Fair And Equitable Treatment in Bilateral Investment Treaties - Essay Example

Critically assess the meaning of "fair and equitable treatment" in bilateral investment treaties (BITs) taking into account the recent treaty-based arbitration 1. Introduction One of the main characteristics of international agreements is the mutual respect (by the participants) of a series of principles that are going to be applied on various sectors within the international community. In current study, the issue under examination is the role of ‘fair and equitable treatment’ as a concept included in the bilateral investment treaties (BITs). In order to understand the above role it is necessary to refer primarily to the various aspects of these treaties as part of the international law. The development of BITs has been extensively examined in the literature. The relevant research led to the conclusion that BITs have been highly developed the last two decades. The main reason for their development has been the fact that these treaties ‘grant extensive rights to foreign investors, including protection of contractual rights and the right to international arbitration in the event of an investment dispute’ (Elkins et al., 2006, 811). From a different point of view, it is supported by Alford (2006, online article) that ‘Bilateral investment treaties (BITs) are commonly regarded as one of the policy tools that a country uses to signal to capital-exporting countries of her commitment to protect foreign investment’. In other words, BITs are a significant mechanism for the protection of investors worldwide offering the necessary framework for the limitation of inequality in investment initiatives within the international market. The structure and the mission of BITs are analytically described by Tudor (2008). In accordance with the above researcher ‘the treatment of foreign investors and of their investments on the territory of a host State is often subject to a bilateral investment treaty (BIT) signed by the national State of the investors and the host State; these BITs usually contain a clause in which the two States offer fair and equitable treatment (FET) to the foreign investors on their territory’. In other words, the concept of fair and equitable treatment (FET) is an indispensable part of BITs; in the case that one of the parties fail to meet its obligations (as described in one of these treaties) then the other party or any person (or organization) that suffers a damage because of this violation of the terms of the relevant agreement can brought the case before an international tribunal. It is the specific body (acting as an arbitrator) that will decide the development of the case and the punishment of the party1 that violated the terms of the treaty. Most commonly, the individuals that brought these cases before the international tribunals are the foreign investors who justify their decision by claiming that they have suffered financial losses because the terms of a specific BIT were not respected by the host country. Other terms included in the BITs could also justify the examination of a specific dispute2 (being related with a particular BIT) by an international tribunal; however, this paper – as noticed above – focuses on the examination of the content of the term ‘fair and equitable treatment’ as this term is extensive used by the BITs around the world. Relevant case law will be combined with the views of the literature in order to present accurately (as possible) the meaning of the above term and its role as part of BITs; the latter have been extremely developed the last two decades in order to respond to the relevant needs of investors around the world. 2. ‘Fair and equitable treatment’ in bilateral investment treaties (BITs) – various aspects of the concept In a general context, BIT could be regarded as being part of the international law. In many cases the role of BITs with other parts of the international law, like the European law, has been examined and evaluated by the relevant international bodies. In the literature, the examination of the relationship between the BITs and the European law (as an indicative part of the international law) has led to the assumption that European law is of primary importance regarding the Member States; at a next level, the member states could participate in BITs with other countries (out of EU) but the power of these treaties over the EU could be then an issue for examination; the EU law is considered to be over these treaties (having an exclusive binding power) for all member states. The specific issue was examined by Radu (2008) who came to the conclusion that ‘provisions in BITs that are not in conflict with EU law could still be challenged if the application of certain EU requirements by Member States interferes with foreign investors rights; to avoid such risks, coherence between different commitments and practices of the Member States is needed and coordination at the EU level is highly desirable’ (Radu, 2008, 237). In other words, states around the world are free to sign a BIT with another state; however their freedom to be binded by specific legal provisions may be limited because of an existed legal framework that is superior if compared with the specific BIT; this is the case of the EU law which is considered to be a legal text of primary importance for all member states. In this context, the respect of the principle of ‘fair and equitable treatment’ could be limited if such a behaviour could be in opposition with existed terms and rules of the European law (always taking into consideration the conditions of a particular case). The content of the term ‘fair and equitable treatment’ would be better understood through the explanation of its general framework, i.e. the text of a particular Bilateral Treaty. Of course, each BIT is focused on the regulation of specific investment issues; however general assumptions could be made regarding the content of BITs and their role within the international community; at a next level these assumptions could help understand the content of the term ‘fair and equitable treatment’ – even at a broad aspect. In accordance with Neumayer et al. (2005, 1567) ‘Bilateral Investment Treaties (BITs) guarantee certain standards of treatment that can be enforced via binding investor-to-state dispute settlement outside the domestic juridical system’. From a different point of view it is noticed by Hallward-Driemeier (2003) that ‘the rights given to foreign investors may not only exceed those enjoyed by domestic investors, but expose policymakers to potentially large-scale liabilities and curtail the feasibility of different reform options; formalizing relationships and protecting against dynamic inconsistency problems are still important, but the results should caution policymakers to look closely at the terms of agreements’ (Hallward-Driemeier, 2003, online article). In other words, the promotion of equal treatment is a basic element of the above treaties. For this reason any violation of this principle could justify the intervention of international tribunal; there is no need to prove that specific damage was caused because of the above violation; the violation itself is regarded as an opposition against the international law and for this reason the state that violated its obligations under the terms of a BIT will have to face the consequences of this action even if no specific damage from this violation has been proved (in most cases it is expected that damages to individual/ investors occur). In accordance with the above, BIT could be extremely negative for a particular country ‘binding’ the country to follow specific rules and decisions and possibly limiting the freedom of its political powers to proceed to specific initiatives. The specific issue was highlighted by Neumayer et al. (2005, 1567) who noticed that ‘developing countries accept restrictions on their sovereignty in the hope that the protection from political and other risks leads to an increase in foreign direct investment (FDI), which is also the stated purpose of BITs’. Indeed the above study has led to the conclusion that the higher the number of BITs signed between a specific country and other countries around the world, the higher the foreign direct investment on the specific country. The influence of BITs on foreign direct investment has been extensively examined in the literature. In a relevant survey conducted among a series of Asian countries (including indicatively Malaysia, Singapore and India) in 2006 by Alford it was proved that ‘BITs have actually promoted FDI, and their effects are substitute for the level of political risk in a country; BITs are more effective in a riskier country; BITs are more potential for most Asian countries to promote FDI except Brunei, Hong Kong, Singapore, South Korea, and Taiwan’. The above study examined the potential for BITs to increase the level of FDI flows towards the Asian countries; it has been proved that there is such a potential but it will be necessary that appropriate measures are taken in order to ensure the protection of the local economic and political framework against potential violations of their fundamental principles. In other words, BITs cannot lead to the violation of existed cultural and social ethics of a specific state aiming the increase of FDI; investments are always welcomed but specific measures have to be taken in order for the national rules and principles (as including in the various governmental decisions) to remain intact through the years even if the structure of the local market is differentiated (under the influence of FDI flows towards the specific country). Referring especially to the term ‘fair and equitable treatment’ as part of all BITs around the world it is noticed in a relevant report of OECD (2004) that the above term ‘is an “absolute”, “non-contingent” standard of treatment, i.e. a standard that states the treatment to be accorded in terms whose exact meaning has to be determined, by reference to specific circumstances of application, as opposed to the “relative” standards embodied in “national treatment” and “most favoured nation” principles which define the required treatment by reference to the treatment accorded to other investment’ (OECD, 2004, working paper no. 3). The above description of the term ‘fair and equitable treatment’ can lead to the assumption that the rights developed to individuals (or states) because of the potential violation of the relevant principle can be ‘absolute’ leading directly to the right to bring the case involved before the international tribunal. However, there is always the case, as already noticed before that the application of this principle is limited under the influence of various factors, like the existence of superior law, as in case of the European law already mentioned before. Even in this case, the violation of the above term will lead to specific consequences for the violator; these consequences will vary in accordance with the existence of other – similar - legal principles that would be also applicable in a specific case. One of the major characteristics of the specific term is the fact that can lead to severe consequences for the violator – i.e. the party that violated the parts of a particular BIT especially the specific part, i.e. the provision of ‘fair and equitable treatment’. On the other hand, if a country that has participated in a specific BIT cannot respond to its obligations (in accordance with the provisions included in the relevant agreement) then the consequences can be severe both in the short and the long term; when the country involved can be regarded as having no particular responsibility for the above outcome – the political or economical conditions changed unexpectedly – then the consequences for the party involved can be limited; however, it would be necessary that relevant provisions exist in the text of the relevant BIT. An indicative example is Argentina and its weakness to respond to its BITs because of the strong political and economical turbulences that occurred in the country during 2001. In this case, the existence of appropriate legal framework within the text of the BIT helped towards the avoidance of severe consequences for the above country because of the violation by its side of the terms of the BITs in which the country has participated. All principles included in the above BITs were in fact violated – including the principle of ‘fair and equitable treatment’. The specific issue was examined by Cruchaga (2004) who noticed that during the specific period, 2001 and the years that followed, ‘the enactment of Emergency Law No. 25.561 abrogated the convertibility regime and triggered investors claims. These claims use bilateral investment treaties, and most of these instruments contain emergency clauses setting the treatment standard’ (Cruchaga, 2004, 82); however it should be noticed that the application of the principles of BITs under similar circumstances are extremely difficult to be protected against potential violations. At a next level, it should be noticed that the violation of bilateral investment treaties is too difficult to be avoided; even under the case of an extreme risk of violation of their rights, foreign investors continue to trust existed BITs; the existence of these treaties can ensure the protection (up to a point) of the rights of foreign investors within the international market; specific measures are usually taken for the protection of these investors (i.e. apart of the above treaties); however, these treaties are considered to be extremely powerful legal texts justifying the right of the persons/ investors that suffer a financial loss because of their violation to bring their case before the authorized international tribunal. In most cases the protection offered through the above body is not considered to be adequate (if compared with the benefits lost because of the violation of the principles of the relevant BIT); however, these treaties are a good base for the development of legal framework for the protection of investors internationally (there are no particular legal schemes that offer a similar protection to investors around the world). The intervention of other organizations in the relevant dispute can be also justified. This is the case of WTO which has the right to intervene in such disputes under the justification that ‘measures affecting intra-firm trade, the investments of foreign service suppliers, or the rights of intellectual property rights holders may, in certain circumstances, constitute breaches of a host States obligations under both the WTO Agreement and the applicable BIT’ (Verhoosel, 2003, 493). It is not made clear whether WTO can have a decisive role in the procedure or whether it is more likely to be on the side of one of the parties (individual or host country); moreover, there is no guarantee that the involvement of WTO in a specific dispute (having the characteristics described above) can lead to the effective resolution of the problem either in the short or the long term; it seems that such an intervention is just supportive (referring to the international law) to the victim of the violation with no further involvement in the dispute; the principles of international law are emphasized but there is no guarantee that the protection provided will be in accordance with the damage caused. It should be noticed that the principle ‘fair and equitable treatment’ can also lead to claims for monetary compensation when the court (international tribunal) considers that there is such a case. In this context, it has been proved that ‘the strongly held precept that private entities cannot directly invoke WTO law in the state courts of WTO Members and claim monetary damages for breaches of WTO law, cannot be replicated to BIT arbitrations without further qualification’ (Verhoosel, 2003, 493). Further rights and benefits to the victim of the violation could be also justified by the international tribunal3 in accordance with the circumstances of the violation4 and the damage caused. 3. Conclusion The presentation of all the above issues can lead to the assumption that BITs are extremely important for the development of Foreign Direct Investment (FDI) around the world; the specific part of these treaties, i.e. the principle of ‘fair and equitable treatment’ has a multi-dimensional character offering rights but also imposing obligations to the participants of BITs around the world. The specific principle has been interpreted using different criteria and views; its main consequence is the fact that whenever its terms are proved to be violated then the victim of the violation can bring his case before of the international tribunal claiming also monetary compensation for any damage suffered by the violator. On the other hand, BITs are found to be developed through the years. Indeed, it is supported by Bernieri (2006, 548) that ‘the old bilateral investment treaties (BITS) are evolving towards new forms of all-encompassing arrangements that include intellectual property and liberalization of trade and services, apart from the classical rules for investment protection’. The development of BITs does not lead to the limitation of their powers within the international community5; all their principles (including the principle of ‘fair and equitable treatment’) continue to offer to foreign investors specific benefits and protection under the terms that the requirements of BITs are met. References Alford, R. (2006) Study Confirms Bilateral Investment Treaties Promote Foreign Investment, online article, available at http://www.opiniojuris.org/posts/1150997221.shtml Bernieri, R. (2006) Intellectual Property Rights in Bilateral Investment Treaties and Access to Medicines: The Case of Latin America. The Journal of World Intellectual Property, 9(5): 548-572 Cruchaga, H. (2004) Bilateral treaties for the protection of investments: The Argentine case. Journal of Banking Regulation, 6: 82-90 Elkins, Z., Guzman, A., Simmons, B. (2006) Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000. International Organization, 60: 811-846 Hallward-Driemeier, Mary, "Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit…and They Could Bite" (June 2003). World Bank Policy Research Working Paper No. 3121. Available at SSRN: http://ssrn.com/abstract=636541 Neumayer, E., Spess, L. (2005) Do bilateral investment treaties increase foreign direct investment to developing countries? World development, 33(10): 1567-1585 OECD, 2004. "Fair and Equitable Treatment Standard in International Investment Law" OECD Working Papers on International Investment 2004/3, OECD Directorate for Financial and Enterprise Affairs. Radu, A. (2008) Foreign Investors in the EU—Which ‘Best Treatment’? Interactions Between Bilateral Investment Treaties and EU Law. European Law Journal, 14 (2): 237–260 Tudor, I. (2008) The Fair and Equitable Treatment Standard in the International Law of Foreign Investment. International Law Reporter, online, available at http://ilreports.blogspot.com/2008/03/tudor-fair-and-equitable-treatment.html Case Law AIG Capital Partners Inc & Anor. v Kazakhstan [2005] EWHC 2239 (Comm) (20 October 2005) AY Bank Ltd v Bosnia & Herzegovina & Ors [2006] EWHC 830 (Ch) (12 April 2006) Czech Republic v European Media Ventures SA [2007] EWHC 2851 (Comm) (05 December 2007) Ecuador v Occidental Exploration & Production Co [2006] EWHC 345 (Comm) (02 March 2006) Ecuador v Occidental Exploration & Production Co [2007] EWCA Civ 656 (04 July 2007) Occidental Exploration & Production Company v Republic of Ecuador [2005] EWCA Civ 1116 (09 September 2005) Svenska Petroleum Exploration AB v Lithuania & Anor [2005] EWHC 2437 (Comm) (04 November 2005) Read More