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Antipathy towards bilateral investment treaties is unwarranted

by Chris Crowe on 18 Nov 2014

bilateral investment treaties

Few things animate the legal profession more than a juicy cross-border dispute. Throw in the word expropriation and dispute resolution lawyers get particularly excited. There were many in the legal profession that mourned the death of former Venezuelan president Hugo Chávez, not out of genuine sorrow for the controversial leader,but simply because of his propensity to expropriate and nationalise. A string of foreign investors have lost out commercially and financially as a result and sought legal recourse.

In recent years, many cases have been launched pursuant to a Bilateral Investment Treaty (BIT), an agreement that normally provides for arbitration in the event of a dispute. The advent of BIT arbitrations has provided a dispute bonanza for lawyers, many of which have cleverly conjured a case out of them.

 More recently Philip Morris launched a case against the Australian state, claiming that the government had unlawfully expropriated its intellectual property when it introduced its plain packaging law for cigarettes in 2011. The case was brought via a BIT between Hong Kong and Australia.

The prevalence of BIT arbitrations has caused several states to consider dismantling their bilateral investment treaties with other nations. South Africa and Indonesia are going through this process. Any new-cross border contracts will not be able to rely on the same protections that were afforded by BITs in the past.

Last year several South American states, including Ecuador, came together to explore the problem of BIT arbitrations. Ecuador has faced several major arbitration cases, including an arbitration against Chevron in the Hague brought via the US-Ecuador BIT.

Denis Brock, a dispute resolution partner at O’Melveny & Myers in Hong Kong believes that some states are wary of BITs because they believe that they confer better rights on foreign investors than on domestic investors. There is also the complaint, whether genuine or not, that BITs infringe a nation’s sovereign authority and that they conflict with public policy.

This increasing resistance to or lack of appreciation for BITs has caused some to wonder whether these agreements are counterproductive to cross-border trade. Arbitration lawyers are naturally adamant that this is not the case. Matthew Weiniger QC, a London-based international arbitration and public international law specialist at Herbert Smith Freehills suggests that doing away with BITs and the avenue of arbitration that they provide, would be risky for global economic activity: ‘Arbitration provisions promote and assist cross-border trade.’

Jeffrey Kron, a dispute resolution partner at Norton Rose Fulbright in South Africa agrees that the availability of international arbitration allows for investor protection: ‘Investors primarily go where they can make good and proper returns, but the security aspect is important for them too.’

Kron though suggests that in the case of South Africa, investors will still receive protection through local legislation and the strong court system. In essence inward investors needn’t simply rely on a BIT to bring a case against a South African entity. Even so, there are many states that do not have as well developed civil justice infrastructure as South Africa. How many investors would be happy to do battle in the Venezuelan or even Chinese courts for instance?

International arbitration, including arbitral proceedings provided by a BIT, are fundamentally attractive when dealing with less predictable court systems. ‘There are two sides to the coin in every dispute. Often you want a neutral body that will resolve that dispute,’ Weiniger remarks.

Weiniger though suggests that the debate shouldn’t necessarily be about whether BITs should remain or be disbanded. He says there is no reason why they can’t be amended or augmented so that unwarranted or spurious arbitration cases are not launched via a BIT.‘If there genuinely is a problem, there is the capability of states to amend the investment treaties. With the later generation of BITs, there have been attempts to provide better clarity and transparency provisions in arbitration,’ he explains.

Laura Abrahamson, a senior counsel at O’Melveny & Myers in Los Angeles who previously led a successful $2.3bn ICSID claim against the Republic of Ecuador on behalf of Occidental Petroleum, suggests that disbanding BITs may ‘drive the market back to political risk insurance’. ‘It is likely that cross-border trade may change but it will continue,’ she says.

Weiniger admits that if other states follow South Africa and Indonesia’s lead, it could have a material impact on the international arbitration environment. It certainly won’t annihilate arbitration practices around the world though. The arbitration sector has experienced enormous growth over the last 20 years and this is because contracts between parties in separate jurisdictions will normally have an arbitration provision in case a dispute arises. He remarks: ‘Arbitration is a creature of globalisation. The more global trade, the more arbitration.'

This post was written by Chris Crowe who is a freelance journalist. He can be contacted at chris@crowemedia.co.uk

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Topics: International Arbitration

Chris Crowe

Written by Chris Crowe