[12] while by the end of 2011 their number worldwide increased to 2,833[13] and is still growing.

Such popularity of BITs in the developing states, where usually the foreign direct investments are one of the key sources of economic growth, is motivated mainly by attracting the investments. As this type of treaty grants more guarantees of protection to the investors, they should be more courageously investing in the states that are signatories to such treaties. However, there is no consensus amid academic circles that the BITs have a positive impact on the growth of investments.

The first econometric study[14] in this respect was carried out in 1998, which has established based on the analysis of 72 countries that the statistical link vis-a-vis the growth of investments and the BITs was extremely weak. In the 2003 study titled "Do Bilateral Investment Treaties Attract Foreign Direct Investment?",[15] the author concludes that no essential link is established between the BITs and the growth of foreign direct investment. Yet, unlike this conclusion, the 2005 study[16] of Professor Eric Neumayer states that the positive correlation was identified between the BITs and the growth of investments. Professors of the Yale University also reached an interesting conclusion[17] in 2005, according to which the BITs have a positive impact on the growth of investments in the low risk states only.

The 2011 study published in the Virginia Journal of International Law,[18] which is based on the interviews with providers of political risk insurance for investments (to what extent are such treaties taken into account when counting the risks), states that the BITs have almost no impact on the growth of investments and in the best scenario they can have an irregular and inconsistent stimulating effect.

Absence of consensus over this subject has many reasons to it: lack of sufficient and adequate data, application of different research methods and models in various studies, etc.[19]

Hence, it is extremely difficult to say assuredly about the extent that the BITs boost investments. As noted above, a quite large portion of investment disputes considered on merits is decided against the states. In the lost cases states may have to pay millions and on several occasions hundreds of millions of Dollars, not to mention the costs of proceedings. Further, proceedings over the investment disputes, and especially if the state loses such a dispute, damage its reputation, which may even undermine the flow of investments.[20] Therefore, as Georgia does not enjoy a desirable environment in terms of protection of property rights, big prudence is required when such treaties are concluded.

 


[1]See the list of treaties on the web page of the Ministry of Justice of Georgia, "Bilateral Treaties on the Promotion and Protection of Investments", available at:  http://goo.gl/GNw2L

[2] See the web page of the Ministry of Economy: http://www.economy.ge/?category=4&lang=geo&item=1082

[3] Such treaties usually include the 'Most Favored Nation Treatment', 'National Treatment', 'Fair and Equitable Treatment', 'Umbrella' clause and other clauses that are construed for the full and comprehensive protection of investors. Yet, based on international customary law or international treaty, the regulatory or other type of intervention by the state in cases of imminent necessity (that may arise out of the national security, health or other significant matters) can be vindicated, but in such case states bear the responsibility of justification (burden of proof).

[4] UNCTAD (2012a), “Latest Developments in Investor State Dispute Settlement”, IIA Issues Note, No. 1, pg. 1, available at: www.unctad.org/diae

[5] Ibid, pg. 2.

[6] Supra note 4; UNCTAD (2011), “Latest Developments in Investor State Dispute Settlement”, IIA Issues Note, No. 1, pg. 1, available at: www.unctad.org/diae

[7] Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Article 54. Available at: http://goo.gl/omMMe

[8] See 'Occidental Petroleum Corporation v. Ecuador', ICSID Case No. ARB/06/11.

[9] ICSID in Crisis: Straight-Jacket or Investment Protection?, Bretton Woods Project (2009), available at: http://goo.gl/QpI2b

[10] L. Trakman (2012), “ICSID Under Siege”, pg. 2, available at: http://ssrn.com/abstract=2006058

[11] International Institute for Sustainable Development (2012), ‘Venezuela’s Withdrawal From ICSID: What it Does and Does Not Achieve', available at: http://goo.gl/Mqoht

[12] UNCTAD/ITE/IIA/2 (2000), Bilateral Investment Treaties 1959-1999.

[13] UNCDAT, World Investment Report 2012, pg. 20, available at: http://goo.gl/jKQ84

[14] UNCTAD/ITE/IIT/7 (1998), Bilateral Investment Treaties in the Mid-1990s, U.N. Sales No. E.98.II.D.8.

[15] Hallward-Driemeier, M. (June 2003). ‘Do Bilateral Investment Treaties Attract FDI? Only a bit…and they could bite,’ World Bank, DECRG.

[16] Neumayer, Eric and Spess, Laura (2005) Do bilateral investment treaties increase foreign direct investment to developing countries? World development, 33 (10). pp. 1567-1585. ISSN 0305-750X.

[17] J.Tobin and S. Rose-Ackerman Foreign (2005) Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties, Yale Law School Center for Law, Economics and Public Policym, No. 293.

[18] Jason Webb Yackee (2011), ‘Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence’, 51 Va. J. Int'l L. 397, 434

[19] Ibid.

[20] Supra note 15.

Author: Andria Nadiradze