Anthony Aust. Handbook of International Law

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BITs establish in broad terms the basis on which compensation is assessed. The UK–Venezuela

BIT 1995 (Article 5(1))

requires that compensation be ‘prompt, adequate and effective’, and

amount to the ‘genuine value’ of the investment ‘immediately before the expropriation or before the

impending expropriation became public knowledge, whichever is the earlier’, and include interest at

‘a normal commercial rate’. The reference to the value immediately before the expropriation became

public knowledge is most important since the very fact of expropriation may well affect the value of

an investment, and there may be no formal announcement, or there may be ‘creeping’ expropriation.

This will also complicate the determination of the value of the investment.

10. See Reisman and Sloane, ‘Indirect Expropriation and Its Valuation in the BIT Generation’ (2003)

BYIL 115.

11. See, for example, Metalclad v. Mexico, ILM (2001) 35; 119 ILR 615.

12. See n. 9 above.

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The date when compensation must be paid is another issue. BITs also provide that payment must be

made without delay, and be effectively realisable and freely transferable. Some BITs permit transfer

payments by instalment if the compensation is large.

Civil disturbance etc.

BITs also prescribe a standard of treatment if investments are harmed by war, revolution, a state of

national emergency, revolt, insurgency or riot. If compensation has to be paid, the investor will be

treated in accordance with the standard laid down in the BIT. In some BITs, this will be MFN or

national treatment, or whichever is more favourable.

Dispute settlement

However well drafted, the interpretation and application of the provisions of a BIT may not be easy.

With so much at stake, it is vital that the investor has a sure and effective way of resolving any

dispute. A valuable aspect of BITs is that they provide that, if a dispute between the investor and the

host state cannot be settled within a specified period, the foreign investor has the right to submit the

dispute to international mixed arbitration:

the seventh advantage. A number of arbitration fora

may be available, the BIT sometimes specifying two or more. The International Centre for the

Settlement of Investment Disputes (ICSID)

is the obvious choice if both states are parties to the

ICSID Convention. Other fora include the Stockholm Chamber of Commerce, ad hoc tribunals

operating under the UN Commission on International Trade Law (UNCITRAL)

or the

International Chamber of Commerce.

Where a BIT gives the investor a choice of forum, in

selecting it the investor will consider the expertise of the administering institution and, among other

factors, its independence, impartiality and confidentiality. However, many BITs specify only one

forum.

Duration of BITs

The initial term of a BIT tends to be ten to fifteen years. When that expires, the BIT either continues

in force indefinitely until terminated by notice

13. See p. 445 below on mixed arbitrations.

14. See p. 379 below.

15. www.uncitral.org.

16. www.iccwbo.org.

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(usually twelve months), or is renewed tacitly for specified periods, unless notice is given before the

end of each (usually ten-year) period. But, even when a BIT has been terminated, it will continue in

force, for a period that can range from ten to twenty years, with respect to investments made before

the actual date of termination.

ICSID

The International Centre for the Settlement of Investment Disputes (ICSID) was established by the

(Washington) Convention on the Settlement of Investment Disputes between States and Nationals of

Other States 1965,

which entered into force in 1966. Although a separate international

organisation, ICSID, has close links to the World Bank, collaborating with it in meeting requests by

states for advice on investment and arbitration law. The ICSID Secretary-General also acts as the

appointing authority of arbitrators for ad hoc arbitrations. ICSID’s publications include a multi-

volume and periodically updated collection of Investment Laws of the World, Investment Treaties,

the bi-annual ICSID Review-Foreign Investment Law Journal (which has the full texts of ICSID

awards),

and the ICSID Annual Report. The expenses of the ICSID Secretariat are financed out of

the World Bank budget, although the costs of individual proceedings are borne by the parties.

ICSID was specially designed to facilitate the settlement of certain investment disputes but, like

the Permanent Court of Arbitration,

it is not a tribunal. ICSID merely provides facilities and

procedures for arbitration between a member state and an investor who is a national of another

member state. The Convention does not define an individual’s nationality, which is, in principle,

determined by the law of the state of nationality, and a person who is also a national of the host state

(dual national) cannot therefore invoke the ICSID procedure.

Nor does the Convention define the

nationality of an investor which is

17. The best source of basic documents and of up-to-date information is at www.worldbank.org/icsid/. See

also C. Schreuer, The ICSID Convention: A Commentary, Cambridge, 2001, and Collier and Lowe, The

Settlement of Disputes in International Law, Oxford, 1999. Each has the text of the Convention, which is

also in 575 UNTS 159 (No. 8359); ILM (1965) 524; UKTS (1967) 25.

18. The text of awards from 1991 onwards are available on the ICSID website, www.worldbank.org/icsid/.

See also the ongoing comprehensive collection in International Convention on the Settlement of Investment

Disputes Reports, Cambridge, 1993–.

19. See p. 444 below.

20. On dual nationality, see p. 179 above.

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a legal person, although this will often be determined in the agreement under which the two states

have consented to ICSID jurisdiction. But, where the investor is a legal person with the nationality

of the host state, but controlled by nationals of another member state (typically shareholders), the

investor is not regarded as a national of the host state (Article 25(2)(b)).

Recourse to ICSID arbitration is entirely voluntary, but once a member state and a foreign

investor have given their written consent to ICSID arbitration, neither can unilaterally withdraw it

(Article 25(1)). Consent to ICSID arbitration is commonly found in investment contracts between

member states and foreign investors, and ICSID has produced Model Clauses for this purpose.

Member states can also give prior consent in their own investment laws (only some twenty have

done so) or, most importantly, in BITs. Consent excludes resort to any other remedies, including

domestic, unless otherwise agreed by the parties to the dispute.

Consent may be made subject to

the investor exhausting local remedies, but this is unusual for BITs.

When adhering to the

Convention, or afterwards, a state may inform ICSID that it would not consider submitting certain

classes of disputes (Article 25(4)).

China has accepted only disputes about compensation for

expropriation or nationalisation. Saudi Arabia excludes disputes about oil or acts of sovereignty, and

Turkey excludes disputes about land. But such exclusions should not have the effect of taking

disputes on those matters out of ICSID jurisdiction if they are otherwise clearly within the scope of

the dispute settlement clause of a contract or a BIT.

Where an investor and a member state have consented to a dispute being submitted to ICSID, the

state of nationality of the investor is prohibited from giving diplomatic protection to, or bringing an

international claim in respect of, the investor unless the other member state fails to comply with the

award (Article 27). ICSID arbitration is also one of the main mechanisms for the settlement of

investment disputes under four recent multilateral trade and investment treaties: NAFTA, the Energy

Charter

21. This reflects a common provision in BITs: see p. 375 above and Collier and Lowe, The Settlement of

Disputes in International Law, Oxford, 1999, pp. 65–8.

22. See www.worldbank.org/icsid/.

23. As to the problems this can cause, see C. Schreuer, The ICSID Convention: A Commentary,

Cambridge, 2001, pp. 345–96.

24. See p. 374 above.

25. See www.worldbank.org/icsid/pubs/icsid-8/icsid-8-d.htm.

26. Collier and Lowe, The Settlement of Disputes in International Law, Oxford, 1999, p. 62.

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Treaty, the Cartagena Free Trade Agreement and the Colonia Protocol of MERCOSUR (see below).

Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings (‘Institution

Rules’) govern the early stages of the proceedings. After that, the Rules of Procedure for

Conciliation or for Arbitration take over and apply, subject to any changes agreed by the parties to

the dispute.

Either party to a dispute can invoke the procedure, although it is usually the investor.

An ICSID arbitration can be held anywhere the parties agree, not just at ICSID’s headquarters.

ICSID arbitral tribunals usually have three arbitrators (see the complex provisions of Articles

37–40). A tribunal applies either such law as is agreed by the parties or, in the absence of agreement,

the law of the member state party (including its conflict of law rules) and the applicable rules of

international law (Article 42). Failure of a party to appear or present his case is not regarded as an

admission of liability, so the tribunal may proceed with the case and make an award (Article 45).

There is no appeal against an award, but the tribunal may be asked to interpret or revise it

(Articles 50–51). Under Article 52, an application to annul an award on the ground of procedural

irregularities is heard by an ad hoc committee of three. Two awards have been annulled on the

ground that the tribunal had manifestly exceeded its powers, although in both cases the committee

has been criticised for going beyond procedural matters and deciding points of law.

All ICSID

member states, even if they are not parties to the dispute, are required by the Convention to

recognise and enforce an ICSID award as if it were a final judgment of their own courts, but state

immunity from execution is not affected.

In that event, the matter would have to be dealt with

under the law of state responsibility. The number of ICSID cases has increased significantly in

recent years. By the end of 2004, eighty-six cases had been concluded, with a similar number

pending.

In 1978, ICSID promulgated the Additional Facility Rules authorising the Secretariat to

administer certain types of proceedings between states and foreign nationals that fall outside the

scope of the Convention. The Facility is also available for cases where the dispute is not about

investment, provided it relates to a transaction which has ‘features that distinguish it

27. For both sets of rules, see www.worldbank.org/icsid/.

28. Collier and Lowe, The Settlement of Disputes in International Law, Oxford, 1999, pp 70–3; Schreuer,

The ICSID Convention: A Commentary, Cambridge, 2001, pp. 881–1075.

29. See p. 173 above.

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from an ordinary commercial transaction’. The Facility has rarely been used.

Energy Charter Treaty

The Energy Charter Treaty 1994 entered into force in 1998 and now has forty-seven parties,

including developing states such as Kazakhstan, Mongolia and Uzbekistan. Russia applies the

Treaty provisionally. Although Japan is a member, the Treaty is Eurocentric. It applies to

investments that are associated with an ‘economic activity in the energy sector’. This covers

exploitation, extraction, refining, production, storage, land transport, transmission, distribution,

trade, marketing or sale of energy materials and products. It also includes such services as the

construction of energy facilities, management and design, and activities aimed at economic

efficiency.

Its provisions on investment promotion and protection and the settlement of disputes provide a

legally binding framework for co-operation between the parties in the field of energy. Although

multilateral, the Treaty is equivalent to a network of BITs. Article 16 gives energy investors the best

of both worlds: in so far as a previous or future BIT gives better protection than the Treaty, the BIT

will apply, and vice versa. The other investment protection clauses are on similar lines to

contemporary BITs, although they go into much more detail and generally give better protection. An

aggrieved investor has the right, but not the duty, to seek local remedies, but even if he does he can

still invoke compulsory international arbitration (under ICSID, ad hoc under UNCITRAL rules or

under the Stockholm Chamber of Commerce), and he does not have to wait until local remedies

have been exhausted.

World Trade Organization

The 1994 Marrakesh Agreement established the World Trade Organization (WTO), as from 1

January 1995.

The Agreement incorporates several existing multilateral trade agreements, and four

important new

30. 2080 UNTS 100 (No. 36116); ILM (1995) 373; UKTS (2000) 78 and www.encharter.org; T. Walde

(ed.), The Energy Charter Treaty, London, 1996.

31. ILM (1994) 1144. The Agreement, including all the agreements making up the WTO, and all other

relevant documents are on the WTO website, www.wto.org. See also Matsushita, Schoenbaum and

Mavroidis, The World Trade Organization: Law, Practice and Policy, Oxford, 2003.

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agreements: (1) the General Agreement on Tariffs and Trade 1994 (GATT 1994), which effectively

replaced GATT 1947; (2) the General Agreement on Trade in Services (GATS); (3) the Agreement

on Trade-Related Aspects of Intellectual Property Rights (TRIPS); and (4) the (vital) Understanding

on Rules and Procedures Governing the Settlement of Disputes. The purpose of the WTO is to

eliminate or reduce barriers to trade. This required bringing existing and new multilateral trade

agreements into a comprehensive system with an effective dispute settlement mechanism. The WTO

is also a permanent forum for the negotiation of further reductions in trade barriers. Decisions are

taken as far as possible by consensus. If this is not possible, it is taken by a simple majority, unless

otherwise provided in the Agreement or another agreement (Article ).

In contrast to GATT 1947, to become a WTO member one has to accept all the agreements and

understandings that make up the WTO. Any state, or separate customs territory,

can apply to be a

member, the terms of accession being agreed with the existing members. At the end of 2004, there

were 148 members, each with one vote. They include all the significant economies, except Russia

and Saudi Arabia.

Dispute Settlement

A means of dealing effectively with disputes between WTO members was essential for the

credibility of the WTO. The Understanding on Settlement of Disputes is in Annex 2 to the WTO

Agreement.

Despite its grossly misleading name, the Understanding is an integral part of the WTO

Agreement and binding on all WTO members. It applies to most WTO disputes. A Dispute

Settlement Body (DSB), on which all WTO members sit, administers the system, establishing panels

and adopting panel and Appellate Body reports, monitoring implementation of rulings and

recommendations, and authorising countermeasures.

The purpose of the DSB is to provide security and predictability to the multilateral trading system.

It therefore seeks settlement of disputes as they arise, not years later, although in practice the process

is complex and slow. Members seeking redress for a violation of obligations

32. The European Communities, Hong Kong (China), Macao (China) and Chinese Taipei (Taiwan) are

each full members.

33. See the WTO’s own A Handbook on the WTO Dispute Settlement System, Cambridge, 2004; Palmeter

and Mavroidis, Dispute Settlement in the World Trade Organization, 2nd edn, Cambridge, 2004; and The

WTO Dispute Settlement Reports, Cambridge, 1996–.

34. ILM (1994) 1226.