What is the Purpose of the Bilateral Investment Treaty?

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bilateral investment treaty

It is unlikely that one can make it through a discussion about international investment without considering the impact of bilateral investment treaties.  Bilateral investment treaties, or BITs, offer a higher level of protection, and options for dispute resolution, than investments without such treaties. Yet a person investing in their own country without much, or any, interaction with investments in foreign countries may never encounter a BIT, and there would be little need to.  BITs deal with investments in countries by foreign nationals, but they can have a large impact on markets and can impact domestic investors and the protections they have.  Understanding bilateral investment treaties can help savvy investor understand their role in both domestic and international investments and how they may protect their investments effectively.  This article will outline the basics of BITs, their purpose, the protections that they provide, and the issues that some people find with them.  The goal of this article is to help investors make decisions with their money that will be protected and have a lasting benefit.  

Bilateral Investment Treaty Basics: 

BITs are treaties between two countries that give certain protections to foreign investors.  These treaties used to be called “friendship, commerce, and navigations treaties” that were often established after wars to protect foreign investors from the wrongful cancelation of their investments.  Because of their history, they are often included in trade pacts between countries that are seeking to expand trade within another country, and the treaties will often cover a variety of other trade issues as well as the BIT.  They allow both individual investors and companies from the two countries to invest securely in the other country without being subject to requirements under the foreign country’s laws and outline the method of dispute resolution that any issues will be directed to.  The type of investments that are protected under these treaties is foreign direct investments, which can expose investors to undue risk without BIT protections.  

The Purpose of Bilateral Investment Treaties:

There are several purposes behind the idea of BITs and many reasons that two countries will put such a treaty in place; however, there are common themes that can be found in all BITs that drive countries to include BITs in their trade pacts.  These common purposes include: 

  • Protection: The most common reason that two countries will implement a bilateral treaty covering investments is to protect their investors in foreign countries where the laws are not the same as their own.  These treaties provide protections and guarantees that ensure the investors will receive the best treatment between the two counties’ laws.  Countries understand the importance of both protecting their own citizen’s investments abroad while encouraging hesitant foreign investors to invest in their economies.  
  • Encourage Trade: Because these protections help investors feel more secure in their foreign investments, it encourages trade between the countries and encourages countries to adopt policies that provide the same or better protection within their domestic policy, which helps develop and encourage trade around the world.  
  • Support Development: By creating these treaties, countries are helping support the development of international laws and standards that create similar protections for all people.  The more success that these treaties have around the world, the greater likelihood that these treaties will be codified in international law.  

There are a host of other reasons that a BIT may be negotiated between two countries, but these are the most common purposes of BITs.  

Protections Provided by Bilateral Investment Treaties: 

The protections provided by BITs are the biggest reason that BITs have increased in prevalence.  There are more than 2,800 BITs between over 150 countries worldwide because these treaties benefit all areas of trade for both the countries as investors feel protected with their foreign direct investments.  These protections allow investors to have confidence that their investments will be safe as they encourage local trade.  The protections that BITs offer include: 

  • Nondiscrimination: BITs will require that investors and their investments will be treated as favorably as the foreign country treats their own investors or investments.  For BITs made with the United States, this protection applies both while the investment is being created and while it is invested in the foreign country—throughout the whole life-cycle of the dispute.  For many other countries, the BITs will only apply nondiscrimination standards after the investment has been established.  Nondiscrimination will often require that the investors will not be subject to arbitrary or discriminatory decision-making.  This protection means that a party will not be excluded or treated differently based on the nationality of the person investing.  However, the parties to the treaty have a right to make certain exceptions from this policy to allow domestic investors to be at an advantage.  
  • Transferability: BITs will often ensure a market rate of exchange when an investor is both establishing and withdrawing an investment.  This allows investments to be transferred effectively and avoids costly delays in the determination of rates, and it applies to all transactions that take place under the investment.  
  • Managers: A BIT will often allow the investor to choose the manager over the investment or fund that they choose, regardless of their nationality.  This means that the investor may allow a trusted manager to oversee the investment over being forced to choose a person within the county that the investment is in.  
  • Limits on Expropriation: Expropriation is the action of the foreign state taking the assets in the investment and using them for public use or benefit.  This is often a large concern of foreign investors, because some states may take advantage of such a claim and control their assets.  BITs will often limit the right of the host state to do so and establish a system of adequate and prompt compensation when an investment is wrongfully expropriated.  This issue can cause a lot of disputes within the investment community.  
  • Restrictions on Requirements: Many countries will have certain performance requirements that can cause investors to avoid their market because it can often be difficult for investors to hit those requirements.  BITs remove these requirements for foreign investors, which allows investors with smaller targets or goals to invest without the fear of expropriation if they are unable to hit those goals.   
  • Arbitration: Many BITs will allow a foreign investor to submit a dispute to a court of international arbitration rather than try and prevail in the local courts.  This adds security in knowing that foreign judges and juries will not be deciding the fate of the investment in the event of a dispute.  Importantly, these are often disputes about government inaction, which will be discussed surrounding the overlap of alternative dispute resolution and BITs below.  

Protections like these help encourage investors to expand their portfolios to countries and markets that had previously been off the table due to various concerns.  However, they are not always the best in certain situations. 

Alternative Dispute Resolution and Bilateral Investment Treaties: 

Disputes that arise under a BIT will often be directed to international arbitration.  This allows the investor and the foreign state to settle the dispute without relying on the courts within the foreign state to decide whether the foreign state violated the BIT.  This saves the domestic court from either ruling against their governing power or against an investor in what looks like a discriminatory way. Several considerations should be noted regarding the dispute resolution mechanism of BITs, which are: 

  • Investor v. Foreign State: A dispute under a BIT will be between an investor and a foreign state.  This is the case because the investor will be suing the state for not enforcing the BIT properly and failing to act to stop the wrongdoing against them.  This is unique to BITs and differs from many other laws and treaties.  In domestic disputes, the investor would typically sue the person that acted wrongly against them.  In other treaties, it is usually the states suing each other.  
  • Private Right of Action: When an investment is subject to a BIT, the investor has a private right of action, which means that they can submit a dispute to arbitration against the foreign state.  This right of action usually stems from the foreign state’s failure to uphold the protections in the BIT.  
  • Applicable Law: The dispute between the parties will be covered by the terms of the applicable BIT and other international law.  This can be confusing and is worth mentioning because there will often be a choice of law in the contract that establishes the investment, yet the BIT will take precedent. Understanding what law is applied is important to the dispute and will help foreign states negotiate the treaties effectively.  
  • Option for Domestic Courts: An investor may choose to use the domestic courts to litigate the dispute, but they cannot be forced to resolve the dispute within the domestic courts.  However, once dispute resolution has begun in the domestic courts, international arbitration is no longer an option.  
  • State to State: Many treaties will also allow the two states that are parties to the agreement to use international arbitration to resolve a dispute between them regarding the application or interpretation of the BIT.  
  • Concurrent or Future Issues: A BIT will only apply to disputes that are currently taking place or take place after the BIT is entered into.  They will not apply retroactively to disputes that occurred before the BIT was entered into.  This is to protect the negotiating states from a flood of disputes and to ensure that the protections hold weight in negotiations. 

International arbitration is a great forum to keep investment disputes out of foreign courts, but it is necessary to also examine the issues that may be present given this model.  

Issues with Bilateral Investment Treaties: 

BITs are a great solution to protect investors while encouraging trade and ensuring that the interests of all parties are honored, but there are also some holes in the treaties that critics have pointed out in the way that BITs are created and upheld.  Criticisms of BITs, or the enforcement and resolution processes involved, have grown as NGOs and states have witnessed the increase and implications of the treaties being in effect.  Some of the common issues noted in BITs include: 

  • Rights v. Obligations: BITs give investors rights while creating obligations on the states that are parties to the treaty.  Some states may end up agreeing to BITs based on the promised economic impact they can have on a nation’s trade without fully understanding the implications of the obligations that it will place on them. Yet when an investor is enforcing their right and forcing the obligations, it can often feel restrictive for the parties. 
  • Social Impact: BITs allow investors to put their money wherever they would like in the foreign state’s economy without knowledge or restrictions surrounding the social, climate, or labor implications.  This means that investors may be investing in outcomes or businesses that are harming the local economy or treating nationals poorly to do well for foreign investors.  There is no oversight to ensure that investments are doing good within the communities that they are in.  Additionally, with the ability of the investors to choose their management, they may not be hearing from those directly impacted by the investment, and it detracts from local jobs. 
  • Enforcement: In the same vein as the two issues mentioned above, there is also an issue with the enforcement mechanism because it only allows an investor to challenge the state’s involvement in the application of the treaty without allowing the state to challenge the investor’s use of the treaty.  Allowing a counterclaim on the investor’s claim based on social issues could create an enforcement mechanism that would ensure that the investments of the foreign nationals are doing good in the local market.  

BITs are a valuable tool to help states encourage investment and trade among their nationals while protecting the interests of the investors, yet some key areas have faced criticism in recent history as states navigate disputes and issues with their BITs.  Finding a balance between encouraging investments while protecting domestic investors and citizens should be key to achieving lasting change.  

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Mark Fotohabadi
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