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 multilateral negotiations, on the TPP (Trans Pacific Partnership) and TTIP (Transatlantic Trade and Investment Partnership). 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 (ISDS). 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 2,400-2,600 bilateral investment treaties were 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 treaties’ terms 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).The article which follows reviews not only the Indian model treaty but also major provisions of international investment treaties, often with special attention to their historical development. Investment treaties were a sequel to earlier agreements covering similar issues such 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 are excluded. 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 are invoked. 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 to terminate.
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 and finance. 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’ macroeconomies (Cornford, 2014: 2-4). Non-applicability 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” (Article 2.4). 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 chill”). 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 (Article 2).
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 in 1981 established to adjudicate claims between United States parties on one side and the government of Iran and Iran state-owned entities on the other. This 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 dispute between states but also between states and other foreign parties. 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 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 aliens”, and “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: 557-558). This still means that the contents of Fair and Equitable Treatment depends 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 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. Exceptions 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 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 dispute under the model treaty. MFN 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, 2008: 572). 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 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 1974 the 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 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 the Convention.
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 subcategory 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 as expropriation. 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). In the Indian model treaty nationalisation and expropriation “for reasons of public purpose” is legitimate but must be accompanied by adequate compensation. The determination of whether a measure or measures should be classified expropriation “requires a case-by-case, fact-based inquiry.” The evidence that expropriation has taken place should include the following: “(i) permanent and complete or near complete deprivation of the value of the Investment; and (ii) permanent and complete or near complete deprivation of the Investor’s right and management and control over the Investment; and (iii) an appropriation of the Investment by the Host State which results in transfer of the complete or near complete value of the Investment to that party or to an agency or instrumentality of the Party or a third Party” (Article 5.2). “Non-discriminatory actions by a Party that are designed and applied to protect legitimate public welfare objectives such as public health, safety and the environment shall not constitute expropriation” (Article 5.4). These conditions are stringent and are likely to narrow the range of cases in which the existence of expropriation can be demonstrated. They are consistent with correspondingly stringent rules concerning exceptions (already discussed) and dispute settlement (see below). Compensation The main issues under the heading of compensation concern the period of time before compensation is paid (promptness), the form in which it should be paid (sometimes characterised as effectiveness of compensation), and how much. The third of these issues is the crucial one since performance under the other two depends on settlement of the question of how much. Under the heading of promptness allowance has to be made for delays due to the resolution of practical problems which have to be dealt with in disputes. Delays are often reflected in interest charges which accrue from the date of the expropriation.
The rules as to the form in which payment is made usually guarantee that the currency of payment should be convertible and not subject to restrictions on transfer. If payment is made in financial instruments the rules guarantee their value (with compensation for discounts from face value, etc.). Concerning how much compensation should be paid agreement is necessary as to the date of expropriation or other forms of “taking”. This is often contentious since the loss of earnings which is to be compensated will be determined by the extent of expropriation or “taking” on this date. But the most difficult problem associated with how much compensation should be paid is that of valuation of the assets or the “taking”. Terminology under this heading is fluid. The concepts denoting compensation go under several names: “market value”, “fair market value”, “genuine value”, and “just compensation”, but mostly boil down to one of a limited number of valuation methods. A useful classification of these methods is that of Robert Herz, former chairman of the United States Financial Accounting Standards Board (FASB) (Herz, 2013: 182-191).This classification consists of three headings: (i) amortised cost, the original cost minus amortisation plus the sum to be received at final settlement; (ii) fair value, the amount for which an asset could be exchanged between knowledgeable parties in an arms-length transaction; (iii) and current value, the present discounted vale of the future net cash flows that an asset is expected to generate. Each of these valuation methods has advantages and disadvantages.
• Amortised cost is based on contractual features of an asset and thus avoids the misleading volatility and noise which often characterise reported financial results.
• Supporters of fair value stress incorporation by the concept of current market and economic conditions, and not the past costs and prices used to estimate amortised costs. But application of fair vale can be problematic when market prices are not available. In their absence United States accounting rules suggest alternatives such as the prices of similar assets or valuation based on models.
• Current value picks up the phasing in time of inflows and outflows associated with an asset, and also makes possible the incorporation of the effects of changes in interest rates through the discount rates used in estimation. The problem with current value is due to the difficulty of identifying in advance the future inflows and outflows used in the calculation.
Cursory consideration points to the difficulties associated with these valuation methods in investment disputes, especially when one of the parties is a developing country lacking a market for the shares of the investment in question or characterised by economic conditions that complicate estimation of prospective revenues and costs. In the case of the Iran-United States Tribunal, where identification of the nature and extent of the “taking” was itself often a complex matter, “each case was examined in detail, with accountants and industry experts, in some instances presented by the parties, in others called by the Tribunal itself. The awards rarely accepted the experts’ detailed submissions but reflected also the judgements of the Chamber hearing the case” (Lowenfeld, 2008: 552). While Bilateral Investment Treaties often specify criteria for compensation in cases of expropriation or measures tantamount to expropriation, corresponding criteria are not included for other violations of treaty terms (such as National Treatment, Fair and Equitable Treatment, or protection and security). In such cases arbitral tribunals have typically