Investor-State Disputes and Investment Treaty Arbitration

1) Introduction

The encouragement of investment, particularly investment into developing countries, is clearly a desirable objective. Investment treaties are designed to achieve two separate but related purposes, one for the benefit of a State and the other for the benefit of an investor. First, there is a need to attract inward investment into a 'host' State. Second, there is a need to protect the investment of the investor in the host State, in particular against un-compensated expropriation by that State.

Those two objectives - the promotion and the protection of investments - have been successfully achieved through the medium of bilateral investment treaties (BITs). BITs have tended to be made between developed capital-exporting countries and developing capital-importing countries, but there is also an increasing trend towards BITs between developing countries.

The first BIT was entered into over 40 years ago between Germany and Pakistan (in 1959). The number of such treaties now exceeds 2,000, and BITs are seen as instruments both for encouraging foreign investment and for protecting the interests of foreign investors.

"The first BITs were made in the period 1959-1969. Much of the inspiration for these and the later treaties came from the 1959 Abs-Shawcross Draft Convention on Investments Abroad and the 1967 OECD Draft Convention on the Protection of Foreign Property...." 34

The resolution of disputes between investors and States was seen to require special machinery. This need was supplied the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, commonly referred to as the ICSID Convention or the Washington Convention. The Convention created an organisation whose purpose is to deal with investment treaty disputes - the International Centre for Settlement of Investment Disputes (the ICSID Centre) in Washington.

An understanding of investor-State disputes - and investment treaty arbitration - requires a consideration of two matters: BITs and the ICSID Convention. These are considered in sections 2 and 3 of this chapter. Section 4 sets out some of the problems that have arisen in investor-State arbitrations.

The ICSID Arbitration Rules are dealt with in Chapter 14, which also looks at the ICSID Centre. The United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules (which may be used as an alternative to the ICSID Arbitration Rules) are dealt with in Chapter 18, which looks at international commercial arbitral institutions and other international bodies.

Because ICSID - both the Convention and the Centre - are dealt with in some detail, only comparatively brief reference can be made in the Manual to two other investment dispute resolution processes: Chapter 11 of the North American Free Trade Association (NAFTA) and Article 26 of the Energy Charter Treaty (ECT) (see sections 5 and 6 of this chapter).

The NAFTA is concerned with trade generally and the ECT with energy disputes specifically. Both are, needless to say, of considerable international importance, and further information about them can be found on their websites.35

2) Bilateral Investment Treaties: the Japan-Vietnam Agreement

Perhaps the simplest way to see how BITs work is to look at the details of one such treaty. A comparatively current example is the agreement made between Japan and the Socialist Republic of Vietnam, entered into in November 2003.36

The agreement between Japan and Vietnam contains the type of provisions that are likely to be found in many BITS:

i) provisions to encourage investment;

ii) fair and equitable treatment provisions and provisions relating to expropriation and compensation;

iii) provisions relating to the free transfer of capital, profits and so on;

iv) investor-State dispute resolution provisions that provide for attempts at amicable settlement, followed if necessary by either ICSID arbitration or arbitration under the UNCITRAL Arbitration Rules.

The Agreement states that Japan and Vietnam wish to promote investment "in order to strengthen the economic relationship between the two countries", intending to "further create favourable conditions for greater investment by investors of one country in the Area of the other country". It contains 23 Articles.

Introductory matters

Article 1 sets out a series of definitions, including "investments". That term cov...

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